More layers than an onion

Mistake number one and the biggest of all: Only Standard Life illustrated correctly by using the appropriate growth rates for illustrative purposes for the correct funds.

The FSA made it clear that the correct growth rate assumptions must be used for funds and to use a lower growth rate assumption where the expectation of return may be lower.

For example, when building a portfolio of higher grade fixed interests is it really appropriate to illustrate at 4 per cent, 6 per cent and 8 per cent? Whereas Standard Life illustrated a bond fund at 2.25 per cent, 4 per cent and 5.75 per cent, other providers illustrated at the full growth rate. What a hoot.

I know providers have been warned about this but they are still doing it. The customer then reads an illustration which shows that a bond investing in collectives is cheaper than buying the collectives direct. How can that possibly be the case? That is a full-on mask of the costs of the contract.

Furthermore I could not see anywhere where it explained how pricing worked on the bid/ offer of the underlying funds and I expect there is another layer of charges lumped in there. It should be clear what the costs are and they should be explicit.

I expect this opacity is also to their own advantage and is linked in with the old mirror fund trick.

Recipe for life bond profit: take fund assumptions to maximum while not treating advisers or customers fairly. Mix with expensive product and use mirror funds to hide further charges. Spray with ‘eau de extra allocation’ so adviser can hide bond commission three pages away.

When I spoke to one provider for a quote they insisted they were giving me access to the actual fund. “It is not a mirror version,” they said. No? “Well apart from a bit of money we keep aside for liquidity.”

Well explain to me why Fidelity Special Situations has returned 32.9 per cent better return over the last five years than Canada Life’s version of the fund. That is at best a very dusty mirror version and another expense for the customer.

Further to this, we have the issue that bonds are indeed being illustrated at exactly the same growth rates as unit trusts. How can that be the case given their considerable tax differences?

And if all that is not enough we have the wonderful structured products happily telling us there are no explicit up-front charges thereby luring the ‘cheap’ customer into believing they are getting a bargain.

Not at all. They simply do what the others do, and factor in their charges in the deal/participation.

This article for sure will be sent to the FSA for them to consider. The winners if its acted upon – quality IFAs and customers. The losers – good old banks and product pushing advisers.

Peter McGahan is managing director of Worldwide Financial Planning