Actuary takes dim view of investments that penalise you
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.