Why are some endowments so much worse than others?

mayb_2

EdInvestor wrote:

You are not wrong.

It was striking that when John Tiner (a very senior financial professional with a top chartered accountant background ) took over the FSA, he was moved to immediately launch an inquiry into the With profits industry in the wake of the Equitable Life crash. As you can imagine, he felt he ought to understand what this was all about.It took almost 3 years before enough information had been gathered and analysed and the FSA felt comfortable to issue new regulations to straighten it out. Three years.

Yet millions of people were investing in these products right through the 90s, whether endowments, pension or WP bonds. It's just astonishing that so many people could be exposed to a product that is so complex that even senior financial professionals cannot understand it.

Talk about smoke and mirrors.

(http://www.fsa.gov.uk/Pages/Library/...001/sp73.shtml
This is a rather long speech made by Howard Davies, Chairman of the Financial Services at the time, to the Institute of Welsh Affairs in February 2001. The title of the speech is "The Future Regulation of With-Profits Business. The following is a quote I have used in another thread:

This lack of transparency has more than an irritant effect. It is one of the most important reasons why mis-selling has been so easy. It has been possible for salespeople to present these policies to investors in elaborate and confusing ways, causing many people to take out contracts whose characteristics were unclear and unsuitable to the investors' needs

If as you say the FSA has new regulations to straighten this out it is certainly not clear that it is benefitting those of us missold these policies.

When considering our complaint, and presumably in full knowledge of the FSA's stated concerns, he rejected our case on the basis that in his experience nobody would buy a product such as this without getting all of the information they needed to make an informed decision. So - it took John Tiner almost three years, but we should have understood it over a cup of tea and a chat with a Company Agent.

So who is looking out for those of us persuaded to buy something we have no hope of understanding? The way some of these things were sold would be called fraudulent in any other sphere. Again I quote from that speach:

The funds are opaque, with investors getting little information about how their funds are invested, or indeed about the nature of the risks (whether risk of early surrender, investment risk, or risk by association as in the Equitable case) to which they are exposed. The annual statements an investor typically receives are often less than helpful in this regard. Even the terminology used seems designed to mislead.

Paul_Herring

EdInvestor wrote:

The FSA then made everyone back its guarantees with bonds ( formerly the regulators were very lax), and that's why many companies now have less than 40% of the money in equities.The policies are safer - the guarantees will be met - but they won't perform beyond that, so there are large shortfalls.

dunstonh wrote:

Lets look at a real example and pick the Standard Life managed fund and look at the annual performance year by year going backwards from 2006

11.09%
18.75%
10.80%
12.24%
-12.44% (stockmarket crash years)
-13.85%
9.98%
14.94%
-1.01%
15.94%

So, you can see it fluctuates a lot.

Now, we move to flaw number 3, which is linked with flaw 2. If you look at that 1997 example again you will see in year one the value would have dropped 1.01% over the first year (ignoring contributions for the moment). So a projection after one year at 4, 6 & 8% would show all red as it got minus 1.01%. but look at the next two years. Well above what was needed. Now comes the problem. two years of negative returns due to a long stockmarket crash. Not a problem as mentioned in flaw 2. However, because everyone thinks short term the endowment problems start. Virtually all endowments at that point would be below track. But look at the four years that followed. Those that surrendered missed out on the recovery and those bad years where the unit price dropped big time would have allowed them to buy new units much cheaper than before. As the price recovered, those units would have made up for the drop before.

So, a possibly naieve, viewpoint is that the FSA is to blame for all this, by forcing all the companies to sell their shares and buy bonds when the market was low?

EdInvestor

It should be pointed out that Dunstonh has used an example of an endowment invested in a managed fund.Such minority unit-linked endowments were not affected by the FSA solvency change, which applied only to With-profits endowments.

Is is IMHO not fair to blame the FSA: they were forced to choose between

a)Doing nothing and thus exposing investors to the possibility of losing almost all their money. Under this option if the money was lost, it might be possible to make it back again later if markets recovered, but there would be no guarantee this would happen.

or

b)Requiring the insurers to back up their guarantees with safe investments. This exposed investors to the possibility of losing only the money that was not guaranteed, but made sure that guaranteed money was protected. This meant however that the likelihood of making losses back later was lower.

IMHO they were correct in choosing option B. It would not have been right to take a decision which converted a guaranteed (WP) product into an unguaranteed (unit-linked) product. Think of what would have happened if the market had gone into the doldrums for 20 years.The suffering would have been much more widespread.

What investors need to realise from this is that guarantees cost money.You pay in lower returns. Under the old lax regime, where insurers were not required to secure the guarantees, people were taking a risk without knowing it.The insurers were claiming that you could have both guarantees and high returns.

