When an IFA wants to recommend an investment to a client, one of the key pieces of information that...
When an IFA wants to recommend an investment to a client, one of the key pieces of information that will be used is a product-specific illustration. Illustrations from more than one company are obtained to enable different companies' products to be compared. But are the IFA and client always comparing apples with apples?
Clearly the IFA wants to be able to demonstrate to the client that the investment being recommended offers excellent value for money. The most obvious factor, often the starting point, will be the potential net return the investment can provide, which means looking at the effect of charges and expenses on that return. The product-specific illustration is supposed to present this picture clearly and, in theory, by comparing the illustration for one product against the illustration for another, it should be easy to see which one offers the best value for money. But is it really that straightforward?
The FSA produces guidelines detailing the information that must be included within illustrations that are used for business sold within the UK. The FSA's rule book stipulates that all explicit charges and expenses the customer will or may bear must be accounted for in the illustration. This should include all charges in respect of any collective investment scheme or insurance fund in which any funds of the contract in question are invested. Basically, the FSA requires product illustrations to reflect accurately the charges and expenses that the customer is likely to be liable for upon making an investment.
IFAs will often recommend an offshore investment bond for the tax advantages it offers the client. If the underlying fund charges are not accounted for in the illustration, however, the full picture is not shown, as clients who invest in portfolio bonds will obviously have to pay the appropriate underlying fund charges as well. If the illustration merely makes reference to the fact that 'extra costs will apply' this doesn't present to the IFA or the client the actual costs that will be incurred. Of course, the reduction in yield figures will look more attractive on an illustration like this, but clearly that is misleading.
Another way in which illustrations can be misleading is by assuming that the investment will be made wholly into a low-cost fund, such as a cash fund. However, while the charges relating to such a fund may be reflected within the illustration, the growth rates used might still be the standard growth rates and these may be unsuitable for a fund of this nature. The FSA's rules state that an illustration must not be created using the normal growth rates if, by doing so, the return is overstated. Appropriate projected returns must be shown.
So, if a product provider uses an illustration to demonstrate to an IFA that its product is better value than another company's, the IFA should examine the illustration carefully against the other company's to ensure that a proper comparison is being drawn. Of course, providers' charges differ, but so do other factors. Price is not the whole story. Service, product flexibility, investment fund choice and technical expertise all contribute to the overall proposition available to IFAs and their clients and, combined with cost, provide a true measure of value for money.
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