Last week I saw recommendations given to a 29-year-old man by a salesman representing a life assurance company. The customer had been "cold called" and decided to take up the offer to sort out his finances. The alarm bells should have rung at this point. You should refuse to meet anyone who cold-calls with an offer of financial advice. They will give you the hard sell.
This client wanted to make his first steps into saving. In this capacity the adviser recommended a pounds 50 a month savings scheme called a maximum investment plan (MIP).
A MIP is a 10-year plan (including a life policy) that used to offer fantastic tax benefits. Most of them don't exist anymore, unless you are a higher-rate taxpayer using the MIP for specialised planning.
In fact the best thing for this customer to do would be to build up some money in the bank or building society. There is no point sticking the only contingency money you have got into a MIP. And, as the adviser might have noted if he had been any good, this client hopes to buy a house. Short-term savings are his priority.
A MIP is no good for short term savings. You will lose money if you have to take the money out within two years of setting up the policy. All the upfront charges and commission eat away at your investment.
The Chartered Insurance Institute's handbook for those taking the financial advice exams makes it clear that the process of advising a client "may require the (tied) adviser to confess an inability to help, to suggest an approach to an IFA or to recommend leaving sufficient money on deposit".
Wise words, but reality falls somewhat short of best practice. In this case an accredited member of the financial services world has said a MIP would be the best way to save for a 29-year-old with no money on deposit at the building society.
The MIP contract pays pounds 365 in commission to the salesman in the first year. Over 10 years, he'll get pounds 876. Telling a client to open a society account earns him nothing.
Over 10 years, the life firm's projections show that pounds 6,000 paid into an MIP will realise pounds 7,650. That's tax-free, but it assumes an optimistic 7.5 per cent annual growth rate. At a realistic 5 per cent annual return, it's pounds 6,770. So that's a gain of just pounds 770. Slightly less than the pounds 876 commission in the salesman's pocket.
The same pounds 50 a month put into an average savings account with the Halifax would return pounds 7,237.38 (after tax) after 10 years. If you stick some in a tax-efficient Tessa and ISA, you'll get back considerably more.
Be careful out there.