With Profits  

What do advisers think of with-profits?

This article is part of
Guide to with-profits

What do advisers think of with-profits?

Advisers have mixed feelings about with-profits funds.

Some claim they are too inflexible and too costly, and in fact the guarantees are not worth the inflexibility.

Alistair Cunningham, chartered financial planner at Wingate Financial Planning, says: "I'm broadly against investments that I think people buy for behavioural reasons rather than financial planning reasons. As with guarantees, there's a cost to these guarantees.

"They apply in very limited circumstances and those guarantees make them very inflexible."

He continues: "I think most people are at least as well served by having a diversified portfolio that's appropriate for their investment objectives.

"Broadly speaking you are guaranteed to get a known value at retirement, but the problem with that is that the known value is a minimum sum assured, and it's likely you'll get more by sticking it in cash."

With-profits funds were very popular in the 1980s and 1990s, and most insurance companies operated in this sector, as the promises were enticing: guaranteed minimum capital back at the end of the term, and bonuses every year and at the end of the product's life. 

With-profits applied smoothing, offering a decent level of return with a certain amount of protection, something that could be argued is perfectly reasonable for many investors.

Paul Fidell, head of business development for investments at Prudential, suggests: "It started to get a bit silly. Some insurers were trying to take market share, and the way you do that was increase bonus rates.

"People started playing silly games with final bonuses and it got too competitive. To support these higher bonus rates, the insurance companies had to be taking more risk with more exposure to equities.

"Equity markets fell [following the bursting of the dotcom bubble] and many funds were left over exposed to the wrong asset class."

Hard to compare

Many funds then moved into bond investments, which paid a lot less, so the final bonuses ended up being smaller, the funds attracted less money, and therefore had less money to invest with, and it became a vicious circle.

Many could not meet the promises they had made to policyholders. Now the FCA asks for a demonstration of ability to pay out to policyholders, and funds have to hold a higher percentage of lower risk assets.

Bruce Dodd, a financial planner at Tilney, does not particularly like them, despite the changes.

He says: "With-profits tend to only be offered by a few providers, although we do come across older plans that have been running for many years. Some of the older funds have a guaranteed annual bonus of, for example, 4 per cent, which as a guaranteed return is highly valuable.