Capital Investment Bond

Mr_Frugal

I have recently been advised to buy several financial products (namely ISA, Personal Pension Plan & a Capital Investment Bond).


Firstly can someone please explain what the difference is between a Capital Investment Bond and a 'Fund' (are they one and the same thing) ?
Secondly, this company provides 3 types of Capital Investment Bonds (CIB) - a 'Deposit Fund', a 'Managed Fund' and a 'With Profits' fund.
As I understand it the Deposit Fund is a low risk (and as such lower return) product, the With Profits is slightly higher risk (& return) and the Managed Fund a higher risk again ???????

I am sure however that I once read something negative about With Profits CIB's - can anyone shed any light ?
If I am looking at investing £25k over 10-20 years would I be safe with a With Profits policy ?
I also read in their literature that they can apply a 'market value reduction' to the With Profits CIB (although the advisor did assure me that providing I didn't touch it for 5 years I was guaranteed the investment could never go below £25k). Does anyone know anything about these 'market value reductions' and can my £25k decrease over time in a With Profits CIB ?

Lastly they charge a 1.2% PA charge on their bonds (no set up charge by the looks of it) - how does this fare with the competition ?


Any advice greatly appreciated....!!

dunstonh

Secondly, this company provides 3 types of Capital Investment Bonds (CIB) - a 'Deposit Fund', a 'Managed Fund' and a 'With Profits' fund.
As I understand it the Deposit Fund is a low risk (and as such lower return) product, the With Profits is slightly higher risk (& return) and the Managed Fund a higher risk again ???????

Who on earth is recommending that? If its a tied agent then you expect crud products but if thats an IFA then its disgraceful.

Firstly can someone please explain what the difference is between a Capital Investment Bond and a 'Fund' (are they one and the same thing) ?

You are comparing a car and petrol. An investment bond is a tax wrapper. Funds are collectives where your money is pooled with everyone elses and you invest in a defined area. You get a number of units at a certain price to reflect your investment.

An investment bond can invest in exactly the same funds as an ISA or pension. They only difference is they charges and the way the tax is handled. An ISA is a tax wrapper. A pension is a tax wrapper. All of these can invest in funds.

If I am looking at investing £25k over 10-20 years would I be safe with a With Profits policy ?

Could be but i wouldnt do it and I wouldnt recommend any of my clients to do it.

I also read in their literature that they can apply a 'market value reduction' to the With Profits CIB (although the advisor did assure me that providing I didn't touch it for 5 years I was guaranteed the investment could never go below £25k). Does anyone know anything about these 'market value reductions' and can my £25k decrease over time in a With Profits CIB ?

Depends on the product and provider. A small minority do have MVR free exit points. At this moment in time, if you really really really really really had to go with With Profits, then only Norwich Union and Prudential would be your consideration. I say that with the reservation that you wouldnt go into with profits for new business at this point if you had any sense.

Lastly they charge a 1.2% PA charge on their bonds (no set up charge by the looks of it) - how does this fare with the competition ?

Dont be fooled by no initial charge. An investment with an initial charge can have lower annual charges and over a 10 year period it can be cheaper.

Name the product provider and can you confirm the status of the adviser (tied, multi-tied or IF). You can verify the status of the adviser on the key facts document they gave you right at the start of the meeting.

The recommendation sounds awful on these fronts:

1 - Investment bonds are priced better for investments over 100k. Anything under 50k is expensive
2 - Investment bonds typically have 100-900 funds. Yours has three and all three are poor options.
3 - investment bonds are geared for higher rate taxpayers or those looking to reduce their IHT liablity (and a few other minor areas).
4 - if the adviser is thinking with profits then that should ask serious questions about their ability to give investment advice.

jamesd

With profits investments are generally discredited these days. Any person recommending one should generally earn a substantial decrease in your level of trust in the quality of their investment advice.

Dunstonh mentions several other reasons to have doubts about the quality of the advice you have received.

Mr_Frugal

Thanks guys - looks like I am going to have to take some further advice before signing any cheque !

Dunstonh - the advisor is tied, in that they work directly for Wesleyan Assurance Society (don't know how they or their products fare generally but would be interested in any feedback).

Cheers.

jamesd

An IFA is required to identify the best product type for you. If they make a wrong product type recommendation they get to pay to put you in the position you would have been had they got it right. This doesn't include investment returns, just product type selection - if funds drop in value, that's OK, so long as funds were the correct choice.

Tied advisers can only recommend the products of their own company.

The two are a world apart and you should really only use a tied person when you already know that you want the product they are selling. This probably explains why you got the suggestions you did, probably selected only from those that particular company offers.

For 25k over 10-20 years the obvious first choice is use of a stocks and shares ISA with a 7000 contribution limit per year. If you have used none of the ISA allowance this year that would let you put in 14k by mid April and another 7k 15 months from now. If you have a partner you can each use your limit, though remember that this is also a transfer of ownership of the money!

Within an ISA or an investment bond you select funds that match your desired risk level. If you want to get some idea of yours, look at dunstonh's profile and send an email to the address there asking for the risk assessment test. Once you know that, ask for suggestions on what general types of funds are suitable and how to select them.

While risk tolerance is a personal thing, do remember that for a long term investment you will generally get better returns at higher risk levels. As the time to end of the investment period approaches you can start to shift to lower risk and less variable investment types.

Risk isn't a single fund choice. You'd always want many funds, some of higher risk, some of lower.

dunstonh

should really only use a tied person when you already know that you want the product they are selling. This probably explains why you got the suggestions you did, probably selected only from those that particular company offers.

Even then, you wouldnt want them to do it as the tied version of the product is usually more expensive or cut down than the independent version of the same product.

the advisor is tied, in that they work directly for Wesleyan Assurance Society (don't know how they or their products fare generally but would be interested in any feedback).

The advice is poor, the product range is poor and the fund choice is poor. Also, if the advice was followed through and you did it, I could almost certainly guarantee that I could get it classed as a mis-sale. Thats how poor it is.

Walk away and see a proper investment adviser.

Primrose

Having been stung in the past by investing in With Profits policies in good times and then finding they have been penalised by having all kinds of financial penalties imposed on them in bad times, I would now avoid them like the plague as they are not financially transparent. This is now a well known fact and I'm surprised any financial advisor is still recommending them. I would also not use any financial advisor who is tied to a specific financial institution as they will only be recommending investments from within their own stable of products, which may not be suitable, or the best value available on the open market. I also recommend that you don't invest in any product if you don't understand how it operates as you will never have peace of mind. It's one thing taking a calculated risk with your money when you know the odds. Investing in the dark is a mug's game.

dunstonh

This is now a well known fact and I'm surprised any financial advisor is still recommending them.

In this case, it is a tied agent. Tied agents cannot give investment portfolio advice. The choice of funds is with the client and even if the tied agent steers you towards one, it will still be documented as your choice.

Tied agents also get fed proproganda from their employer. All the positive things will be making their way but not the negatives.

A tied agent isnt really a financial adviser. They are insurance salesmen.