But there is no such thing as a free lunch.

And yes, I quite agree that much of the responsibility for the mess lies with the old very lax regulators whose lack of action lulled investors into a false sense of security. What we now know is that ignorance is not bliss and that you must DYOR.Naive and trusting is no longer an excuse. "I don't know anything about pensions" is no longer an excuse.

If you don't understand a product, don't buy it.

Caveat emptor rules.

Crazy_Saver

Originally posted by EdInvestor
What we now know is that ignorance is not bliss and that you must DYOR.Naive and trusting is no longer an excuse. "I don't know anything about pensions" is no longer an excuse.

If you don't understand a product, don't buy it.

I couldn't agree more EdInvestor. Something that we can all say with hindsight. But it is still such a shame that all those poor ignorant fools (myself included) who were too trusting back in the late 80s/early 90s are left so out of pocket while so many FAs (present company excepted) laughed all the way to the bank!:mad:

mayb_2

Crazy_Saver wrote:

I couldn't agree more EdInvestor. Something that we can all say with hindsight. But it is still such a shame that all those poor ignorant fools (myself included) who were too trusting back in the late 80s/early 90s are left so out of pocket while so many FAs (present company excepted) laughed all the way to the bank!:mad:

You didn't need a degree to be sold one of these things, and the general consensus amongst those who have tried to unravel these with profits policies is that it is beyond the understanding of most of us ordinary folk. Whilst we have become aware, having lost out to this situation - we should remember that there are many out there who even if they know what has happened to them are not able to engage in the conversation or take any action. We wouldn't be chatting here except for Martin's site. I haven't been able to have this conversation with the companies responsible for instance. They just ignore my questions and point me at the Ombudsman.

Those of us who now know better would probably feel even less secure in trusting in pensions or savings. We know how wrong they can go and that really there is nothing we can do about it. I can't afford savings or pension plans because I am busy trying to pay off the mortgage shortfall. The only advice I take now is from Martins web page - at least he is on my side and its costing me nothing.

The Agent who sold me my with profits plan was paid commission but didn't see fit to keep me informed. I don't hold him or his company responsible for the fall in the stock market - but they are guilty of keeping us in the dark. So actually EdInvestor I don't agree with you and the caveat 'if you don't understand a product don't buy it' means I for one wont be buying anything in future - because nothing said here so far answers the original question
" who is out there to help ordinary customers like myself to choose a bank, building society or insurance company etc.. that will invest our money wisely?" or perhaps we should ask how do we know who to trust to give us good advice.

dunstonh

i drive a car but dont know how the engine works. I dont want to. I dont need to. I just need to know that it works and it will be maintained. I think that is what you are getting at mayb.

" who is out there to help ordinary customers like myself to choose a bank, building society or insurance company etc.. that will invest our money wisely?" or perhaps we should ask how do we know who to trust to give us good advice.

Remember, that a bad experience doesnt make all advisers bad. Harold Shipman was a murderer but that doesnt make all doctors murderers. The number of bad transactions compared to good is marginal but its always the bad ones you hear about. Especially on sites like this which is pro consumer and anti establishment.

mayb_2

I am sort of with you dunstonh but actually it is more like - even if you explained it to me all day I would never understand how the inside of a car works, and so I will ask a mechanic and hope he will tell me the truth and not just try to part me from my money.

I would have liked to take responsibility for my own investments, pensions, savings etc etc. but not knowing anything about them and not being given any information upon which to make informed choices, that opportunity was denied to me. I, therefore, find it a bit rich when people glibly state that people such as myself and Crazy Saver and the many others contributing to this forum, should take responsibility for their own predicament.

The fact that we are chatting on this site shows that those taking part are trying to do just that - but the odds are heavily stacked against us and we do need to be able to rely on somebody to help.

The point being that we did not even have enough knowledge to tell a good IFA or investment from a bad one. It must have taken years for you to learn everything you know, but people insist on insisting that we should have known what we were doing and taken responsibility for getting the information and asking the right questions etc etc etc. You have said yourself that the IFAs need the right software to be able to give a full overview of the market - well I don't have that now and I didn't even have a computer then. If it was all so transparent and easy why are so many of us in the poo? Why would we need FSA's and Ombudsman and Financial Advisors if we could so simply take this on board for ourselves?

It must be uncomfortable to be any sort of FA, and you believe that you are a good and fair one I know, and find that this sector is being given the blame for so much of the misselling that has taken place. However, the fact remains that a fair bit of blame is placed there because that is where we feel it belongs.

Ps I do wish it was only one bad experience dunstonh but most of our pensions savings and endowment mortgage type things were all taken out during a period of two years and so all have gone the same way. In fact 100% of experience so far has been bad.

