Protected FTSE Plan and Guaranteed Equity bonds - are they same thing?

matt_pimlico

I have a letter from an IFA suggesting investment in a Barclays 5 year FTSE Plan. It offers 120% of the rise (if any) in the FTSE 100 index. However there is 3% commission payable.

I notice National Savings and Investments offer a very similar product called Guaranteed Equity Bond (GEB). It also offers 120% rise (if any) in the FTSE 100 Index. There is no commission payable.

Can anyone tell me whether they offer the same or have I missed something?

SeanW

Both are Guaranteed Equity Bonds.

dunstonh

Commission is not something you pay directly. The product provider pays it. With the Barclays plan, Barclays pay the IFA. With the NS&I plan, NS&I keep the commission for themselves. Dont get hooked up on the commission. Look at what you get and what you pay or dont pay.

GEBs are very poor quality products. Have you instructed the IFA that you want such guarantees? Or is it just a mailshot?

matt_pimlico

Why are GEBs poor quality?

dunstonh

They are expensive for starters and the charges are not explicit but implicit (explicit charges you can see. Implicit you cannot).

Investments in the stockmarket get dividends. You would be looking around 3% p.a. GEBs do not pay any dividends. So, there is your first charge.

Then there is averaging at the end of the contract and sometimes at the beginning as well. That can work for you on occassions but also against you in others.

You are also tracking the FTSE100 which has been an awful index to track for over a decade. The eggs are all in one basket and its a basket full of holes.

medicman

I have to say that I completely disagree with Dunstonh. There is undoubetdly a place for guaranteed trackers in a cautious portfolio. For example the current Legal and General Guaranteed product pays out 125% of the growth in FTSE100 after 6 years with a guarantee of no loss of inital capital if held to term. The extra 25% surely helps compensate for dividends, and even if dividends were to be more than 25%, well this is the price one must accept for the guarantees in place. There is also an early get out clause after 3 years that if the FTSE100 has grown by 15% or more then you will receive fixed growth of 25% of your original investment. Furthermore you can get a guaranteed 2-2.5% back in comission by going through a discount broker. This means that even if the early trigger point is reached, including the comission back from the discount broker you have earned about 27% growth in 3 years, which strikes me as pretty good for no risk to your capital and way ahead of any deposit account.
In all honesty it doesnt surprise me that an IFA like Dunstonh wouldnt recommend such a product. Virtually every IFA I have ever met (which is about 10 in total) has only ever recommended expensive products with high upfront comission and trail comission. The difference here is that whilst there is an upfront comission of 3% on such a product, there is no trail comission (typically 0.5% a year) so why on earth would someone like Dunstonh recommend this product when he can recommend a much riskier product where you could in theory loose a lot if the markets go against you, but that pays him his trail comission.
P.S. I am in no way linked to Legal and General. I work as a doctor

cheerfulcat

For example the current Legal and General Guaranteed product pays out 125% of the growth in FTSE100 after 6 years with a guarantee of no loss of inital capital if held to term.

It doesn't pay 125% of the growth, it pays 125% of the difference between the starting level and an average of the level of the index in the last part of the term.

To be fair, some of these GEBs with kick-outs aren't as bad as the standard GEBs but on the whole they are miserable products.

SeanW

According to Money Facts Heritable Bank will pay you 6.05% a year interest for the next 5 years, your capital is almost certainly guaranteed.

£1000 in 5 years will be worth £1341, a total increase of 34.1%.

I think that means the FTSE will have to grow from 6339.4 to 8068.79 to get the same return.

dunstonh

In all honesty it doesn't surprise me that an IFA like Dunstonh wouldnt recommend such a product. Virtually every IFA I have ever met (which is about 10 in total) has only ever recommended expensive products with high upfront comission and trail comission. The difference here is that whilst there is an upfront comission of 3% on such a product, there is no trail comission (typically 0.5% a year) so why on earth would someone like Dunstonh recommend this product when he can recommend a much riskier product where you could in theory loose a lot if the markets go against you, but that pays him his trail comission.

My business model is built on 1% initial commission across the board on all products so no bias exists.
Also, GEBs are typically rated as risk 5 on the 1-10 scale (some at risk 6). So they are not as low risk as you suggest and a cautious portfolio can match the risk (or even be lower potentially).

If you go back in time to when GEBs started becoming mainstream (mid 90s) then you will find that more GEBs have failed to pay out a surplus than those that have made anything.

You are tieing your money up into a fixed term product tracking one of the worst indices in the world for performance.

If you had invested £10,000 in one 6 years ago, you would be getting back £10,000 now. If you had invested in a FTSE100 tracker fund you would be getting back £11,621 (and I am no fan on FTSE100 trackers either). A cautious managed portfolio with annual rebalancing and after charges would be closer to £17,000.

So, I make no apologies for not liking them.

P.S. I am in no way linked to Legal and General. I work as a doctor

I think its a bit rich you harping on about commission when you look at what doctors charge for private consultations compared to NHS.

RayWolfe

One other thing to remember is that the growth/profit attracts tax in the final year not each year. So if you are on the cusp of tax or higher rate tax you could be in for a nastier surprise at term end rather than a spread over say five years.

medicman

responses as follows:
Sean W - I've no idea what heritable bank's rates are and whether you are referring to a cash ISA or a savings account. If a cash ISA - then in all honesty I agree with you that is a decent rate and I would always invest in a cash ISA in April every year and then top it up with an ivestment into a mini S+S isa at some point later on. The Legal and General investment and heritable bank investment are thererfore not comparable. If it's a savings account subject to tax then yes that's fine for someone who pays no tax - but can I ask you what precentage of the population are in that situation? And also would those people necessarily be interested in investing in a stock market exposed ISA.

Dunstonh - I was referring to my experience of IFA's not to yourself and apologise if I came across in that way. . Just as a point of interest are you telling me that you rebate all trail comission and therefore your sole income is 1% comission. I very much doubt it. I suspect you take a reduced initial comission on investment bonds and then take annual trail comission.
Also manipulating figures to make investments look like good value is incredibly easy. can I ask you where ou got these figures from? Was it from research done by IFA's or investment companies by any chance?
Finally - if you spent 5 years working night and day to become a doctor, your parents had sacrificed virtually everything they had to help you through uni, only for you to then be faced by further hurdles put up by the government and you were as good at your job as most doctors I know - you would expect to be well paid also!! Can I ask how much the average IFA charges on a fee basis - I can assure you it is far more than virtually every doctor in England earns per hour. And when was the last time you were a work at 3AM!!!!