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With Profits Uncovered
AIFA’s commentary on NMG’s with profits research
Background
AIFA developed the Stakes in the Ground (SITG) concept to provide documented evidence of current financial services practice. The objective is to provide a detailed analysis of the way in which the industry is carrying out business in particular areas at particular periods in time. The intention is that the results of this research can then be used by regulators, the industry and consumers, as a point of reference to be drawn upon in the future, as evidence of how business was being conducted and the environment that prevailed at a certain period in time.
Following a rigorous appointment process, the stakeholders (AIFA, ABI and ILAG) chose NMG Financial Service Consulting Ltd as the consultants to carry out the first SITG project. The stakeholders chose with profits as their first stake and NMG’s independent research, which was carried out on both a qualitative and quantitative basis, focused specifically on advisers handling of with profits business.
We believe this is the largest piece of factual and attitudinal research on with profits ever undertaken in the financial services industry.
NMG’s brief was to hold a mirror up to the industry and record ‘warts and all’, and as accurately as possible, what advisers attitudes are to with profits investment; what information they are accessing; and where they are sourcing it from; and how advisers are approaching advice to existing and new clients in this area. The stakeholders did not want the study to judge the quality of advice being given; neither did they want it to suggest what should be adopted as best practice.
The Research
The research is supported by five appendices:
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Environmental analysis
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Research methodology
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Quantitative findings
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Qualitative findings
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Library
There is a vast amount of material in Appendix 5, including, for example, PPFMs, marketing literature, articles and compliance manuals which could be used to establish opinions and behaviour at the time when business was being carried out. We are not publishing all of this data due to its complexity and confidentiality. Instead we will be placing the complete study in a central library.
NMG used a representative sample of advisers which included both Independent Financial Advisers (IFAs) and Whole of Market advisers; neither have contractual obligations to product providers.
For the quantitative research, 544 small to medium sized adviser firms completed an online survey between August and September 2006 and around 244 of those advisers completed a follow on survey soon after. For the qualitative research, 20 representatives of large adviser firms were interviewed each for 45-60 minutes during September 2006, using the same discussion guide (for consistency) whilst allowing for an in-depth focus on key areas.
Environmental analysis was also carried out to provide a context to understand the economic and political background against which advisers behave.
Our Comments on the Findings
We are not surprised that a broad range of views emerged about with profits. This reflects the complexity of the issues which need to be considered before a decision can be made such as the attitude of the client; the nature of the contract and the term of the investment. There is an almost even split between those who think that with profits has a role to play in the future, as part of a diversified portfolio of investments, and those who fundamentally disagree. This highlights a strength and divergence of opinion that IFAs have about the concept of with profits and its relevance in today’s market that cannot be ignored.
Coupled with the complexity of the decisions surrounding with profits, there is a general nervousness about handling products which have been the subject of significant adverse comment in recent years and remain under the Financial Services Authority’s scrutiny. In many cases this has led to an overly cautious approach when considering recommending clients to switch out of with profit funds.
We were pleased to see that in spite of the fact that many advisers seem to be sceptical about with profits investment because they think it has inherent flaws which cannot be overcome (e.g. lack of transparency) that even these ‘sceptics’ reviewed their clients’ situation objectively before reaching a recommendation. The 35% of online respondents deemed firmly opposed to remaining in with profits (Chart 2 – page 7 of the Executive Summary) still confirmed adherence to proper processes of reviewing existing or new clients’ policies before advising a client on the action they should take. However, this does highlight a concern that many advisers have predetermined views of with profits irrespective of the provider, the investment strategy or the client’s attitude to risk.
AIFA’s view: when recommending a transfer from a with profits investment it is imperative that each case is assessed on its individual merits. IFAs need to follow a clear process’ on each individual case and make sure they don’t fall into the trap of making assumptions about a fund’s performance or investment strategy.
IFAs’ wide range of views and behaviour when it comes to handling with profits leads to the conclusion that there is no ‘right’ answer to the question which hangs over these products. It may clearly be right to leave a client in a fund once all the issues have been considered. Equally, it may be right for another client to switch. There will also be times when the decision is not so clear cut as the pros and cons can be equally weighted. This makes the adviser’s job even more difficult and it will often be down to the client to make an informed decision.
