Beware advisers who bear investment bonds
Informed Choice chartered financial planner Martin Bamford was quoted in an article in the Independent on Sunday today, discussing how Investment Bonds are sometimes missold by advisers due to their opaque commission structures.
The article explains that complaints to the Financial Ombudsman Service (FOS) about unsuitable Investment Bonds have almost doubled in the past year.
It goes on to describe a number of cases where the recommendation to use an Investment Bond tax wrapper was potentially unsuitable.
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.
Investment Bonds remain suitable in a number of circumstances, but investors should take care to ensure that the reason for the recommendation is suitability rather than to generate a higher commission payment for the financial adviser.
You can read the article in full here.