We are reviewing the advice given in relation to investment bonds
If you invest in an investment bond it gives you access to the best funds such as Fidelity special situations and it’s cheaper to invest that way. This way you can access all the best funds in one place.
Worldwide’s view: Score: 0 out of 10
Absolutely brutal and contrived advice.
Basically an ISA then a unit trust should be the choice for most customers. Both pay an adviser 3% commission whereas the default choice here is a bond, which pays 7.5% commission. Not suggesting that’s the reason but I’m sure the adviser can warrant that level of commission for the advice!!!
Advisers often sell it on the basis that there are external links within the bonds to outside quality fund groups like fidelity special situations for example. By and large this is not treating customers fairly. The customer will genuinely think they are buying the fidelity special sits fund but they are buying a so-called mirror version. What does that mean. The fund they are buying is simply a version of the real fund but with a different charging structure, which can be hidden inside the fund price as opposed to the explicit charge on unit trusts where you know what you are paying for. Moreover the tax will have a large impact. Although the bond wrapper is positioned to be cheaper the real charges are not exposed. Let’s give you an example. If a customer bought a unit trust with fidelity special sits they would have enjoyed considerable return. If they bought a Canada life fidelity special sits plan within a bond they would have expected the same return – exactly the same return. They have a snowball’s chance.
The following Hindsight Chart (click to view larger) shows the performance of several life funds linked to the Fidelity Special Situations fund over the past 156 weeks (3y) or so. (Many life offices have links to this fund. As expected the underlying fund (i.e. the Fidelity Special Situations) has a both a higher performance and higher volatility. This can mostly be explained by differences in taxation; the life fund links include an accrual for the insurance company’s corporation tax liability whereas the underlying fund does not. Another factor is that life funds tend to include a small amount of liquidity so that a life fund may hold say 95% in Fidelity Special Situation Acc units and 5% in cash. And of course there are additional expenses to consider
Perhaps the more significant curiosity is not the difference between the life funds and the underlying vehicle but the spread of returns between the different life funds offering links themselves. Even accounting for differences in charging structure (i.e. what charges are included in the price of the life office units) there is a significant spread of returns (+56.8% to +64.5%) and volatilities.
As you can see Mr Jones who invested into the fidelity special sits fund has gained 78.13 %. Mr smith next door who invested into a bond and bought their version of fidelity special sits achieved 56.79 % even though he thought he had the same fund. The truth is he will never know. Whilst he sits over the bar with Mr Jones they will just talk about how well it’s doing but Mr Jones is over 12% per year better off – even though his adviser was concerned about charges!!
In real terms MrJones who was invested in Fidelity special sits achieved 37.8% more return than Mr Smith i.e. the difference in return expressed as a percentage better than AIG over 3 years.