why go with guarenteed growth bonds and not a building society fixed year

Rollinghome

mr_fishbulb wrote: »

Hadn't seen their website before, but the guid to investing looks great for beginners - http://www.candidmoney.com/investment/default.aspx

Does seem to be very objective and one of the few where the guy who owns it, Justin Modray, does have a some real knowledge of the subject (and an LSE economics degree, which is better than most advisers).

Rollinghome

Aegis wrote: »

From what I've seen, most guaranteed equity bonds offer a lower commission rate than what's available on standard unit trusts and OEICs, so it's unlikely to be a purely commission-driven product selection. I'd expect a product like this to pay somewhere in the region of 3% with no trail, compared with an OEIC that could pay up to 5% with 0.5% trail.

It's more likely that the product was chosen because to risk averse people it looks like a no brainer at first glance: capital protection with some exposure to market upswings. Delving into it a bit more, some unfavourable terms might be spotted compared with direct investment into the markets, but the direct investments come with extra risk of losing money in absolute terms, and may therefore be inappropriate for the lower-risk investors.

But 3% (or more) on £70K is still over £2k in commission. Far more rewarding than just telling the totally risk-averse client to just stay in cash, which would earn the IFA nothing. I suppose that's preferable to being ripped off for 5%/£3.5K plus trail for a few OEICs that could be bought from H-L without any front-end charge at all. Better than being caught for up to 7% commission on some tasty money makers.

It's fine if people understand that commission-based IFAs don't make money from giving objective advice. They get paid for selling.

jamesd

Perhaps you might consider building your own guarantee? I'll illustrate how with £1,000.

First, you start with a savings account or other guaranteed product. I'll use a five year savings bond paying 4.5%. After five years of 4.5% £1,000 will have grown to £1,246. You only need to guarantee 100% so all you need to put into the savings is £802. Five years of 4.5% grown on £802 is £999.44, so that gets you your 100% capital guarantee.

That's used £802 of your money, so with the rest you can buy a FTSE 100 fund. That's £198 into the fund.

But you'll probably find that there's also a term in the agreement that says if the FTSE 100 drops by more than 50%, you take that loss. While the guarantee is currently assuming it has to cover 100% loss, not just 50% loss. So more is in the savings account than really needed.

If they split it to £400 in the FTSE 100 and £600 in the savings account, what happens after a 50% FTSE drop? The FTSE part is worth £200 and the savings part is worth £748 after the five years of 4.5%. £200 + £748 = £948 so it hasn't delivered the 100% guarantee. But the FTSE 100 pays about 4% in dividends a year and those dividends pay out £86 over five years. £948 + £86 = £1,034 so you have managed 100% of the capital after the 50% drop that you want protection from.

Here's how it works out for other possibilities:

75% drop: 748 + 86 + 100 = £934.
50% drop: 748 + 86 + 200 = £1,034 = 100% guarantee met
No change: 748 + 86 + 400 = £1,234 = 23.4% gain.
50% gain: 748 + 86 + 600 = £1,434 = 43.4% gain.
100% gain: 748 + 86 + 800 = £1,634 = 63% gain.
200% gain: 748 + 86 + 1200 = £2,034 = 103% gain.

You're also not restricted to using just the FTSE 100 with the DIY approach. You can use indexes that are more likely to make money and you can diversify across several, say including a global index as part of the investment part. For example, there are enhanced corporate bond funds that currently pay around 8% and could be used as part of this mixture, or a range of equity income funds like Invesco Perpetual Income or a mixed bond and equity fund like Invesco Perpetual Monthly Income Plus. Those pay some income and have lower drop potential in a bad year, so they decrease the proportion that would need to be in a savings account to provide a guarantee.

atypical

jamesd wrote: »

Perhaps you might consider building your own guarantee?

Is this something an IFA would ever suggest? It seems to tick all the boxes whilst reducing charges. You could tweak the numbers/composition based on the risk a person is willing to take.

dunstonh

atypical wrote: »

Is this something an IFA would ever suggest? It seems to tick all the boxes whilst reducing charges. You could tweak the numbers/composition based on the risk a person is willing to take.

Yes it is. The DIY structured plan was first posted by me on these boards some years ago.

