Investors are being advised to check whether they really need an investment bond in their portfolio, as fresh evidence surfaces that some financial advisers may not be acting in the best interests of their clients.

Unit-linked bonds, a type of investment bond, remain the most popular product sold by financial advisers apart from pensions and Isas, according to a recent report from Defaqto, the independent analyst.

In fact, the market for unit-linked bonds in the UK is still worth £12bn a year, according to MetLife, an investment bond provider.

These products pay up to 7 per cent commission and are frequently criticised for causing a “commission-bias” among financial advisers.

One adviser, who does not recommend investment bonds, says a client had been sold a bond by a leading bank only last year, and had not been made aware that the adviser would receive 7 per cent commission on the sale.

Such practices would directly contravene rules by the Financial Services Authority, which state that customers have to be made aware in advance of how much commission they are paying to the adviser.

However, Defaqto claims that most of the advisers it questioned for its report were paid only 4 per cent commission or less – similar to most other financial products – meaning that there was no commission bias.

“Those that do take the high commissions are spoiling it for everyone else,” says Fraser Donaldson, an analyst at Defaqto.

Many in the financial adviser community agree, with some expressing shock that other advisers still take 7 per cent commission on the sale of a product.

But there are other reasons to be suspicious of investment bonds.

Dennis Hall, an independent adviser at Yellowtail, thinks that many advisers use them because they are marketed by life companies as easy to understand and pre-packaged.

“Despite the tax inefficiency of these products, they are sold as being easier to administer than a portfolio of unit trusts,” says Hall.

This means less work for the adviser, who does not have to review the investments regularly for clients and can let the life company do the leg work.

However, Donaldson argues that this can also be in the best interests of the client. “The advantage of life companies if you’re an adviser is that you have a great network of support which is worth a lot – it’s difficult to put a price on as it’s an advantage to clients as well,” he says.

Another concern is that insurance companies and advisers often trumpet the supposed 5 per cent per year “tax-free” withdrawal from an investment bond. But the tax is only deferred until the bond matures, at which point higher rate taxpayers could be liable to a further 20 per cent income tax on money they withdrew years ago.

And Hall warns that clients also do not understand that if they use the 5 per cent a year withdrawal feature, this is not income from their investment, but is rather taken out of the capital to meet the “income” needs.

“Your average man on the street doesn’t understand that the 5 per cent is a return of capital,” he says.

Even so, MetLife argues that the 5 per cent tax-deferred feature can make sense for higher rate taxpayers who think they could become basic rate taxpayers when they encash the bond. It also stresses that it only pays 4 per cent commission on its bonds, removing the risk of commission bias.

Investment bonds are also far less tax efficient than they used to be, after capital gains tax rules were introduced last April, which made CGT a flat rate of 18 per cent.

This did not directly affect investment bonds, which are free of CGT, but made them less attractive when compared with unit trusts.

While unit trusts are liable for 18 per cent CGT, investment bonds are liable for 40 per cent income tax at maturity, so for higher rate taxpayers, they can be tax inefficient.

Investment bonds are not always the best product for inheritance tax planning either, warns Hall, as they are liable for income tax on death. So a dependant could end up paying 60 per cent in total on an inherited investment bond – 20 per cent income tax plus 40 per cent inheritance tax. This would compare with no further tax on the sale of a unit trust, which would be free of capital gains tax on death – yet many advisers still recommend investment bonds for this purpose.