Popping up in my google alerts email on With Profits Bonds this evening was an article written by Tony Hazell in Financial Adviser entitled "Tales from the Crypt". It was a gloves-off attack on with-profits (and Aviva's with-profits in particular) and I found myself agreeing with much of it.
One point in particular, however, left me wishing he and others used different language. He states "Had investors ... possessed the flexibility to move their money to better alternatives without facing horrendous penalties..." If I could change one thing about about how journalists and media-connected Financial Advisers talked about with-profits it would be to stop incorrectly referring to the Market Value Reduction as a penalty. As Arsene Wenger might say, "it was never a penalty."
Let's imagine you gave me £100 in January 2000 and I tell you I'm going to give you a return of around 4% each year. So by 2010 it's worth £150 and we'll call that your "pretend fund value". However, back in 2000, in the small print, there's a caveat or two. The main caveat is that I'm going to deduct £10 for my troubles upfront and then invest your remaining £90 in the stock market and what you'll really get back will depend on how well your £90 performs. We'll call that your "real fund value."
The good news in the brochure is that if your £90 grows well when you ask for your money back I'll give you more than the "pretend fund value" as a "terminal bonus".
Unfortunately, we've had a ten year bear market, your £90 has performed poorly and, you know, I'm not a charity, you'll just get back what it's really worth: £120. OK, that's less than your "pretend fund value" but I'll have to reduce that pretend value back to the real market value if you want your money back.
Now, you and I both know that's not how with-profits bonds were marketed, but it's as close a representation for with-profits as I can think of at this time on a Friday night / Saturday morning. But although that's not how it was marketed, this is a reasonable approximation of what was in the contract.
The fund is worth £120. it's not done what you wanted or what I lead you to believe it might have done but it is what it is. It's £120. You can keep it with me if you like and hope your £120 eventually catches up with that pretend £150 I made you think it was worth.
You might be thinking "What's in a name?". Well, for as long as you think of the Market Value Reduction as a penalty, you will be focussing on the wrong thing. You're focussing on my made-up figure of £150 when it's only worth £120. It will only ever be worth £150 if I've stipulated in the contract you can have that figure on the happening of a certain event like death or the 10th anniversary. If such a feature exists, then this guarantee could be truly valuable if exercised.
In my opinion, that's a different mindset to approaching the investment genuinely believing that that it's worth £150 and treating the £120 value as a £30 penalty. A penalty implies the policyholder is undertaking a wrong doing for which a penalty is appropriate. Who wants to commit an act that is deserving of a penalty? And who feels good about their investment that has just avoided a penalty?
If the personal finance media and financial advice profession is honest about what these policyholders have, admit that the investment is only worth the market value, policyholders will get genuinely excited about these amazing 10th anniversary guarantees that are passing thousands of investors by each week. If we don't, their golden value will be lost.