EdInvestor

mayb wrote:

I would have liked to take responsibility for my own investments, pensions, savings etc etc. but not knowing anything about them and not being given any information upon which to make informed choices, that opportunity was denied to me.

Generally if you want to take control of things, a bit more effort is required.Those who wish to do it passively and pay others to work on their behalf will almost invariably find their returns are lower - shopping around for better value and keeping an eagle eye on your money is a must.

This is the same in all consumer areas though, and has been for years..

I do have some considerable sympathy for young people who were effectively forced to have an endowment mortgage if they wanted to get a home loan at all - there was quite a bit of this, especially in the building societies, in the 80s and early 90s at a time when the market offered much less choice.

There are numerous anecdotes of people who wanted a risk free repayment mortgage but were told they would be denied any mortgage if they refused an endowment.These people most certainly deserve redress.

The OP was certainly sold a savings plan with high charges which has done very poorly, and such products (pensions as well) were very common in those days: there are still quite a few around now.(See the very long AXA Sunlife thread over in the Savings and Investment forum).But it's a difficult one as she hasn't made a loss and it's not clear that the policy was actually unsuitable for her needs.

dunstonh

If it was all so transparent and easy why are so many of us in the poo?

It is more transparent now but wasnt in the 80s and early to mid 90s.

It must be uncomfortable to be any sort of FA, and you believe that you are a good and fair one I know, and find that this sector is being given the blame for so much of the misselling that has taken place.

It is fustrating. Especially when you consider that the FOS has published stats which confirm that over 80% of IFAs licenced today have never had a complaint (pension, endowment or other). Much of the problem was caused by those that have long gone or with salesforces. I cannot recall the stat to hand but its something like 12 companies accounting for over 60% of all complaints. You also have tied agents pretending to be IFAs. Again stats on that show that over 2/3rds of people seeing a tied agent believe the adviser to be independent. So, of course if something goes wrong, IFAs get blamed even when it isnt IFAs. We have seen that quite often on this forum where people have posted as such.

However, the fact remains that a fair bit of blame is placed there because that is where we feel it belongs.

I would disagree. The "blame" lies with a range of people and a number of external events which no-one saw happening.

The buying of endowments is very similar to mortgaged buy to lets today. You have a significant number of people that believe that property always results in profit. That was the same as endowments. They had never failed, were usually cheaper than repayment mortgages and consumer greed meant people wanted more.

I never sold that many endowments (or repayments) as mortgages was not a big part of my business. Luckily I only sold unit linked ones and used a very low target growth rate (4.4%). However, I can tell you that the most common reason for someone going with endowment rather than repayment was the fact that endowment mortgages were £10-£20pm cheaper than repayment mortgages. It didnt matter about the risk, it didnt matter about the lump sum potential at the end. It was purely a decision down to monthly cost.

Endowments were not mis-sold to the degree is made out. The redress proceedure that was chosen was a disaster and made it a free for all. It doesnt matter if you were mis-sold or not, you can complain about having an endowment and if the documentation wasnt up to todays levels it usually results in redress paid. Its free money in many people's eyes. They have nothing to lose so put the complaint in.

Those who wish to do it passively and pay others to work on their behalf will almost invariably find their returns are lower

That I totally disagree with. I have taken on loads of investments over the years from people who did try it themselves and their returns were lower and would have remained that way.

It all comes down to quality. If you go to a tied agent for advice on investments, you are going to end up with lower quality investment funds and you are seeing someone who is not authorised to give portfolio advice. If you see an IFA that isnt experienced in investments then you could potentially get the same. However, an experienced IFA giving quality advice would be hard to beat. How can you tell is no doubt what you are going to say? Ask for the research. You can view the research and judge the amount of work that has gone into it and whilst you may not understand all of it, you can get a feel for things. Low quality investments tend to have low quality research and you can spot it a mile out. Always ask to see the research.

moneysaver

dunstonh wrote:

It doesnt matter if you were mis-sold or not, you can complain about having an endowment and if the documentation wasnt up to todays levels it usually results in redress paid. Its free money in many people's eyes. They have nothing to lose so put the complaint in.

How is the compensation Free Money? Not all endowments were attached to mortgages. These endowments could be worth less than half of what was originally discussed at time of sale. Many people were counting on this money for e.g pay for daughters wedding, pension etc. Now they are thousands of pounds short of the lump sum they were promised, the compensation does not even go close to the shortfall many are facing. If it was attached to a mortgage people are facing hardship by having to extend a mortgage or change onto a repayment then try & find life cover 15yrs 20yrs after the endowment was started & maybe have an illness which would now not be covered by new insurance.

Moneysaver