A nice little earner for everyone except the investor

If there is a common thread to the many plaintive remarks made to personal finance journalists by the insurance industry, it is that we tend to underestimate the sterling work they carry out on behalf of their policyholders.

Whenever I begin to waver and find myself agreeing with this view, a reader's letter brings me back to earth. One this week comes from Dr Fergal O'Driscoll, a GP based in Lowestoft.

Dr O'Driscoll joined his partnership in 1987 and spoke to a financial adviser. The adviser suggested a nifty little scheme by a company called Scottish Equitable. This involved borrowing pounds 40,000 from Scottish Equitable itself, with equity in the surgery used as collateral for the loan.

The insurer would then invest the money it was advancing Dr O'Driscoll for 10 years and pay him the proceeds at the end of that period. Meanwhile, the good doctor would carry on paying interest on the loan to Scottish Equitable.

In theory, the investment gains would pay off the loan plus the interest and leave a tidy additional sum for Dr O'Driscoll. Scottish Equitable's literature at the time suggested in bold letters that he might earn net returns of up to 33 per cent.

It hasn't quite worked out that way. Last month, Dr O'Driscoll received a letter from Scottish Equitable in which it informed him that the returns on his pounds 40,000 investment would be pounds 61,000 at maturity next year, which is actually pounds 2,000 less than the interest paid on the loan over this period.

Other members of the surgery who took the same advice and have invested up to pounds 120,000 more, face similar losses.

What we have, in effect, is a situation where the "adviser" made one heck of a lot of commission on the total investment by all the doctors - at least pounds 7,500. Scottish Equitable has made a fat profit too out of Dr O'Driscoll's money and that of his partners. The only people to have suffered are the investors themselves.

Scottish Equitable, according to a special report about which I wrote last week, is currently refusing to provide statistical information on its products to Money Marketing, a specialist financial paper. Its refusal supposedly stems from the fact that it no longer markets with-profits endowments of the type sold to Dr O'Driscoll and his partners.

With returns of barely 50 per cent over 10 years on the money invested, one might suppose that the real reason is that Scottish Equitable feels a sense of shame at its poor performance.