Innappropriate Investments

bigfreddiel

Last week's Saturday's Telegraph Money section front page article listed 5 Investment Hazards namely:

Investment Bonds
Structured Products
Multi-manager Funds
Inflation Linked bonds
ETFs

In some cases the article said these products were appropriate but did not explain under what circumstances - can anyone on this board oblige and explain the pros and cons.


cheers

fj

Rollinghome

I guess this is the article you mean: http://www.telegraph.co.uk/finance/personalfinance/investing/8946740/Five-investment-hazards.html

Investment Bonds
Investment bonds are frequently sold by advisers as being tax-free. They aren't and in fact are likely to be tax-inefficient for most people. But they pay very good sales commission. An article in the FT decribed them as like buying a pig in a poke that you can't open for 10 years. There's a decent article on the potential pitfalls here: http://www.which.co.uk/money/savings-and-investments/guides/investment-bonds/investment-bonds-tax-issues/

Structured Products
Often sold to investors who want low risk and would be better keeping their money in a savings account. But savings accounts don't pay sales commission. Too often the return for locking money up for years is poor. That's because they aren't generally tax efficient. People are often impressed by the fact that they might get the return of the FTSE without risk without being aware that the cost for that is they won't get a major part of the return from the FTSE, if there is one, which is the dividends.

Multi-manager Funds
The problem is generally the cost. The historical return on equity investment has been around 5% pa, though much lower over the last dozen years. Funds with charges well in excess of 3% will wipe out most of the chance of beating the return on cash.

Inflation Linked bonds
Seem to be sold as an alternative to NS&I I/L bond but they generally compare very badly both on return and on access to money especially if they're subject to tax. Being locked in means no exit, unlike NS&I bonds, if inflation in the years to come is low.

ETFs
Tricky if people don't understand what they're buying and for simple index trackers the UT equivalent will often be cheaper.

I'm sure you'll get a few other views and there's lots of other easy ways to damage your wealth.

Meeper

So basically, the article listed them as "hazardous", but said that they might be suitable in some circumstances, neglecting to say what circumstances those might be in the hope that they can focus people on their more senationalist "they are hazardous" line. Interesting journalism there.

I've never seen an investment bond being sold as tax-free, this is news to me. Neither are they tax-inefficient for most people. Investment bonds have a perfectly legitimate place in the portfolio of available options, and the nonsense about paying very good sales commission is a total red herring designed to make the adviser look bad. In reality, investment bonds these days are sold on the same pricing basis as an investment ISA or another general investment account. The bond wrapper is simply an alternative vehicle in which the investment is placed.

Structured Products - yeah, not too keen on the majority of these. They use derivatives and high risk and high cost instruments in order to provide the guarantees and if the counterparty providing the guarantee fails, there is a massive element of risk involved. Don't like them, to be avoided generally.

Multi-manager funds are more expensive than normal funds, but this is due to the additional management being employed. The argument for active vs passive investment rages on, however multi-manager funds is more on the "super-active" approach. Personally, I'm inclined more towards passive funds at the moment, and I don't see the point of the additional layer of management that multi-manager funds have. Don't get me wrong, there have been some multi-manager funds which have done excellently and outperformed the market significantly, well in excess of their costs, but these are few and far between.

ETF's are specialist and shouldn't be recommended to the average investor. They are not easy to understand and, in fact, many IFA's don't understand them at all so how could they recommend them. Part of the confusion comes around the fact that there are multiple types of ETF, and a "pure" ETF as I would call it would be looked upon differently to a synthetic ETF which has a different structure entirely.

Lots of ways to damage your wealth, sure.

[Text removed by MSE Team]

dunstonh

Last week's Saturday's Telegraph Money section front page article listed 5 Investment Hazards namely:

Investment Bonds
Structured Products
Multi-manager Funds
Inflation Linked bonds
ETFs

What we getting next week? 5 things Tesco sell which are inappropriate?

In some cases the article said these products were appropriate but did not explain under what circumstances - can anyone on this board oblige and explain the pros and cons.

Going to keep it simple and short which means there could be caveats and I am not covering all scenarios

Investment bonds - good for higher rate taxpayers who will be basic rate or lower in future (you avoid higher rate tax and can defer it until you are basic rate and not pay any higher rate tax. Over 65s close to age allowance, those that use their annual CGT allowance. Corporate investors can use them to defer gains until a later business year when corporation tax is lower. Easy to place in trust. Not included in local authority care means test and other means tests. Modern versions can use UT/OEIC funds and cost no different to other wrappers or unwrapped.

Structured Products - I did one of these today and that is rare. A niche product but oversold by banks. However, every now and then a good one comes along that makes it worthwhile. e.g. the one I did today has 10% gain for every year in force as long as FTSE doesnt go above the starting point (will kick out early with 10% for each year if it does) but will only lose money if the FTSE100 goes down by more than 50% at maturity. So, for your UK equity sector holding, you are getting the potential of 10% a year gains with no loss unless ftse drops by more than 50%. Personally still prefer conventional investments but suits the right person with the right risk profile who feels that the coming years are likely to see low gains on the market but is likely to be a little higher in future. Counterparty issues apply and FSCS protection doesnt exist. Should only have limited exposure and be picky on terms. Quite useful for those that do not use their CGT allowance as they are often taxed as capital gains (so if you put £10k in an ISA, you can still put £10k in one of these and get tax free growth - subject to you not using your CGT allowance up elsewhere)

Multi-manager Funds - tricky one this. An experienced investor shouldnt go near them but an inexperienced investor looking at no servicing and wants to invest and forget could well be suited to an unfettered version. Fettered versions should be avoided.

