analysis & strategies
The new generation of with- profits are an uneasy compromise and fail to offer the long-term smoothing the old with-profits offered. Instead, distribution, managed and capital guaranteed products will have a bigger role to play, according to research conducted by Datamonitor.
Mis-selling scandals and the UK's Sandler Review have pushed companies into increasing transparency on with-profits products.
Datamonitor found 56% of intermediaries surveyed report either a negative or a very negative reaction from customers at the mention of the phrase 'with-profits'. Next generation with-profit products have emerged to give investors and regulators what they wanted.
However, Datamonitor has warned these products are an uneasy compromise. They fail to offer the long-term smoothing the old with-profits offer, smoothing instead over a much shorter time period in order to offer increased transparency.
Datamonitor said with-profits must be viewed as a long-term investment and the smoothing mechanism provides genuine protection from stock market falls.
The UK's Financial Services Authority has already made it clear the product must be viewed as long term, and reminded investors that bonuses are not guaranteed and that penalties may apply if investors exit early - so the warnings to investors are already transparent.
According to Datamonitor, even though with-profits are a strong product for long-term saving, serving many conservative investors well, regulatory obsession with transparency and potential mis-selling, combined with a media campaign against them mean with-profits are in terminal decline. They will be taken over by managed funds, distribution funds and eventually capital guaranteed funds.
Distribution and managed funds are the best replacements for with-profits on current offer from providers, said Datamonitor. Distribution funds offer a stable return of between 5% and 6%pa, plus the prospect of capital growth.
Managed funds offer the potential of strong returns and may also be tailored to market conditions. Capital guaranteed products will also have a bigger role to play in the future.
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