After 18 months in the pipeline, we finally got a look under the bonnet of Vitality’s new investment proposition this morning.
In both accumulation and decumulation, the insurer is attempting to revolutionise the investment space by offering either bonuses or fee reductions for investing early, investing over a long period and, most importantly, for keeping a healthy lifestyle throughout.
First off, Vitality is certainly right that it has broken new ground by launching Vitality Invest. While offering rewards for investor loyalty is nothing new – see Hargreaves Lansdown’s current fight with the taxman over how they are treated – linking health to investment products has never been attempted in this way before.
A drawdown investor has little incentive to ensure he lives longer and healthier if they can see their pot dwindling quickly. Even impaired annuities, one could argue, carry a perverse financial incentive against improving one’s health and forgoing their preferential rate.
Vitality wants to flip that on its head.
Commercially, I understand the value in the new proposition. Ongoing management fees are king in a post-RDR, post-freedoms world dominated by concerns about running out of money now drawdown is the norm and how to deal with increasing longevity.
Vitality says that with its incentives, it can add 10 or more years onto the life of a drawdown pot. Let’s say you’ve got a decumulation client with £250,000 in drawdown – 1 per cent ongoing fees are obviously £2,500. With a 4 per cent withdrawal rate, and assuming absolutely no investment return, you’ll still take 1 per cent of £237,600 the year after: just shy of £2,380. For little extra work, that’s tens of thousands of extra pounds over the lifetime of a policy. There must be a calculation somewhere in the Vitality offices showing that this will outweigh the cost of the benefits it is providing.
Being concerned with long-term management fees is a fact that Vitality, to its credit, was not shy about discussing at a briefing for journalists this morning.
Vitality Life’s chief executive Herschel Mayers says: “The management fees we earn are more when the volume invested with us is larger, and the longer the period, the more management fees we earn. The tipping point for profitability is the quantum of those fees we earn.”
What’s more, while not all of the financial benefits in Vitality Invest require investors to also have a health or life products with the insurer, it will also represent a useful cross-sell for those looking to take full benefit of the package.
What this needs to work is scale. The race is now on for Vitality to convince as many IFAs as possible its new investment solution is right for its clients. It is making no shortage of effort here, hiring an extra 60 business development staff to get out to the adviser market.
I can predict the questions and challenges they will face from advisers: “So now I need to be a personal trainer as well as a financial planner? Do we really need any more products? Won’t this just go the way of guaranteed drawdown and be a passing fad?”
If nothing else, the offering will really separate planners who see themselves primarily as investment advisers from those who see their role more as holistic life coaches. If I’m a financial planner who purely wants the best investment return for my client, I may favour a traditional wealth manager. If I am a behavioural economics evangelist, I might look to the nudges Vitality is offering as a good way of encouraging my client into the right savings behaviours.
I can predict Vitality will face questions from prospective clients too: “Is it right that my financial adviser has access to all of this medical information about me? Should I be locked into the same provider all my life? What if I just don’t want to go to the gym?”
Vitality certainly doesn’t have the investment heritage of seasoned wealth managers that some planners may be looking for. What it does have, however, is a brand – and branding – that resonates far more with the upper middle class (its target market) than most private banks.
Speaking to Mayers, I asked if there were plans to take the proposition direct to consumers at some stage. The short answer is that the firm probably will. But taking it to advisers is very much its priority first. Let’s see how many answer the call in the coming weeks.
Justin Cash is editor of Money Marketing. Follow him on Twitter @Justin_Cash_1