No Monkey Business: a no nonsense clearing in the personal finance jungle

Saturday, February 26th

With-profits for the Sandler Suite: no way

Malcolm Berryman, Chief Executive of Liverpool Victoria, makes a plea in the FT today for including with-profits in the 'Sandler Suite' of products that can be sold to the public with lighter regulation (because their simplicity, clarity and low cost greatly reduce the risks the customer will buy a pig in a poke). In seeking to differentiate Liverpool & Victoria from other with-profits providers who have much lower reserves and very little equity-backing (quite fairly), he makes the strongest case of all against a with-profits fund: the customer's selection risk needs to be diversified.

A necessary condition of the Sandler product concept is that the risk in selecting one or other provider does not need diversifying. Sandler's concept is of a true commodity product, where there is no agency risk and customers are essentially indifferent to owning one of a type instead of several. Funds that track the systematic return of an asset class and are structured as 'bear trusts', with no exposure to the financial distress of the provider, are commodity products. Diversification by provider is not necessary.

With-profits are the very opposite: the exposure to the financial strength of the provider operates at many levels, all in an unpredictable way: asset mix, enforceability of guarantees, active-management risk and the impact of marketing and operating costs on policyholder returns. If you're not sure about the requirement to diversify these risks, ask anyone who was entirely dependent on Equitable Life's with-profits contracts.

There are many other necessary conditions for lightly regulated products, covered in the topic index under 'with-profits', 'low-risk products' and 'regulation'. With-profits also fails these.
Stuart Fowler on 02.26.05 @ 10:28 AM GMT [">link]

Thursday, February 24th

Asset wars #1: Who's telling the truth about equity risk?

I shall file regular dispatches from the frontline in the battle of ideas pitching bond investment against equity investment, ‘fair value’ accountants against traditional investment consultants. It’s a big issue for individuals because it’s really influencing what assets are held on their behalf. That, as we well know (the ‘90% Rule’ in No Monkey Business), will significantly affect their financial outcomes.

The first dispatch deals with the question of the relationship between equity risk and time. A popular claim made by professionals is that equities are less risky for a long term investor. As typically presented, this is a myth – a howler. The second myth is that people who make this mistake (professionals or their customers) are stupid – the modern equivalent of flat earthers. The real position is much more subtle. Uncertain equity outcomes do not narrow the longer the time horizon (we’ve known that since the 16th century) but (and it’s a whopping ‘but’) the time horizon makes a big difference to most individuals’ risk ‘utility’ function. The equity bet can perfectly rationally be rejected by an investor with one horizon and accepted by another investor who has the same risk preferences, approaches bets the same way, but has a longer time horizon. When related to investor utility, the statement that may be mocked as a howler could be perfectly valid.

An instance of this, a spat between Adair Turner and John Ralfe, prompted this dispatch.
Stuart Fowler on 02.24.05 @ 07:57 PM GMT [">more..]

Wednesday, February 23rd

Insurers say 'no commission bias, OK?'

No, not OK. The Association of British Insurers have published a report proposing changes to the commission basis for distributing financial products in the UK. I'll come back to their proposals in another entry but first let's focus on what they say about commission bias. So-called independent research "found some limited commission-related bias towards particular companies and product types but no evidence that commission was inducing advisers to sell where no sale was appropriate". If true, it would be quite a coup for the industry. But the truth is the research on which it is based cannot possibly support any conclusions about bias to riskier products, to more expensive products than necessary or even to product sales where another course of action altogether would be better advice.
admin on 02.23.05 @ 06:55 PM GMT [">more..]

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nomonkeybusiness.org

a no-nonsense clearing in
the personal finance jungle

By whom

For whom

Business connections

With-profits for the Sandler Suite: no way

Asset wars #1: Who's telling the truth about equity risk?

Insurers say 'no commission bias, OK?'

Topical Index:

External Links:

nomonkeybusiness.org

a no-nonsense clearing in the personal finance jungle

By whom

For whom

Business connections

With-profits for the Sandler Suite: no way

Asset wars #1: Who's telling the truth about equity risk?

Insurers say 'no commission bias, OK?'

Topical Index:

External Links:

a no-nonsense clearing in
the personal finance jungle