There are three ways you can buy investments. Two are good and one is bad, but it’s the bad way that most people choose, and that’s why they complain about the results. The two good ways of buying investments are:
• Choose them yourself. The internet makes it possible to be a successful DIY investor, but you must make sure you read and understand enough before piling into anything. Use our Model Portfolios as a starting point.
• Get an independent adviser to help you choose. The adviser should question you in depth, assess your comfort level with risk and propose a set of investments that together meet your objectives.
Teams of salespeople ready and waiting for you
The bad way of choosing investments is to let someone sell them to you. This is the method used by the banks who have squads of people they call advisers. These advisers are in fact salespeople whose aim is to sell the products the bank tells them to.
The banks designate product ranges ‘suitable’ for the kind of customers who ask them for advice. If you have lots of money, they may offer you a ‘premium’ service but it’s still usually a hard sell of their own products - unless it is millions, when you get referred upstairs to their ‘private banking’ service for the super-rich.
The trouble with the standard ranges of bank investment products is that the banks try to make them suitable to as many people as they possibly can. That kind of compromise in designing financial products can be damaging when it comes to investments.
Abbey’s revised plan offers lower returns
I’ve previously criticized Abbey for its Guaranteed Growth Plan (GGP), and it turns up again, this time because Abbey has launched a savings account called Super Saver paying a massive 9.1%. As with Abbey’s Super ISA offer, this rate is paid for one year only.
You only get this if you also invest an equal or higher amount in an Abbey investment product, including its multi-manager range of investment funds and its Guaranteed Growth Product (GGP).
The one Abbey’s advisers may well steer you towards is the GGP, which offers a return linked to the stock market with a no-loss guarantee. Abbey has just revised the terms of the GGP so that the maximum you can make is 35% over 3.5 years or 60% over six years.
Compromising your investment
This is what I mean by compromising the investment. The whole point about the stock market is that if you are lucky you can make huge gains when the market goes up. So why buy a stock market plan like the GGP where there’s an upper limit on the gains you can make?
Especially when the cap is pretty low - 60% over six years is an annual return of just under 8%, well below the returns that have been achieved in good periods of stock market growth in the past.
Abbey says its no-loss guarantee means that even nervous people can safely buy into the stock market using the GGP – this is true. But for most people, a spread of investments - a bit in cash deposits, a bit in fixed interest, a bit in property, a bit in shares - is the ideal way to do it, and if you do that, why bother with a no-loss guarantee on the stock market bit of your investments when this severely restricts how much you could make?
Take it seriously and take responsibility
Abbey’s real agenda is to say that a combination of its saving account and the GGP is the answer to the question:
‘What should I do with money I can afford to invest for six years?’
I still think Abbey’s is a poor solution and that most people can do a lot better, either by taking the thing seriously, doing their research and becoming DIY investors, or by going to an independent adviser who will put forward a better-designed package of investments.
Too good to be true
The other question worth asking is who is really being protected by the no-loss guarantee. If you consult an independent adviser, and they put forward investment proposals that lose you money, then if the adviser failed to explain quite clearly what the potential risks were and how those investments were suitable to your circumstances, you can claim against the adviser, and there have been plenty of cases where people have been compensated for poor investment advice that failed to meet the criteria laid down by the regulators.
In contrast, where a bank salesperson persuades someone to buy a GGP with its no-loss guarantee, then because they can’t actually lose money, Abbey knows it will rarely if ever be subject to a claim for compensation for bad advice.
That’s why Abbey’s advisers will normally only propose investments that create the potential for loss if you have a lot of money. Yet it’s accepting that potential for loss that enables you to make big profits. If you really don’t want to accept that risk, then you’ll probably be just as well off buying simple fixed-rate investments where you know what the return will be.
