A rough ride ahead for with-profits

The with-profits bonus declaration 'season' provides an excellent opportunity for advisers to review clients' with-profits investments.

A key feature of this year's declarations is that, despite the continuing rise in stock market performance since 2003, for many clients regular bonus rates are being maintained at last year's levels. Whilst improvements to investment returns are feeding through to a gradual reduction in Market Value Reductions (MVRs), clients with a longer-term investment view may feel disappointed with this news.

The degree to which bonus declarations vary depends to a large extent on the asset mix of the fund. Improved stock market performance will only feed through to the extent that a fund is invested in 'riskier' assets, such as equities and property. Clearly, the asset mix also determines a fund's future growth potential, meaning that clients invested in funds with little or no equity exposure should be reviewed with high priority.

Suitable advice issues
The FSA's February 2006 Newsletter to financial advisors stated:
'One area of particular relevance to financial advisors is the ongoing advice for policyholders in all with-profit funds, regardless of whether the fund is open or closed to the new business. We have anecdotal evidence that suggests two reasons why advisers may be deterred from offering to review with-profits investments:
1) because there are concerns that they will be accused of churning; and 
2) advisers simply don't have the confidence to give meaningful and bespoke advice to their clients on any with-profits investments...
...the critical factor we would look for (as with any other advice) is the suitability of that advice to the particular circumstances of the client.'
The FSA therefore expects advisers to guide clients through an important decision: to stay in their with-profits fund or to leave and invest in a suitable alternative. A suitable alternative would be, in many cases, a more transparent unit-linked vehicle.

Looking forward
It is clear from this year's bonus declarations that the issues facing many with-profits investors are structural and long-term in nature.
A structured approach to the review of all clients' with-profits investments should therefore form an important part of any adviser's business plan over the coming months and years. Closed with-profits funds may provide a useful starting point for these reviews, but are not the only funds which may not be meetings investors' requirements.
Failing to act could have serious consequences for these clients.