Without Profits, Without Fail

IN my last post, I directed readers to a presentation by Dimensional Fund Advisors. For me, Dimensional represent the acceptable face of investment: a robust methodology; extremely keen charges; a transparent and straightforward way to invest.

With-Profits is the other side of the investment world, the Dark Side of investing. With-Profits is where:

• you give a lump of money to an insurance company to (mis)manage, with no overarching investment methodology
• the costs are buried within opaque charging structures (these investments can pay handsome commissions, funded by you, dear investor)
• whatever positive returns are achieved come at the discretion of the insurance company, which has final say each year on how much your with-profits fund has grown (or not, as is normally the case).

And did we mention that, when markets fall, the insurance company running the with-profits fund can arbitrarily apply what is a called a Market Value Adjuster (MVA or MVR, for you jargon junkies).

The MVA reduces the value of your investment and, ostensibly, is put in place to "protect the interests of long-term investors in the fund" or some other such claptrap. Basically an MVA means that if you have the temerity to want your money back, you get less than you would have done otherwise.

Here's the kicker: MVAs are at the discretion of the insurer running the fund. The insurance company decides the level of the MVA (10, 15, 20 or 30% etc), when to apply it and when to remove it.

MVAs are in force across a wide range of insurance company with-profits funds currently. Who knows when they will be removed?

In other words, if with-profits didn't exist, you would be hard pressed to invent a more inadequate or unsatisfactory way to invest your money.

BUT the good news is that many with-profits bonds sold in the late 1990's or early this decade came with a get-out clause - the no MVA guarantee. This means that at (typically) the 10 year anniversary of the bond, you can encash the wretched thing and the insurance company cannot impose an MVA.

Potentially this is a get-out-of-jail card for those poor people stuck in with-profits. Understandably, the insurance companies will not advertise this aspect of their product. Tons of with-profits bonds were sold a decade or so ago. Losing these funds (and the revenue they bring in to beleaguered insurance companies) would disturb them immensely. Bless.

So don't let inertia cost you on this one. If you have any with-profits type investment, dig out the policy documents and have a damn good read through them. If, like me, you lose these documents as soon as get them, pick up the phone to your insurance company; when you get through after 30 minutes or so of being told - on endless loop - how valuable your call is, ask them "Is there an MVA free date on my bond?" As you wait a further 30 minutes to be put through to the correct department where somebody may know the answer, get ready to ask the second question, "How do I get out of the bond on the MVA free date?" You will probably be sent an encashment form to complete and return. Don't bank on this getting to you in anything less than three weeks.

Take care, because some with-profit funds are less useless than others. Some have stronger performance potential than others; some may even have guaranteed rates of return that cannot be taken away over time. See the disclaimer at the bottom and to the right of this post: I am not recommending you encash your with-profits investments - that is your call to make. You need to have your eyes open wide if you are considering encashing any investment, ever, and never more so than when walking through the Alice-in-Wonderland of with-profits, where nothing is ever quite as it seems (except the miserable long-term returns these things generally produce).

Of course (and you kind of knew this was coming) you could contact your financial adviser, who will do all of the legwork and due diligence for you in respect of your with(out) profits investment, hopefully competently. If you don't know such a person, I can give you a steer....

{The above is solely the opinion of Nick Lincoln. It is not individual financial advice and should never be taken as such. If you wish to discuss the issues raised in more detail, please make contact with Nick. If you ignore this small print and act on his opinion(s) without first seeking financial advice or reading at least 100 pages of Key Features Documents containing numerous risk warnings, you may well be struck down by lightning}