Who is to decide who is ‘sophisticated’?

Four years ago, traded life policy (TLP) funds were labelled as potential replacements for with-profit funds. Three years ago, certain fund providers were pushing for their own IMA sector.

Last week these same fund providers stated that TLP funds were never intended for the retail fund-buying community after the FSA labelled them “high risk, toxic products that are generally unsuitable for the majority of UK investors”.

When a fund makes its return by estimating the date of someone’s death, marketing is always going to be tricky. This task was made no easier when, in August 2006, the American viatical marketmaker Mutual Benefits Corporation (MBC) was prosecuted for fraud. It was found guilty of understating the life expectations of policyholders, which therefore increased the value of their policies.

Despite this, in the years afterwards several funds have been launched to British investors, with the promise of returns uncorrelated to those of equities or bonds. Indeed, back in 2007 a report issued by Professor Merlin Stone of the Bristol Business School, said TLPs might be the best alternative to with-profit funds. For this to happen however, the report said more needed to be done to raise the profile of TLP funds among IFAs. (Comment continues below)

A year later, some TLP product providers said they wanted to lobby the IMA to create a new sector to help promote the asset class. This never happened, given their offshore domiciles and lack of Ucits III status, but the thinking was that a peer group would help promote the asset class, with retail investors in mind.

Odd, then, that these same providers are now at pains to point out that the funds were only ever aimed at “sophisticated investors” (see news analysis, page 12).

Owing to liquidity constraints, TLP funds have never been able to be packaged as Ucits III funds, and last week’s FSA statement will likely be the death knell to any groups looking to change this.

The key problem has always been what happens if a fund runs out of cash and cannot continue paying the life assurance premiums. If this happens, the policies effectively become worthless.

Most of the groups, to give them their due, have always stated that an education drive has been needed to increase demand, but is this drive alone enough to transform so-called retail investors into sophisticated investors?

Just last month, Managing Partners told Fund Strategy it deals with retail investors as long as they are sufficiently sophisticated. However, it added that it is down to the IFA to categorise who is sophisticated and who is not.

SL Investment Management, which has long maintained TLP funds are not suitable for retail investors, puts IFAs in the same category because they rely on the people selling the product for information.