Greater scrutiny of charges – and greater demand for transparent and liquid holdings – will result in the disappearance of expensive and inefficient investments, advisers predict.
● With-profits bonds. Bonds investing in life insurers’ with-profits funds have been criticised for their failure to smooth out returns by adding bonuses, and their imposition of high exit charges. “With-profits have been withering on the vine for many years and are probably only still supported by commission-based financial advisers,” says Danny Cox, of independent financial adviser (IFA) Hargreaves Lansdown. A ban on commission payments from 2012 will see them die out, reckons Jason Butler of fee-based advisers Bloomsbury Financial Planning. “Apart from being opaque and expensive, with little upside but most of the downside of investment markets, the [regulations] should remove the commission incentive supporting the distribution of these nasty products,” he says.
● Onshore investment bonds. These bonds, which can hold a mix of equities, fixed interest and property assets, “generally are at a clear tax disadvantage to other pooled investments such as open-ended investment companies,” says Cox. Brian Dennehy of independent advisers Dennehy Weller & Co says they are “not extinct, but compared with sales volumes over the last 10 years or so, they might as well be”.
● Regular savings endowment policies or maximum investment plans. Following changes to capital gains tax, these life insurers’ investment policies no longer have tax advantages for high earners. “In spite of this, some advisers still recommend them, which makes no sense to me.” says Cox.
● Complex structured products. Products that pay a return linked to indices but with limited downside protection should not last, says Butler. He highlights “structured products that magnify losses if the underlying index falls by more than a set amount”. Dennehy cites “horribly complex structured products that are sold over the counter through banks and buildings societies”.
● Funds of hedge funds. Listed funds that invest in illiquid hedge funds will be forced to evolve, says John Davey, research analyst at independent advisers Bestinvest. “I do not think they will become extinct but they will change dramatically.” Butler believes their charges are unsustainable. “Funds of hedge funds charge the same 2 and 20 [per cent] costs as their underlying holdings and still expect to beat the market. Are their investors mad?”
● Life settlement funds. Funds that hold a portfolio of secondhand life insurance policies have come under scrutiny following the collapse of fund manager Keydata. “Apart from the lack of transparency, and quite high charges, there is an increasingly bad smell about this asset class, arising from dubious procurement practices of the underlying life policies,” says Butler.
● Expensive index tracker funds. Any UK tracker that charges more than 0.5 per cent a year should disappear, says Butler.