Inflation Linked bonds - Should avoid when NS&I index linked certs are available.

ETFs - fashionable with DIY investors. Synthetic ones carry high risk potential. Aimed at more experienced investors who can tell the differences between the different types and how they work.

There are some very good scenarios that can make all the above suitable. However, like any product, they wont suit everyone. So, to call them hazards is wrong. To be on guard would be better and make sure justification is sound.

ses6jwg

I notice that the terms on the inflation linked bonds have improved a little over the last few months.

Most now offer a minimum return of around 3% gross/ aer if inflation falls or stagnates and around 100-120% of any RPI growth, over a 5 or 6 year term.

OK, still not up to the standards of the NS&I product but better than they have been.

ses6jwg

EDIT saying that why are these newer products not listed on the website?

Both Santander and Legal and General both offer better products than the YBS product but aren't listed.

From memory Santander is 5.5 years, minimum return of 18%, 105% of RPI change over the term.

L&G is 5 years, minimum return of 17%, 100% of RPI change.

sabretoothtigger

Good info. I showed a strutured product to someone but they were put off by the fact it does rely on the issuing company not to go completely broke and since thats usually a bank and they are flashing red right now it is something to be wary of I guess.

Bonds also, the biggest reason not to go it alone in getting one is that often it means buying just one company.
They can easily get into trouble and you have put it all on black pretty much. Tesco were trying to sell one recently through various retail outlets I think, they are taking advantage of being a brand name.

Most people should stick to distributed risks, like the ftse index is a great leap in the right direction away from individual risks like that

dunstonh

I showed a strutured product to someone but they were put off by the fact it does rely on the issuing company not to go completely broke and since thats usually a bank and they are flashing red right now it is something to be wary of I guess.

It is a key issue and you would be surprised at how many fail our due diligence. Indeed, more fail than pass and it has got to the point where we almost only use one market counterparty.

However, if you accept investment risk and everything happens to stack up, then the odd one every now and then can appeal for a small amount (no more than 10% with any one market counterparty is the general rule of thumb that IFAs use)

I treat them as having a starting position of being something I dont like as default unless it can persuade me otherwise

Bonds also, the biggest reason not to go it alone in getting one is that often it means buying just one company.

Bonds in the article were investment bonds. Not the other types. (bond, as you know, being the most misused marketing name going - investment bonds are technically known as single premium, non qualifying, whole of life assurance - you can see why marketing preferred investment bond!).

Rollinghome

Meeper wrote: »

So basically, the article listed them as "hazardous", but said that they might be suitable in some circumstances, neglecting to say what circumstances those might be in the hope that they can focus people on their more senationalist "they are hazardous" line. Interesting journalism there.

If the intention is to point out that these products are oversold and often inappropriate then the article is a valid and helpful to counterbalance the one-sided spin from those paid to sell them. I can understand why someone selling them would prefer the problems not to be mentioned.

Meeper wrote: »

I've never seen an investment bond being sold as tax-free, this is news to me. Neither are they tax-inefficient for most people.

Then you need to get out more. I’ve twice been present recently when advisers have claimed they were tax-free and that the permitted 5% pa withdrawals of capital were tax-free, Because the capital gains are taxed as income they are unlikely to be tax efficient for anyone who hasn’t used their £10,600 pa cgt allowance – which is the majority of people. They will pay tax they didn’t need to pay.

For a small number of people with special circumstances they could be helpful but that’s unlikely to be the case for most people sold these things. I expect you sell these things every day of your life and will be very good at overcoming objections.

Meeper wrote: »

Investment bonds have a perfectly legitimate place in the portfolio of available options, and the nonsense about paying very good sales commission is a total red herring designed to make the adviser look bad.

And no doubt you will argue that the FSA is entirely mistaken to try to deal with the problems of dodgy selling by banning sales commission in 12 months time.

Meeper wrote: »

ETF's are specialist and shouldn't be recommended to the average investor.

Expected you to agree on that. They don’t pay sales commission either do they?
[text removed by MSE Team]

[text removed by MSE Team] Last edited by MSE Andrea; 15-12-2011 at 2:13 PM.

Thank you to MSE team for removing that extra-ordinary homophobic namecalling comment that seeming to imply that anyone questioning those investments must gay. Most adults have moved on from that sort of nonsense.

skevvybritt

Can anyone advise on whether I should stick with my NS&I index linked savings certificates, or look to invest elsewhere? What are the forecasts for RPI in 2012?

Cheers!

Rollinghome

skevvybritt wrote: »

Can anyone advise on whether I should stick with my NS&I index linked savings certificates, or look to invest elsewhere? What are the forecasts for RPI in 2012?

Cheers!

It's not just the forcasts for RPI you should look at but also the likelihood of getting any better return elsewhere, particularly as your certs are tax-free.

Always depends on your circumstances and tax position but for most people certainly worth holding for a while yet.