However, what you tend to find is that once you start explaining investments to that level, you find the investor is willing to take a different direction. It also needs an investor that is willing to listen and not have capital security. If they insist on security then you just cant do it as you are no longer acting in line with the objectives and leaving yourself open to a complaint (i.e. investor says "I wanted guarantees" and the recommendation, whilst potentially better, has no guarantees).

EdInvestor

merl1955 wrote: »

Your right we are terrified of losing this money, and we understand about making your money increase to cover inflation. but psychologically any drop in the actual lump sum scares the death out of us as this has got to last us from the age of 57- till infinity.

Earlier you mention you are prepared to take a risk with an S@S ISA.That would involve investing up to c. 10k per person per year.

Dipping your toe in the water like this is a much more sensible way to go.Put the rest of the money in the best straightforward bank accounts/bonds you can find at no risk.Over 70% of your money is certain to be safe, can you live with that?

For the risk-based bit,go through a discount broker such as www.h-l.co.uk.

They will not take 5% initial charge off your money when you invest it (as a bank or other adviser usuallly will) and they will also rebate some of the 'trail commision' they get paid by the fund managers.

At the end of the year you can either take up next year's ISA allowances and put in more money - perhaps diversifying the funds you choose this time, (diversifying reduces risk, the old eggs in baskets principle).If you're unhappy with this year's fund choices, you can switch the money to other funds.

That way you can build up an investment portfolio tax free over several years, while taking a risk with only a small proportion of your total money, the rest being safely in the bank.

There is no need to blow it all at once.Take your time.

.

dunstonh

They will not take 5% initial charge off your money when you invest it (as a bank or other adviser usuallly will) and they will also rebate some of the 'trail commision' they get paid by the fund managers.

You say usually... The FSA's own figures show the IFA average at 1.8%. Whilst average means some get more, it also means some get less. However, the average is more reflective of the "usual" figure.

merl1955

Thank you all for your advice, I looked at the website candid and it is very informative (but not as good as this forum) however, I liked it's calculation section very good.
I think from what was said is put some of the lump sum into a fixed account either for 1yr 2yr 3yr 4yr 5yr ( I suspect we may either do 3 or 5 yr) which will say bring the total back to the original £70,000 and then use the other amount to invest in a diverse group of investors e.g. government gilts corporate bonds property etc., then hopefully the money made will actually give us the growth we are looking for, without losing the orignal sum.
Again we would rather take a safer option and would possibly go with the advice of the IFA and put it into Jupiter Merlin income portfolio, which seems to suit the novice player.
Now all we have to do is sit down and sort out how much this would cost us. I know from reading your blogs that we have to ask but when we tried it wasn't actually that clear how much it would cost us.
I think if we took the capital protection plus growth bonds there wouldn't be any commission? and nothing was said about the Jupiter investment.
I must say I think that schools should offer a G.C.S.E course into understanding money. It is such a minefield when it comes to getting an honest straight forward plan!!
It's much easier taking a loan than making what's your own safe.

jamesd

The Jupiter Merlin range is a good one.

Via your IFA the cost will depend on the terms of their agreement and they should explain those clearly, including initial charges and ongoing charges from the investment management company and how much they will receive out of those for providing their service. The maximum initial charge would be around 5% of which the adviser would get 3%. The usual ongoing annual amount would be 0.5% of the investment value taken out of 1.5% typical charges from the fund manager, which are reflected already in the performance results of the investment. Lower charges than this are quite likely, depending on where in the country you are (London is more expensive because of higher costs for the IFA) and how much is invested.

There are online discount IFAs like Hargreaves Lansdown that don't normally offer advice but instead discount almost all of the initial commission (usually all or all but 0.25%) and return to you about half of their ongoing annual (trail) commission as it's paid to them. HL do have an advice service but it's quite expensive compared to most IFAs.

For the cash deposits in addition to fixed interest rates you could consider putting some into the NS&I inflation-linked bonds. This will give you more protection if inflation rises significantly.

Charterhouse

jamesd wrote: »

For example, there are enhanced corporate bond funds that currently pay around 8%.

Such as?? Sorry, but I'm sceptical.