It is quite amazing that the regulator, the Financial Services Authority, has allowed one of the biggest single sectors of the UK investment market to end up in such a mess. With-Profits, both as a concept and in reality, is often completely opaque.
Despite the obligation for With-Profits providers to publish a PPFM (Principles and Practices of Financial Management) it is still often impossible to uncover all the relevant facts and figures. The PPFM documents themselves are often crammed with impenetrable jargon and detail and, like With-Profits in general, appear designed to make things as unclear as possible. The attitude of many With-Profits companies with regard to transparency is often nothing short of abysmal, and is in direct conflict with the FSA’s “Treating Customers Fairly” initiative.
It is hard to believe that in the modern investment world With-Profits still plays such a large part. It is clear that the concept of With-Profits has been mis-sold, allowing Insurance Companies and their sales people to present With-Profits as something it is not (not all IFA’s are wholly innocent either). With-Profits has undoubtedly regularly been sold as a direct alternative to deposit accounts.
There remains somewhere in the region of £300 billion invested in With-Profits, many are trapped by redemption penalties (often called, MVR’s, MVA’s etc.) but the funds themselves continue to deliver appalling results.
However, a small minority (Step forward - Prudential, Aviva, LV= and Wesleyan) have achieved positive and very acceptable results for their plan holders. These companies aren’t rocket scientists, they simply applied the original principles and benefits of with-profits, not chasing market trends and fashions, and investors with these companies are likely to be pleased with the results. Although there are another few companies who have achieved, at best, reasonable returns, somewhere in the region of 40% of all With-Profits investors are in funds that are doomed to underperform substantially in the future.
One of the many contradictions for With-Profit investors is that those in good plans with good companies, achieving good results, are likely to be in a position where redemption penalties (MVR’s, MVA’s, or some other element of the With-Profiits alphabet soup) do not apply, and they can move out of the fund quite easily. Sadly, this is another opportunity for the unscrupulous sales person to lump all With-profits funds under the same umbrella. In a nutshell, the poor funds usually have the highest penalties, the good funds often have no (or very low) penalties.
Yet another contradiction is that the good funds, with the best results, are usually those that have the highest asset allocations in shares and property which, ironically, makes them more vulnerable to market downturns and less suitable for the cautious investor that they are aimed at. Help !
If you have a With-Profits based investment, or are considering investing in one, take advice now.
For advice on and investment visit IFS Investment page for Independant Financial Services