Investing SSIA cash in equities pays off in long run

Investors need to take a longer-term view when looking at stock market, writes Laura Slattery

The original Eircom shares debacle, the prevalence of worthless stock options from the dotcom era, and the volatility of high-profile pharmaceutical stock Elan have done little to convince Irish people that investing in the stock market is anything other than gambling in all but name.

Affinity to the solid, tangible world of property has also prompted many potential investors to stay away from the ups and downs of equity investments.

But this nervousness is often misplaced, according to the Professional Insurance Brokers' Association (Piba), which says the differing values of maturing Special Savings Incentive Accounts (SSIAs) will act as "a wake-up call to consumers".

According to Piba chairman Liam Carberry, someone who contributed the maximum €254 a month over five years to an equity-linked SSIA will receive about €26,000 before tax from their maturing policy, while an SSIA saver who contributed the same amount to a deposit account will receive about €21,000. Part of the problem, he believes, is that consumers who approach financial institutions directly are not getting proper advice. "Every day brokers see consumers filled with fear around the question of equities, believing erroneously that they are high risk," he says.

"Returns on equities have been over 20-30 per cent per year since 2003 and while these returns can fluctuate - as evidenced in the past fortnight or so - over the longer term, equities outperform deposits by a substantial margin. Furthermore, they have done so for decades, with the exception of short blips, from which they have always recovered."

Bank savers, Carberry says, are getting a raw deal. "In an environment of rising inflation, the value of savings in banks is actually being eroded." In other words, deposit accounts are vulnerable to "inflation risk", or the risk that the money will lose its purchasing power over time.

Meanwhile, Piba chief executive Diarmuid Kelly is concerned that simple deposit accounts won't be covered by the Irish Financial Services Regulatory Authority's consumer protection code, which means the banks offering them have no requirement to check the needs of the customer, recommend a suitable product or explain in writing the reasons for that recommendation.

These "fact-finding" and suitability requirements, which include the obligation to write a "reason why" letter, have so far only applied to intermediaries, but will be extended to all financial services providers in respect of certain investment and insurance products when the regulator's consumer protection code comes into effect.

The code is designed to prevent further examples of recent mis-selling cases, where banks persuaded elderly customers to invest five-figure sums into equity-linked products with no guarantees on their capital.

As a result of crashing stock markets, large portions of their life savings were wiped out.

In cases where it could be proven that the financial institution had not warned the customers about the risks - in other words, that the value of their investment could fall as well as rise - the financial services ombudsman Joe Meade and his predecessors have awarded compensation to complainants who suffered losses.

Piba's point is that by not extending the code to "basic banking products" like simple savings accounts, customers will end up being mis-sold in a very different way: as financial institutions won't have any incentive to give "proper advice", customers will leave large sums of money in low-yielding deposit accounts for long periods of time and miss out on the higher returns from equities.

Banks make high margins on deposit money by lending it on, Kelly points out.

But consumers always have to consider the agenda of the person selling them a financial product. Banks may make high profits from deposit accounts, but anyone who sells investment products receives some kind of commission for doing so.

Consumers who are worried that the advice they receive is not impartial as a result of these commissions should consider paying a fee to a broker who is licenced as an authorised adviser.

There may be very good reasons why an equity-linked investment is not suitable.

As equities are volatile, they are not suitable for short-term investments of less than about five years: financial advisers often recommend investment terms of eight years or more.

Consumers who invest in equities should always have a nest egg in a safe deposit account that they can dip into in case of emergencies. If they haven't already got some money put aside in a safe, accessible account, they shouldn't risk losing their entire savings by investing in equities.

For investors who don't want their money to go into freefall even temporarily - as equity SSIAs did in the early years of the scheme before recovering - there are equity-linked products with capital guarantees.

These investment funds and bonds, which often have high internal charges, have a fixed term and offer limited access, but they are a halfway house between deposit accounts and either direct share or managed fund investments.

SSIA holders who opted for deposit accounts without a second thought may well just shrug their shoulders at the thought that those who took the risk of equity SSIAs are on course to receive about €5,000 more. (The exact value of their fund will depend on when they invested, the pattern and value of their contributions and the investment fund selected.)

After all, the deposit savers have not technically lost €5,000, they have just refused the bet.

Although equity markets have generally risen over time, there are thousands of investors for whom the 2000-02 bear market felt like rather more than just a "short blip". Losses were not confined to tech stock speculators - many pensions savers nearing retirement saw the value of their funds dip alarmingly at just the wrong time.

The SSIA experience for equity investors, despite this week's shaky markets, has been much more positive, and banks are now trying to convince the majority of people who took out deposit SSIAs that it's not too late to play the market, sending out application forms for their new products to customers whose accounts are about to mature.

But the financial regulator has warned consumers that although equity-based SSIAs have generally made more money than deposit SSIAs, there is no guarantee that stock markets will continue to perform as well as they have done in the past few years.

Before signing up to anything, consumers who don't know their unit funds from their cash deposits should consider reading the financial regulator's guide to savings and investments and its publication, SSIAs - Your Little Black Book, which is available by phoning its consumer helpline on 1890-777777, by visiting www.itsyourmoney.ie or by calling into its information centre at College Green, Dublin 2.