Safety in uncertain times
The turmoil of markets over recent times has highlighted the need for investment guarantees – but has the industry grasped the opportunity to provide these much needed safety nets for investors?
The optimism during the five-year bull market experienced up to 2007 has largely been forgotten. The sharp fall in equities during 2008 is a painful reminder of how quickly markets can turn, and whilst markets have recovered strongly since the lows of early 2009, investor confidence is some way off returning to the good times.
The ups-and-downs of this investment period have been accompanied by some ups-and-downs of product offerings. Thankfully, in the main, the ups and have outweighed the downs, with many strong providers beginning to offer investment guarantee products to the market. The most noticeable low point of this period was the closure of Hartford Life in 2009, which saw the sad loss of some innovative products.
Back in early 2006, Synaptic were invited by AEGON Scottish Equitable to a preview of their 5 For Life product. At that time it was clear that a wave of new products entrants were on the way, so a new module was created in Synaptic Research tools later in 2006, known as protected benefits, to represent investment bonds offering these additional guarantees. Since 2006 similar enhancements have been made to the software to highlight the guarantees available under retirement based products. The initial response to this module from IFAs was negligible, but timing was the dominant factor here – the bull market was still looking strong so why would clients wish to pay extra for an investment guarantee?
Since the launch of protected benefits back in 2006, we have witnessed more providers wishing to compete in this area, but perhaps even more noticeably, a visible increase in confidence from IFAs wishing to recommend these types of arrangements to their clients. It would seem that the extra cost of 1%-2% is becoming a worthwhile trade-off for the security being achieved – the recent bear market has been a stark reminder of the risks inherent in investing.
In a recent survey to Capita Financial Software users, 8 in 10 advisers agree that a cost between 1% and 2% is affordable for these types of guarantees. In the same survey, 8 in 10 confirmed that their clients have lost significant value in declining markets, and 7 in 10 expect market volatility to continue for the next two years. The real pain of investment loss, and the lack of market confidence in the foreseeable future, is clearly the driver behind this realisation of paying for extra protection.
According to the survey however, the emergence of guarantees has not automatically found its way into IFAs’ daily advice processes. 88% of IFAs surveyed are aware of the guarantees available, but only 69% have made specific provision in their risk assessment of clients and 66% in client reporting.
The first launch of protected benefits in September 2006 included just seven products; five versions of the 5 For Life from Aegon Scottish Equitable, one entry from Hartford Life, and the Riley Bond offered by Royal London. Today’s software shows 28 different product entries from nine providers, demonstrating the commitment made by product manufacturers over this period. The breadth of guarantee types is now impressive; some are designed to secure future income levels, others to provide capital value lock-ins and others ensure protection to death benefit payments.
This improving commitment to providing guarantees to investors has not been from providers alone. Synaptic statistics show a massive increase in research being conducted by IFAs for guarantee related products. Interest in protected benefits in 2009 rose by 63% over levels recorded during 2008. Clearly it is not possible to predict how markets will look in say, five years time, but the evidence of recent uptake of guarantee products should mean that fewer investors will need to feel the pain of investment loss than experienced in 2008.