Abbey continues to launch poor-value investment products with eye-catching gimmicks.
This time, it’s the offer of a 10% interest rate on your ISA, but as usual the reality falls way short of the promise. Whatever the products lack, the marketing guys at Abbey do have chutzpah. Their latest investment plan is called the Abbey Super ISA. I don’t think so.
What this plan offers is 10% on the cash you invest in a mini-cash ISA. But you get that rate for just 13 months.
After that? Well, I’d be surprised if you didn’t find you had to move your money to go on getting a good rate. So that gets a high gimmick score and also a high hassle rating.
Lump sum investment: arrange advice here
Take away the last number…
You only get this interest rate if you put at least the same amount as you put into the high-rate mini-cash ISA into Abbey’s Guaranteed Growth Plan (GGP). The GGP ties your money up for three-and-a-half or six years.
There’s a no-loss guarantee, and a minimum return of 6% over 3.5 years and of 18% over 6 years. If the FTSE 100 Index rises enough that 50% of the rise is greater than 6% over 3.5 years or 18% over six years, then you get a higher payout.
That last sentence should have you scratching your head. What are the chances of the FTSE 100 Index rising from its current 5,800 to over 6,150 in 3.5 years, or to over 6,840 in six years, the levels required for you to get a higher payout? Don’t have a clue? Join the club.
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Will it pay off?
Well, let’s forget the 10% on the cash ISA - after all, you only get it for a year. Let’s just ask how high the FTSE Index would have to rise over 3.5 years for you to get a reasonable return of 6% a year at encashment.
Earning a steady 6% a year would turn an initial investment of £1,000 into £1,233 for a 23.3% gain. So the FTSE 100 Index would have to rise by double that or 46.6% (you only get half the rise) to a level of 8,500.
So here’s a question: if Abbey said: would you like to invest in a plan that will give you a reasonable return of 6% a year if the FTSE Index rises to 8,500 in 3.5 years’ time, but otherwise will give you a worse return than you can get on a deposit account, what would your answer be? I hope to goodness it would be a loud NO.
Lump sum investment: arrange advice here
Footsie must rise to over 10,000
Now let’s run the figures over 6 years. To get a reasonable return of 6% a year, turning your initial £1,000 into £1,432, the FTSE 100 Index would have to rise at double that rate from its current 5,800 to a level of 10,811. How does that strike you? Answers on a postcard to Abbey please.
Now I’m not going to go into the stats on the percentage of occasions in which the FTSE 100 Index has actually attained those kind of growth rates, though those stats are available - Abbey has them and could easily publish them in its literature if it wanted to give investors some idea of the possible returns. Of course it doesn’t, and the Financial Services Authority lets Abbey get away with it.
In sum, Abbey’s Guaranteed Growth Plan is a lousy product that’s almost sure to give investors a poor return on their money. You’ll probably do better with Abbey’s new Direct ISA paying a variable interest rate of 6.25%.
SIPPs: find advice here
Trading on ignorance
Abbey’s Guaranteed Growth Plan and many products like it are trading on investors’ ignorance and lack of ability to do the maths on what are essentially complicated bets rather than investments.
Yet the FSA doesn’t apply to these complicated, opaque, and generally poor-value products any of the disclosure rules it applies to unit trusts and other WYSIWYG investments. And you won’t have clue from the literature how much Abbey is making out of it, even though that information has to be provided for almost every other type of investment.
FSA asleep at the wheel again
Do you see products like Abbey’s GGP rubbished in the Press? Do financial journalists ever bother to look under the bonnet and question them? Depressingly, they don’t.
When companies as big as Abbey and Barclays crank out products like these, the media shuts up and lets them get on with fleecing unsophisticated investors, and the regulators turn a blind eye because ‘investors’ capital is safe’.
Yes, but so it would be if I promised you a return of 50% at the end of ten years with a no-loss guarantee and a pie-in-the-sky promise of more if the FTSE 100 Index went up by an astronomical amount. It would still be a lousy investment, but the only way you will know that is if you are given the information on which to base a judgment.
This is pretty much a textbook example of what economists call exploitation of information asymmetry. Abbey knows all about the stats and the likelihood of various levels of return from this product based on history to date. You don’t. Guess who is going to do better out of the product?
And the textbook economist’s answer to the systematic exploitation of information asymmetry? Simple: make the information publicly available. Sadly, I predict it will be at least another couple of years before the Financial Services Authority takes this blindingly obvious step to protect investors.
