"Gamble that leaves us without profits"

Comment on FT Personal Finance Article 23/01/09

In fairness to the writer, this article is more balanced than most articles I've read over the last week in connection with With Profits policies. For example it includes statistics that show that a decent With Profits fund has more than doubled the return of a UK Index Tracker over 20 years. As the title implies, however, the article focuses on the negatives and the returns of the worst performer.

In answering its own question about why there was so much variety in returns of With Profits compared to the variety of returns in UK Index Trackers, the article blames actuaries for how they set bonus levels when in fact the cause of the variety is down to a more straight forward explanation and is more honest than implied if it were simply down to the whim of actuaries.

Studies have shown that as much as 90% of the returns of an investment are determined by the mix of assets held. All the UK Index Trackers are in one type of asset only (shares of UK companies) and by their nature of aiming to track the FTSE index there really ought to be very litle variety of returns. By contrast a With Profits fund is typically invested in a wide-spread of assets (such as cash, commercial property, gilts, shares in companies in the UK and those of companies abroad). It follows that funds with multi-assets will show greater variety of returns in the peer group than funds all invested in the same asset.

With regards to the wide extremes of returns referred to in the article, it is important to note that the type of assets held in a With Profits fund can be influenced by factors other than those aimed at maximising returns. In particular, it is often the case that where a With Profits fund has in the past offered generous guarantees it needs to invest in more cautious assets in order to make sure it can deliver on those promises. This may be fine if your policy has those guarantees; not so fine if it doesn't because your potential returns will be restricted as a result.

I'd add that I can certainly relate to the experience described by one of the writer's colleagues of the apparent use of With Profits Bonds as an investment panacea for all clients. In my time working for two insurance companies as an Account Manager for regional and national IFA practices, I know that With Profits Bonds were sold as a core holding to many, many investors.

However, to explain away the reason for this high sales volume on commission is an over-simplification and only in part reflects my experience. It doesn't for example, explain why many IFAs who charge clients a fee and transact investments with all commission put back into the plan were recommending With Profits Bonds in the late nineties and early noughties, and why quite possibly some still continue to.

One of the perils facing all financial advisers is that we know time will be the judge of the quality of our advice. When choosing an adviser you can undertake all the due dilligence possible, get references, recommendations, check qualifications, have a fact-finding meeting and so on, but no matter how hard you look you won't find one with a working crystal ball. A good adviser will be highly qualified, invest a large proportion of time continuing to develop his or her knowledge of markets, trends and changes, undertake a detailed analysis of your financial position and your aspirations, explain recommendations simply and point out the risks, consequences and disadvantages of the recommendation. But the advice can only ever be based on what is known at the time. If advisers, fund managers, journalists and investors knew a year and a half ago (let alone 10 or 20 years ago) what we know today we'd have all done a few things differently...

Of course as time moves on, it's essential for advisers and investors to check that any recommended investment remains valid in the light of what we know now. That's why we set up www.withprofitshealthcheck.com