With or with(out) profit investments
FOLLOWING on from last week's column on with-profits, we had a number of callers wanting further answers. I'll cover these below.
Much of what is written about with-profitsis indeed written, one can only assume, with the information advantage I referred to last week. We don't know what we don't know, so we don't think to ask that question, or search through 100 pages of a company's documents to find what we don't know to look for.
After all, these are sold as a straightforward and less risky solution. Just as most current politicians are a victory of marketing and misinformation over correct data, these investments can be no different. "Sleight of hand”
One of the most glaring points was that made by the Financial Ombudsman Service who state, regarding with-profits in a section on their website titled ‘with-profits bonds', that a “with-profits bond may not have been a suitable recommendation for a consumer who needed access to their capital at a fixed point in the future” – a pretty powerful statement which I fully comprehend given the complete lack of nakedness of this arrangement.
An inherited estate is required for a with-profits fund in that it is supposed to hold back returns in good years for the bad years. But what happens to that fund (inherited estate)?
Insurance companies were at liberty to dip into with-profit funds to pay compensation for mis-selling as well as attracting new business. This is a clear conflict and “thorn in the side” between the shareholders of a company and the with-profit policyholders.
Why is a with-profit holder being disadvantaged for bad advice given elsewhere in the business? One might think it's no more than an easy cash flow account for them.
Indeed studying deep into one or two we could see that Prudential had previously set aside £1.6 billion and Aviva, £266 million.
A note in a near 60-page document by Prudential, that investors are encouraged to read and keep up to date with, shows that these conflicts between using with-profit funds for shareholders or the policyholders is very much an issue.
Referring to the balance of how assets are used, they state that policy holder interests need to be balanced with “shareholders' interests in the continuing operation of the business, including writing new business, and managing the market, credit, insurance and other risks associated with that business”.
How many with-profit holders are aware of that? Talk about having your cake, eating it and having deliveries each day. We “give it all but you want more”.
If I pull the engine open on these arrangements it's just a make up of different investments like every other managed fund, but this one has a ‘parent' who not only decides how much to give you, is able to feed themselves from it in times of need on their holiday.
Despite strong investment performance over the last few years, some investors are still being charged a market value reduction (MVR) – the ability of the manager to simply decide to downgrade the value of your fund if you try to access it. And so the ‘parent' can tell you what's in your fund but if you try and access it, your “hands are tied” as they can just change their mind.
“On a bed of nails she makes me wait” indeed.
Moreover, to protect the future gambles in accounting of such an impossible and opaque structure, many funds are paying bonuses in a different way.
A reversionary bonus is added each year and cannot be taken away. A terminal bonus is paid at the end but is only worth what it's worth at the moment you ask, and so can be taken away at a second.
It's therefore, no surprise funds have been allocating to terminal bonuses rather than reversionary bonuses.
:: Peter McGahan is the owner of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a free 11-point health check on your with profit investment, call Darren McKeever on 028 6863 2692, email email@example.com or visit www.wwfp.net.