Ac­tu­ary takes dim view of in­vest­ments that pe­nalise you

Weekend Argus (Saturday Edition) - - PERSONALFINANCE -

on’t in­vest in a sav­ings prod­uct that has an up­front com­mis­sion of any kind. This is the ad­vice of an in­de­pen­dent ac­tu­ary who is not at all happy that the life as­sur­ance in­dus­try con­tin­ues to sell in­vest­ment prod­ucts that re­sult in penal­ties if you do not keep pay­ing your con­tri­bu­tions or if you with­draw your sav­ings be­fore ma­tu­rity.

The penal­ties ap­ply to most life as­sur­ance en­dow­ment poli­cies and re­tire­ment an­nu­ities (RAs).

The good news is that the days of these un­ac­cept­able prod­ucts could be num­bered (see “Com­mis­sion struc­ture on life as­sur­ance sav­ings prod­ucts ‘is not sus­tain­able’”, above).

The penal­ties are largely a re­sult of the per­verse way in which the life as­sur­ance in­dus­try pays its prod­uct-flog­gers – and prod­uct-flog­gers is what they are, be­cause they sell prod­ucts that are sel­dom in your best in­ter­ests.

Fi­nan­cial ad­vis­ers can get – up­front or within the first two years – half of the com­mis­sion on what you will con­trib­ute in to­tal over the en­tire in­vest­ment term of a prod­uct. So, for ex­am­ple, com­mis­sion on con­tri­bu­tions you will make to your RA fund 20 years from now has al­ready been paid.

With some life as­sur­ance prod­ucts and most non- life as­sur­ance sav­ings prod­ucts, par­tic­u­larly col­lec­tive in­vest­ment schemes (unit trusts and ex­change traded funds), the com­mis­sion is paid when you ac­tu­ally make the in­vest­ment.

The in­de­pen­dent ac­tu­ary, who did not want to be named, pro­vided a real-life ex­am­ple of how you can be pe­nalised se­verely by a life as­surer, even when you are com­mit­ted to sav­ing for your re­tire­ment. But no mat­ter how com­mit­ted you are, life is full of un­ex­pected events – and if any­one should know this, it is the peo­ple who work in the life as­sur­ance in­dus­try, which is based on pro­vid­ing cover for un­ex­pected events.

The ex­am­ple in­volves a young woman who be­longs to an RA fund.

In 2006, she lost her job and had to re­duce her monthly con­tri­bu­tions from R2 193 to R1 200. The life as­sur­ance com­pany smacked her with a penalty of R15 957, which re­duced her ac­cu­mu­lated sav­ings by over 16 per­cent, from R97 856 to R81 899.

In Oc­to­ber 2008, when the woman was work­ing again, she in­creased her con­tri­bu­tions to R2 000 a month. But in Fe­bru­ary 2009, she again lost her job, and

Dre­duced her con­tri­bu­tions to R1 262 a month. This time, the life com­pany hit her with a penalty of R14 201, which re­duced her sav­ings of R160 375 by just un­der nine per­cent to R146 174.

In July 2009, she was em­ployed again and re­verted to sav­ing R2 000 a month. In July 2010, she fell preg­nant and stopped work­ing. This time, the life com­pany con­fis­cated R19 547, or just un­der 11 per­cent, from her ac­cu­mu­lated sav­ings of R182 049, leav­ing her with R162 502.

What makes all this even worse is that on the R49 705 the life as­sur­ance com­pany con­fis­cated in to­tal the woman also lost all fu­ture in­vest­ment growth.

So here is a per­son who is com­mit­ted to sav­ing, but who has been abused by a prod­uct provider and its prod­uct-flog­ger.

The prod­uct- flog­ger should have ad­vised her that there was a bet­ter op­tion than a life as­sur­ance RA fund – if not from the out­set, at least when she lost her job the first time.

She should have started a new non-life as­sur­ance RA with the ex­tra money she wanted to save.

If this prod­uct- flog­ger knew any­thing, he would have known that there are col­lec­tive in­vest­ment schemes that do not have these aw­ful con­fis­ca­tory penal­ties – but then they do not pay up­front com­mis­sion, which is prob­a­bly why he did not ad­vise her prop­erly.

