Are you one of the 10 million+ people who have money in with-profits?
And exactly why are so many people invested in this sector?
The number of people who have money invested in with-profits plans, of one sort or another, in the UK today is estimated to be over 10 million.
The total amount of money held by policyholders is estimated to be around £300 billion.
Given these numbers there is a fair chance that if you are reading this you will, somewhere in your pension or investment holdings, have money in a with-profits plan. There are many people we communicate with who don’t even know they have a with-profits fund in their plans.
The purpose of this short article is to correct a common misconception and if you hold a with-profits investment you may well be affected by this misconception.
Here it is:
The thinking is, if so many people have money in this type of investment and there is so much money collectively held in with-profits IT MUST BE BECAUSE IT IS A GOOD INVESTMENT.
Why else is there £300 billion in with-profits? How could it possibly be, that millions of people have this holding if it is, actually, in reality – MORE OFTEN THAN NOT - A POOR INVESTMENT?
There is a reason why with-profits has big numbers attached to it and it is nothing to do with its worth as an investment!
The reason is simple: with-profits was a highly lucrative (staggeringly lucrative) product for financial services firms to sell to their customers. The incentive for salesman was off the scale.
For example a £30,000 investment into a with-profits pension or investment could easily have yielded a commission of around £2,000.
In the 1990s and for much of the early 2000s, firms of all sorts were lapping it by selling bucket loads of with-profits investments to their customers. Financial Advisers, Stockbrokers, Building Societies, Banks and Insurance Companies were distributing the product at pace, making hay.
It may be pertinent for you to ask yourself – how did I get this with-profits plan I now hold (if indeed you do)? In all likelihood you will have it because it was sold to you through one or more of these distribution channels.
And the reason it was easy for sales people to sell or distribute is because with-profits was packaged as something safe and cosy that would provide a reliable return, relatively secure, with limited risk. In many cases it was packaged up to appear similar (if not exactly the same?) as a savings account.
With-profits was a marketing man’s dream, a salesman’s pathway to high earnings and often a distributor’s best profit producer.
That is why there is £300 billion sat in the product today; that is why 10 million plus people have it in their ‘portfolio’. It is because it was one of the easiest and best products for “the industry” to shift that ever existed; not because it was, or is, a good investment.
The real issue today is transparency; most people who have a with-profits holding or a chunk of money in this type of fund have no real idea if it is doing well, badly, what it’s prospects are and it’s true value to them.
There is so much gobbledygook surrounding the returns, the terms and conditions, it ends up being a mystery for many policyholders to know how their fund is performing.
Plus those same distribution sources who now look after the billions in with-profits are still handsomely rewarded - year after year - for keeping it there, a £10 billion fund (not especially big in the scheme of things) might have annual fees of £100 million coming in. £100 million in recurring fees each and every year!
So the incentives continue, even today, despite new sales having dried up; because the companies looking after with-profits funds are keen to keep their cash cows pouring out the fees.
This means they are incentivised to keep the funds – at the very least – looking good. Therefore they sometimes play little tricks to make things look better than maybe they really are.
There is no outright deception here, it is simply that economic incentives will encourage the companies to present and manage the funds in a certain way.
However – the reality is many funds are simply poor value and this includes some funds with billions in them.
They may also have risks involved which the policyholder is not aware of.
It is unlikely that the true position of an individual’s with-profits investment is in line with their original requirement or what was sold to them at the outset.
With-profits is truly a success story; but only in the sense that it has been a success for the distributors of with-profits – not for the policyholders!
The claim that this is an open and shut case has to be made with some caveats; first, there are some with-profits funds that have performed well. Second, there are providers of with-profits, today, who retain the original ethos and continue to run their funds very well. Third, even where there are disappointing returns, there can be reasons for policyholders to stick with what they have.
However of the £300 billion, there is a high proportion which represents poor value for the policyholder; of the 10 million people who hold this investment it is clear many have no real idea what they hold and the dangers or risks inherent.
Our aim is to help policyholders understand – clearly and in very simple terms – exactly what they have and therefore support decisions how to manage their position going forward. Our report service is, if you like, a translation service.
Our report will provide you with a clear translation of what your policy is worth, how it has performed and what its prospects are. Giving you total clarity and transparency. Translating the gobbledegook into Plain English.