Howe to do it: Let me know if you want a cheap leather jacket

The other day I was accosted by the "Italian gentleman" who plies his trade in leather jackets from the back of his car. It is probably five years since my last encounter with him on the Beach Road. If only certain financial service companies followed his lead and made contact every five years instead of what appears to be every five days.

The continuous bombardment from an array of "financial advisers" is of growing concern. Many are apparently in business more to make money for themselves and their companies than their clients.

Of course, there are some very good ones out there, but some serious homework needs to be done to sort the wheat from the chaff and ascertain that they have the experience, technical background and professional accreditations to service your investments wisely.

Many of their products appear to come with a high up-front fee. Personnel in the industry have to make a living but in return for their commissions they should be in a position to answer clients' questions honestly and impartially. But often advice is patchy and biased and their product knowledge sketchy.

One of the most popular savings schemes, with-profit plans, just so happens to be currently one of very poor value. Following a volatile downward fifteen-month trend from the world's equity markets, millions of investors will have seen relatively small bonus payments.

Returns generally have been slashed in line with the abysmal performance of most international stock markets. With-profit plans invest mainly in shares but will also include a mixture of bonds, property and other instruments.

They are the underlying investments for millions of pensions and bonds. Those insurance companies who seem to use complicated formulae to calculate annual returns invariably sell the schemes.

The main aims of the exercise seem to be one of "even" returns with the investors' savings growing annually. The process would appear to be one of holding back money during good years to compensate investors when the bad times hit so that their savings do not go up and down in value but show a steady growth pattern.

Those companies reporting earlier in the year have tended to show reduced returns with the annual bonus rate down as much as 30 per cent from the 1997 returns. Some of the really poor performers are returning less than risk-free savings accounts.

Why then would any sane person continue with this form of investment when for instance they would be better off in unit trusts? The answer is simple and obvious — most with-profit plans will penalise for early withdrawal so that the money is often trapped for many years. Some studies have indicated that investors would have been better off investing in a unit trust than a with-profits bond even with the same company.

With one famous financial institution, the unit trust has paid out at an annual rate almost double over the past five years. How many investors would opt for a total return of 150 per cent rather than 60 per cent?

Part of the troubles at Equitable Life may have stemmed from the fact that it paid out too much from its with-profits fund. Contrast this with Axa who built up huge surpluses because it did not pay out enough.

There is a general feeling that the very notion of with-profit bonds is outdated and that calculations could be manipulated. There is no doubt that more corporate governance is required, the veil of secrecy must be lifted and financial institutions should be more accountable for their actions. Let me know if you want a cheap leather jacket!

Tim Howe is managing director of Al Ghaith and co, public accountants, and a financial writer.