Review Process
We were particularly pleased to see that a considerable amount of existing business is being reviewed. Nearly 50% of the 544 advisers responding to the online survey had reviewed with-profits bonds, pensions and mortgage endowments in the last 12 months.
It should be noted that there is rarely a contractual obligation in existence for an adviser to give ongoing advice, particularly for endowment mortgages where it is more likely that there will be no ongoing relationship with the client. Advisers also have on their books what are known as ‘inactive’ clients - those who do not respond to communications from their advisers. The research shows that about two thirds of inactive clients have not received a review in the last 12 months.
AIFA’s view: one of the issues which could be considered following the publication of this research is whether or not inactive clients, including those clients whose advisers are not obliged to give ongoing advice, need to be approached in a different way in order to be better informed about the options for their with profits policies. What would need to be considered is whether it would be desirable to do this; how it could be done and by whom; and who bears the cost.
Decline in With Profits Business
The research confirmed that sales of with profits products are rapidly declining. Only 31% of the 544 advisers surveyed online had completed a new sale during the 12 months leading up to the survey. The main new business carried out was in pensions and with profits bonds. And of those new sales, the main reason given for recommending a with profits product is as part of a balanced investment portfolio.
AIFA’s view: the low volume of new business is evidence of the lack of confidence in with profits generally above the margin. We question whether this is because of regulatory decisions and the constant media focus or a genuine belief that the concept can be replicated and delivered in a more transparent and effective way; for example through a wrap platform.
Knowledge and Information About With Profits
85% of advisers said they were confident they had sufficient knowledge to advise on new and or existing with profits products. However, many would like more support from product providers as 72% of respondents disagreed, or strongly disagreed, with the statement that providers ensure that the IFA is equipped to advise on with profits by providing suitable training and relevant information.
There is plenty of information available to advisers on with profits but only 28% of the 544 respondents made use of life office PPFMs (principles and practices of financial management).
AIFA’s view: AIFA has repeatedly encouraged advisers to make use of PPFMs when advising on with profits, but evidence suggests that advisers find them complex, difficult to analyse and extract relevant information from. Also, as there is much variation in the amount of information each provider communicates within each section, this makes it difficult for advisers to make direct comparisons. It would seem that life offices need to improve the way in which they communicate information on their with profits funds.
There seems to be a contradiction between advisers’ perceived confidence and their competence. Eighty-five percent of advisers say they are confident about their knowledge to advise on with profits and yet 72% say they need more training and information. This suggests that some advisers’ confidence may not be matched by their competence. An alternative conclusion is that advisers are confident in their ability to advise on with profits, but are not receiving adequate provider and/or client specific information to do the job properly.
Closed Funds
The research demonstrated that there is a lot of mistrust about closed funds, with 54% of the online respondents agreeing with the statement that the disadvantages of holding an investment in a closed fund are sufficient in isolation to justify a client reinvesting elsewhere. However, further analysis of this ‘closed fund’ group, revealed that despite their lack of confidence in the management of closed funds, there is little difference in behaviour between them and those advisers who disagreed with the statement.
AIFA’s view: the lack of confidence in closed funds being well managed and productive is hardly surprising considering some of the returns (or lack of…) in recent years. However, not all the funds are poor performers. Advisers should ensure they have all the relevant facts and the latest information about a fund before they make a recommendation, rather than just dismissing a fund because it is closed.
AIFA’s Overarching View
Advisers putting their own views and preferences to one side in favour of acting in a professional manner and placing their clients’ needs first, would seem to be the dominant finding of this research into with profits. But for some, their confidence in their ability to advise in this area may not be matched by their competence. There is also an element of predetermined views which advisers need to recognise if they are not to pre-judge a situation.
AIFA suggests that advisers should ask themselves what the regulator would be looking for when examining advice given in this area. We would recommend the following:
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the advice process is thorough and evidenced;
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any preconceived ideas advisers may hold should be put to one side;
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there is a robust analysis of any recommended switch (e.g. stress testing the financial impact of switching – consideration of exit penalties for example (MVRs) and the upfront costs of buying new products);
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that advisers have a full understanding of the individual policy facts and figures.
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