PPS, Al­lan Gray, Coro­na­tion, In­vestec, Syg­nia, et­fSA and 10X In­vest­ments of­fer prod­ucts that have nei­ther up­front com­mis­sions nor penal­ties.

The great thing about Syg­nia, et­fSA and 10X is that they of­fer prod­ucts that track in­dices, which re­sults in a sub­stan­tial re­duc­tion in costs and an in­crease in your fi­nal ben­e­fit. This is par­tic­u­larly the case when com­pared with an ac­tive as­set man­ager who, in ef­fect, dou­ble-charges you by levy­ing an an­nual as­set man­age­ment fee plus a per­for­mance fee.

FEES UPON FEES

Even with col­lec­tive in­vest­ments, you have to be wary of com­mis­sions and fees that are de­ducted to pay your fi­nan­cial ad­viser. Nor­mally, there is a com­mis­sion, which is a per­cent­age of your con­tri­bu­tions, and there is an­other fee, which is based on a per­cent­age of your ac­cu­mu­lated as­sets.

I have no prob­lem with the first fee, but the sec­ond fee takes a whack out of your sav­ings and, for most peo­ple, it is sim­ply not nec­es­sary.

The fee as a per­cent­age of your as­sets is sup­posed to be for on­go­ing ad­vice. But most fi­nan­cial ad­vis­ers do not have the qual­i­fi­ca­tions to pro­vide in­vest­ment ad­vice – as­set man­agers are far bet­ter suited to do this, and they gen­er­ally charge far less.

You are not obliged to pay these on­go­ing ad­vice fees and can stop them at any time.

Most peo­ple need only a prod­uct in which an as­set man­ager makes the de­ci­sions about which as­set classes to use and the un­der­ly­ing in­vest­ments. And such a prod­uct is avail­able – it is called a multi-as­set or bal­anced fund. Money is flood­ing into these funds. Leon Cam­pher, chief ex­ec­u­tive of the As­so­ci­a­tion for Sav­ings & In­vest­ment SA, says in a re­view of the col­lec­tive in­vest­ment in­dus­try for the quar­ter to the end of Septem­ber that the South African multi-as­set cat­e­gory re­mains the most pop­u­lar cat­e­gory with in­vestors. This is be­cause multi-as­set funds en­able in­vestors to di­ver­sify across as­set classes within one fund.

The South African multi-as­set cat­e­gory at­tracted net in­flows of R35 bil­lion dur­ing the third quar­ter this year. Over the 12 months to the end of Septem­ber, in­vestors com­mit­ted a to­tal of R110 bil­lion to South African multi-as­set funds.

“Never be­fore has a sin­gle fund cat­e­gory claimed net in­flows of this mag­ni­tude. The South African multi-as­set cat­e­gory now holds 44 per­cent of in­dus­try as­sets (ex­clud­ing the world­wide, global and re­gional sec­tors),” Cam­pher says.

Multi-as­set funds have a va­ri­ety of risk pro­files, and many of them meet the pru­den­tial in­vest­ment re­quire­ments of the Pen­sion Funds Act, which means they are suit­able as the un­der­ly­ing in­vest­ments of an RA fund.

There is very lit­tle need to pay a fee for on­go­ing ad­vice to some­one who does not know much about as­set man­age­ment. The only ad­vice you need – for which you should be charged by the hour – is on se­lect­ing a fund that suits your risk pro­file.

Gen­er­ally, when you are young, you should in­vest in a higher-risk fund with high eq­uity ex­po­sure, be­cause you will earn the best re­turns and the ef­fects of volatil­ity will iron out over time.

As you ap­proach re­tire­ment, you need to lower the volatil­ity risk and de­crease your ex­po­sure to equities by se­lect­ing a fund that is more con­ser­va­tive.

So spread the word and take the ad­vice of the in­de­pen­dent ac­tu­ary: do not in­vest in a prod­uct that pays an up­front com­mis­sion on the pre­mi­ums or con­tri­bu­tions you have yet to make.

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