Several IFAs have already responded to the projection rates debate, following publication of the FSA's latest consultation paper.
Martin Brook from Brook Financial Advice says:
I have just read your article on projection rates. It is essential that all contracts, whether past, present, or future provide projections, since they are a fundamental tool in:
1) calculating different premium requirements, assuming different returns, for any form of planning that requires a targeted amount at a given point in time (mortgage planning; retirement; school fees to name but a few);
2)enables an adviser to have a discussion on which return to assume dependant on underlying assets i.e. help customers assess risk;
3) once customer & advisor have decided on risk levels & acceptable return, can obtain quotes from a number of providers to see 'value for money';
4) having decided contract & company, over time, projections can show whether a contract is ahead or behind original assumptions.
In essence, projections, if used properly, do the following:
1) decide contribution amount
2) help & quantify risk evaluation
3) help company selection
4) enable quantifiable review programme
Clearly without, wouldn't be able to complete the above.
Graham Cotton from Payne Sherlock Financial Services, Chichester, adds:
Interesting to see what Mr Smee has to say and concerned what the alternative may be. The wheels in this industry have been reinvented that many times I am note sure if I am trying to ride on a unicycle or 30 wheel juggernaut.
Can we apply some common sense? Clients are coming to us as IFAs for advice as they do not know what to do on a financial matter and spending vast amounts of time teaching clients an industry is costly. Clients I feel are choosing to not understand projections because we live in a nanny state and they could be compensated for this possible short comings in understanding.
Can we not just just have clearer wording. I started in this industry in 1990. I still remember the leaflet I was taught to use then with clients. It had projection figures in numbers and columns with very clear wording. We explained these are not maximums or minimums purely a guide this in turn highlighted there was a risk attached. It seems rather strange that I have had not received any complaints. Back to KISS, Keep Insurance Selling Simple because bottom line that's what it is.
1) At least they recognise it's a mess! As an analysis of the problems caused it's pretty good;
2) One glaring gap is official responsibility for misleading investors by setting projection rates that required high inflation to last for ever. Are mistakes made by officials any better than those made by the market?
3) Distinction between product specific projections and personal specific projections (ie contributions profile, whether or not buy and hold) is very helpful territory: eg endowments were problem because premiums wrongly set for required certainty - an aspect of suitability that has to be person specific;
5) Not enough recognition that competition between firms will be increasingly at service level not product level, leveling the playing field between manufacturers and retailers (whether banks, platforms, advice firms or whatever). It is vital the FSA has the imagination to see the potential of this structural change and does everything it can to encourage it. I'm not sure it does (eg 4.14 makes a good point but then fails to refer to the significance, eg the effect on consumer expectations and peace of mind of having continuous information about progress of an uncertain journey, with targets and resources applied that were based on the sort of uncertainty about th epath that is currently being reported). The information the FSA is discussing here is part of decision support, hence service, and that is likely to overwhelm the unimaginative obsession with competition by level of projected returns. If manufacturers try to compete by exaggerating product claims when there is no retailer involved, they will undermine trust in buying direct and confirm the role of retailers. That should be discipline enough.
6) There is scope to reinforce the distinction about what you can or must say about the future depending on whether it is an independent sale or a direct sale by manufacturer. But the issue here as always is whether the independent sale if commission based really is independent. The original depolarisation proposal, creating a separate advice market, would have allowed the FSA to free projections for advisers.
7) There are some helpful distinctions about what you need to say that is standardised according to the product - eg guaranteed equity products need a warning about the inherently low probability of a gain in excess of the opportunity cost (as we have discussed).
8) This should also apply to how a product is being used, ie distinguishing between a product which is a complete investment plan (eg a pension contract that could be invested one way throughout its life) and a product that is being used as just a building block in a plan - this ties in with the distinction about how something is being sold.
9) Section 5.3 touches on one of my technical bugbears: starting projections from an inconsistent starting point. This is exactly what the FSA rates do, the reprojection letters do and most stochastic models also do - no progress there then.
10) I obviously will vote for importance of projections that are generic to asset classes to help spread awareness of a risk spectrum based on what type of asset you expose your money to. However, these will need to take a small risk with additional complexity which is to contract between real and nominal risk. If I had to pick three understandings that would transfer people's handling of money they are what cash can do, what equities can do, and what inflation can do - including what it can do to both cash and equities.
11) I am sorry to see the questions about withdrawing and banning are framed by linking them as one question. It is vital to get a clear picture of relative risks of each - I suspect FSA has prejudged this.
Warns on profits
Hargreave Hale seeking legal advice
Latest news and analysis
First mentioned in Cridland Report