Beware advisers who bear investment bonds
Complaints double in a year as an 'epidemic' of mis-selling rages – so investors must ensure products offered suit their financial needs.
Sunday 28 March 2010
Problems surrounding missold investment bonds have reached "epidemic" levels, according to independent financial advisers.
Distrust of the products is also growing according to the most up-to-date figures from the Financial Ombudsman Service, which show that complaints about unit-linked and with-profits bonds almost doubled in the past year to 2,783 and 1,213 respectively.
In one high-profile case, insurance giant Zurich received a dressing down from the ombudsman after an adviser encouraged a man to unnecessarily move £292,000 into an investment bond, which reportedly came with £17,500 in commission.
But while the products are not new, sky-high commissions continue to lure advisers into recommending bonds, although they are often inappropriate for the investor. Not only do most bonds carry exit penalties for cancellation within five or six years, they are not always tax-efficient and carry risks which the investor may not be fully aware of.
"It happens too frequently, largely as a by-product of the bonds being used as a one-size-fits-all solution to solve an investor's problem," Roddy Kohn, director of independent financial advice firm Kohn Cougar, says.
"Some financial advisers make it look as though they are giving choice to the investor, but they don't have the experience or product knowledge to recommend anything else but an investment bond. There's a real epidemic of mis-selling," Mr Kohn added.
With advisers able to receive commissions as high as 8 per cent of the sum invested, consumers should beware of accepting recommendations to buy an investment bond.
Diane Needham, an independent financial adviser at Meridian Capital, who specialises in advising the elderly, says people come to her having been mis-sold investment bonds. A recent case involved a woman in her early eighties, who had been told to invest her entire life savings – £150,000 – in an investment bond that had a five-year lock-in period and generated £12,250 in commission for her former adviser. To make matters worse, the woman was then advised to withdraw the maximum level of capital each year in what was then a low-risk investment strategy, so the value of her fund crumbled, leaving her in dire straits when she needed to go into care.
"It doesn't take a rocket scientist to work out that if you are going to take investment income from day one, [the fund] hasn't actually earned anything yet. So it stripped her capital and she had a significant shortfall for about 18 months after the initial investment was set up. She lost a small fortune in money," Ms Needham said.
Ms Needham helped the woman get her money back by complaining to the ombudsman, but it took nine months and caused undue stress to the woman, who now suffers from dementia.
But it is not just the elderly who have become victims of inappropriate sales; all age groups and financial backgrounds are at risk. Martin Bamford, director of the Cranleigh-based independent financial advice firm Informed Choice, says a lot of the confusion comes down to the way sales information is outlined to potential investors.
A "smoke-and-mirrors" approach is used to disguise the commission and potential benefits are exaggerated, he says. "It is much less clear when you are taking commission out of an investment bond that the money is actually coming out of the investment, unlike a unit trust or an Open Ended Investment Company, where it is clear any money coming out is being charged directly to the money being paid in," Mr Bamford said.
A 51-year-old, self-employed woman recently came to see Mr Bamford after discovering that her £308,000 inheritance – which she had been advised to invest in three bonds, Hartford, MGM and Sterling, by a different financial adviser several years earlier – had plummeted to just £241,000, despite being sold to her as a low-risk investment.
Again, Mr Bamford suspects the motivation for the bonds' recommendation related to upfront commissions, but says she might have avoided the loss and bond exit fees had she used another strategy. "A far more efficient investment strategy would have been to maximise the annual ISA allowance (£10,200 for the over-50s) and invest the surplus in a portfolio of unit trust investment funds, using up her capital gains tax allowance to make capital withdrawals when needed," Mr Bamford says.
Despite the welter of complaints to the ombudsman, and growing alarm at investment bond performance, the financial services industry is still heavily targeting advisers. Arthur Childs, managing director of Arch Financial Planning, says he is offered big incentives to sell the bonds. "Even within the last year we have had major providers writing to us, saying: 'You can have 7 per cent commission upfront' for selling these bonds, which is completely inappropriate," he says.
But, as with many financial products, it is not the investment bonds per se which are to blame, rather the way they are sold. Bruce Jamieson, principle of Jamieson Financial Management, for instance, says there are occasions when an investment bond can be "extremely useful" – such as when someone has used up their capital gains tax allowance – and it would be wrong to tarnish all sales with the same brush.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Planes go hybrid-electric in important step to greener flight
- 2 Antonio Martin shooting: Police and protesters clash over teenager's death just five miles from Ferguson, Missouri
- 3 British actor Idris Elba cannot star as James Bond because he is black, says shock jock Rush Limbaugh
- 4 Hip hop is both racial and political, and for Iggy Azalea to suggest otherwise is insulting
- 5 Man hospitalised with pneumonia after downing eggnog at office Christmas party
British actor Idris Elba cannot star as James Bond because he is black, says shock jock Rush Limbaugh
Rozanne Duncan: Ukip expels councillor for 'jaw-dropping' comments made in BBC TV interview
Germany anti-Islam protests: 17,000 march on Dresden against 'Islamification of the West'
Ukip member gets into Christmas spirit with Union Flag plea to Santa 'for our country back'
BBC director Danny Cohen: Rising UK antisemitism makes me feel more uncomfortable than ever
Alex Salmond has 'broken his word to the Scottish people' says Scottish Lib Dem leader
iJobs Money & Business
Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...
£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...
£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...
£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...
Day In a Page
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens