Could with-profits be making a comeback?

Mix shares with fixed interest, add a sprinkling of property and a dash of cash and you have the perfect blend.

In practice it has, in the past decade or so, delivered disappointment, frustration and confusion to many investors.

But is that the fault of with profits or a consequence of how it has been packaged, marketed and sold?

Has a sensible concept been undermined by high charges, mismanagement, inflexibility and opacity?

Returns were too often based on the whim of managers and actuaries who failed to spot economic, investment and demographic trends, some of which were obvious to anyone who spotted granny was still going strong at age 90.

Smoothing returns turned out to be sinking returns.

Promises were made that could never be fulfilled and sales were based not on investors’ needs but on the profits they would deliver to advisers and banks.

Promises were made that could never be fulfilled and sales were based not on investors’ needs but on the profits they would deliver to advisers and banks

So can with-profits work without this baggage? In the post-RDR world Aviva is offering a bond with an annual management charge of between 0.5 and 0.8 per cent, depending on the amount invested

Investors can buy a capital guarantee for an extra annual charge of between 0.3 per cent and 0.5 per cent. This allows investors to cash in without loss after either five, six or seven years in a 60-day window centred on the particular anniversary they have chosen.

Crucially, Aviva will contact investors to remind them of the anniversary. If they choose not to cash in the extra charge is dropped going forward.

So that is clarity about what a guarantee will cost allowing an informed decision by the investor and their adviser.

This looks cheap compared with the charges on some bonds and structured products offering similar guarantees. Of course, there are adviser charges on top. But those are for you to negotiate.

The proof of the pudding will be in the eating. Can the fund – which is 52.2 per cent equities, 18.8 per cent property, 24 per cent corporate bonds, 3.7 per cent gilts and 1.3 per cent cash – deliver the returns investors expect, whether it be to beat inflation, savings rates or a balanced managed fund?

Will they be happy just to get their money back – and lose out to inflation and savings rates – if the market falters?

Aviva’s Portfolio Level Bond has turned £10,000 into £10,819 in one year £11,915 in five years and £17,604 in 10 years; steady but not spectacular.

With-profits is not for everyone – and certainly not for the massive numbers who were sold it in the 1980s and 1990s.

But a steady, balanced investment with as little risk as possible will undoubtedly fit the bill for some.

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Borrow more and save less

Chancellor George Osborne wants to work towards a fiscal surplus in the next parliament.

If only he would give savers the same opportunity. Instead the Help to Buy schemes have forced savings rates to a new low.

Financial data firm Moneyfacts says the average two-year fixed cash Isa rate crashed from 3.34 per cent in September 2011 to just 1.82 per cent in August this year.

Meanwhile the average two-year fixed mortgage dropped from 3.69 per cent to 2.56 per cent in just one year.

Strange is it not that while saying the government wants to borrow less and save more, he is encouraging consumers to borrow more and save less?

But perhaps, not so strange.

In the government’s eyes savers are hoarders who sit on their money, while borrowers are the great knights spending in the high street, DIY stores and reinvigorating the building industry.

I suppose it has never occurred to them that savers’ money is invested too – in lending to those selfsame borrowers.

Building societies need to think carefully about their strategies. Money might be cheaper from the government right now, but it will not be there forever.

By alienating their core savers they are encouraging them to seek alternative homes for their money, such as shares and bonds, and it might be that once they are comfortable with those, they will never come back.

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The truth can hurt

A colleague was having lunch with a financial adviser last week. The adviser expressed his deep concern that he and others will be facing difficult conversations with their clients in the coming months on platform charging.

“Well”, replied my bouncy friend, “if you’d been open with your clients about the level of charges and the real cost of investing in the first place then you wouldn’t be having to have this conversation now, would you?”