Investment bonds: too many strings attached?

Unscrupulous financial advisers could be pushing unwary people into the wrong type of investment, simply to boost their income ahead of a commission clampdown. Alarm bells have been raised by an independent financial adviser worried that the practice is widespread, despite the financial services industry already suffering a serious image problem from several previous commission scandals. Philippa Gee, managing director of Philippa Gee Wealth Management, says investment bonds are being pushed on investors because they pay commission to advisers of up to 9 per cent. She says the sky-high payouts encourage advisers to recommend the bonds – which are offered by insurance companies – even though they may not be right for people. She points out that the bonds have exit penalties for cancellation within five or six years, they are not always tax-efficient and they carry risks which an investor may not understand. "Investment bonds are single premium life insurance contracts but I think the word 'bond' is misleading as it naturally instils a confidence in the product that shouldn't automatically be there," says Gee. "How well the investment bond does depends on how it is invested and what charges are involved. "The problem with the charges is that they are far from transparent, as the bond may seem to be adding to the investment amount through so-called allocation rates but actually taking away from the policy in terms of commission to the IFA and charges to the insurance company," says Gee. "Clients often end up getting charged 10-12 per cent if they surrender the policy in the early years and don't appreciate how much of their money has actually been paid out to others."

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Source: The Independent - Money; 10th July 2010 12/07/2010

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