Its all very simple, really

Smoothed bonus products have suffered due to a lack of clear communication, which has lead to confusion for investors and intermediaries, and several questions raised by the PFA.

In fact it was the PFAs most recent ruling about surrender values, disclosure, and several posed questions which led Dave Hudson at Old Mutual SA to find time to talk about this much maligned investment product.

There is smooth, smoother and market related; then there is short term and long term.

What is the appetite of the investor and does the intermediary understand the product, and can they explain to an investor in high market return environment why their investment in the smoothed bonus product didn't match the market.

It's smooth both ways, ala the Japanese economic and market decline over time. You are not immune from market catastrophe.

Hudson does advocate that entry fees should be introduced when the markets are strong, because according to Hudson the investors that enter these funds at these times are benefiting at the expense of the existing investors.

To complicate matters Hudson says that their one big fault is that of miscommunication. One term returns are what the product is about and it's only paid out on term, death or disability not on surrender.

Spare a thought for the investors that invested their lump sums in market related funds their ride has been terrifying, to say the least. Well, it appears that it isn't only the consumer and intermediary that are confused.

A recent ruling and subsequent media interviews by the PFAs office confused matters even more when several questions were posed to the life industry.

To get the marketing statement out of the way Hudson says that there is no better time to put a lump sum into a product than when you are about to retire. He is about to retire.

As a starting point the customers view of absolute investing is that these type of products attempt to be positive most of the time and losses are assumed to be rare. There are no benchmarks, and performance is irrespective of what the markets do.

Hudson says that underlying the returns is a shock absorber, the stabilization fund in their case, which ensures that returns are smoothed if markets don't perform.

In good market return periods any surplus made by the asset managers looking after the smoothed bonus product underlying funds is placed in the pool and used to smooth those poor market return periods.

And just in case you were wondering, Old Mutual has been in the smoothed bonus game for the past 22 years, since 1984, and when the product was initially launched there was much criticism and disbelief that the smoothed bonus would perform, despite market conditions.

It appears that concerns raised recently have not been dealt with and the myth perpetuates that the actuaries would be conservative and they hold back, which will lead to a drag are just that - myth.

According to Hudson it also appears that brokers were a little irritated when the industry decided to be a little more conservative with their projections, and tempered their projections to more reasonable levels, at a time when the markets were pumping.

The falling inflation rates also compounded the issue, and when the forward projections were reduced the customers were in uproar, although the after-inflation percentages and performance were improving.

Hudson suggests that investors and intermediaries do the shopping basket test, over time, against the smoothed bonus line, as Sanlam did many years ago, to get a realistic sense of how their investment performed.

Hudson says that in fact it appears that the smoothed bonus product costs the life company more as they have to adhere to capital adequacy rules. That's the price you pay for smoothing. There is a fraction of a percentage point involved, in the cost of capital and it does become evident over time.

While the capital costs are higher than a market related investment Hudson says that the business still makes money.

Editors thoughts:

* It appears that this lack of communication is now being addressed. Old Mutual is starting an education processes to explain the product offering.
* An analogy: If a car is technologically advanced, will the salesperson tell the prospect not to buy the car because its so advanced? Not likely. Its used as a selling tool. If it doesn't perform as per the salesperson then the prospect will complain to the salesperson.