# The value of illustrations



## Brendan Burgess (19 Nov 2001)

<!--EZCODE BOLD START-->* Mith*<!--EZCODE BOLD END--> said:

There is no legislation for illustrations, except insofar as a statutory illustration has to be produced when flogging the products of a life insurance company. Introduced to control, an out of control sector, it does not apply to other investment manufacturers, like Unit Trusts, OEIC's, Investment Trusts, Share portfolio's and customised packages like self administered pension schemes. Even Bank deposits.

Curiously the life sector is the only one that sticks to flogging its ware by using illustrations of possible future value. But the others flourish without this crutch. 

Perhaps illustrations themselves should be banned, but that would mean the life sector going cold turkey, before adopting a more professional advisory standard, than the twin barrell old IIF Illustration guidelines with all the attending bunkum of Gross Growth, rather than IRR%, Future Values rather than Present Values, and zero link to the underlying risk/reward profile of the fund. 

<!--EZCODE BOLD START-->* Liam*<!--EZCODE BOLD END--> replied:

Hi Mithrandir, 

I agree with you. Illustrations on investments & pensions have little value and I rarely use them. Imagine going in to a stockbroker with £100,000 which you wanted to invest in a diversified portfolio and getting an "illustration" from the stockbroker. 

I believe what little value they have is on regular contribution contracts as a way of illustrating the effects of charges ( not as a way of giving the client any impression of future values).

<!--EZCODE BOLD START-->* Troy*<!--EZCODE BOLD END--> added:

Agree wholeheartedly with the last two speakers. Illustrations were a concoction of the life industry to try and explain away upfront charges as not mattering in the long term. If one doesn't have upfront charges one doesn't have to prove anything. Illustrations should be banned (as I understand they are in some countries). 

I think the scarfless one was making the point that EBS are using 12%, which is in excess of that allowed in the life sector were illustration assumptions are controlled through the Society of Actuaries on foot of the Disclosure Regulations.


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## Liam D Ferguson (19 Nov 2001)

*Should illustrations be banned?*

I wouldn't go so far as to say that illustrations should be banned outright.  They serve a useful purpose in showing the "man in the street" the difference between a low-charging regular contribution plan and a front-loaded one.  

If Billy Punter is considering £100 per month into a savings plan and he sees one illustration based on 8% growth which shows a projected value of £0 in year one, compared with another one which shows £1,100 in year 1, it's pretty easy to figure out which one has higher charges.  A lot easier than trying to understand nil allocation periods, initial units, accumulation units, bid/offer spreads, bonus units, annual management charges, annual service charges and so on an on and on....

Anyone in favour of a system of illustrations where only 0% growth was assumed, thus the illustration was only useful in comparing charges and could never be used to give an impression of future returns?

Liam D Ferguson
www.ferga.com


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## UDS (19 Nov 2001)

*Re: Should illustrations be banned?*

<!--EZCODE ITALIC START-->_ "Anyone in favour of a system of illustrations where only 0% growth was assumed, thus the illustration was only useful in comparing charges and could never be used to give an impression of future returns?"_<!--EZCODE ITALIC END-->

I think the problem with that is that the effect of charges does vary according to the investment return.  The higher the return, the more significant annual charges become, relative to initial charges.  0% long-term return is (hopefully) an unrealistic assumption, and would tend to favour products with a low initial charge and high ongoing charges.


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## CM (19 Nov 2001)

*Illustrations & charges*

<!--EZCODE BOLD START-->* I believe what little value they have is on regular contribution contracts as a way of illustrating the effects of charges ( not as a way of giving the client any impression of future values).*<!--EZCODE BOLD END-->

I agree - that's their only use as far as I can see!


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## Galileo (19 Nov 2001)

*Re: Illustrations & charges*

A fair level of agreement here and that includes me.  One wonders why life companies still put such effort into illustrations when no-one as yet in this thread sees any marketing value to them.


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## Liam D Ferguson (20 Nov 2001)

*Re: Illustrations & charges*

Hi Galileo, 

If I'm being cynical, I could say that, while all those who have contributed to this thread so far are astute enough to realise that a projection is <!--EZCODE ITALIC START-->_ not_<!--EZCODE ITALIC END--> a forecast of what they can expect, there are plenty of poor punters out there who will fall for all sorts of dodgy sales guff from dodgy sales folk.  Using illustrations.


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## CM (20 Nov 2001)

*Re: Illustrations & charges*

Yes - it's scary how many people read the illustrated returns as some sort of guarantee no matter how often and prominently it is pointed out that it is just an arbitrary figure. Is there a standard way to calculate RIY or does this depend on assumed growth rates anyway? I'm just wondering if there's another standard way to state charges such that they could be used for a meaningful comparison of different products. Do the new disclosure regulations require such a standard charge figure to be quoted or do they just require charges to be stated in the usual bid-offer spread, ongoing charges, management charge, penelties etc. format which doesn't really aid in comparing the effect of overall product charges...?


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## Troy (21 Nov 2001)

*RIY make's Delboy look honest*

RIY is the ultimate in smoke and mirrors.  It was concocted by the life industry to attempt to show that, after all, stealing your first years' premium amounts to much the same thing as a reduction in your deposit account interest rate of 0.5% over 20 years.

For some reason which is beyond all explanation the following heroes in turn fell for this RIY ruse:

1)  The UK Authorities
2)  Eddie Hobbs
3)  The Irish authorities.

Utter smoke and mirrors.:mad


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## Liam D Ferguson (21 Nov 2001)

*Re: RIY make's Delboy look honest*

Hi Troy, 

RIY may not be perfect, but do you have a viable alternative?  Sure one of the disadvantages is that it expresses the charges of a front-loaded product over the entire term, but when read in conjunction with the years 1 - 5 projections of surrender values, most punters will see that their product is front-loaded (when they see that the year 1 projected value is nil).  

And more to the point, if the punter is looking at two products (one of which is front-loaded, the other isn't), s/he will quickly see that both the RIY figure and the projected surrender values on the front-loaded thing are poor. 

Which is a lot better than asking a punter to decipher all the gobbledygook that each company would otherwise issue as an "explanation of charges" and then try to compare the two.   

I like the RIY figure because it's a standard, easy to read format for expressing charges.  As UDS pointed out above, another imprefection is that the RIY figure will change with the assumed growth rate being used, but do you have any alternative suggestion?

Regards...Liam


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## Troy (21 Nov 2001)

*The Holy Grail*

<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> <!--EZCODE BOLD START-->* <!--EZCODE ITALIC START--> "I like the RIY figure because it's a standard, easy to read format for expressing charges. "<!--EZCODE ITALIC END-->*<!--EZCODE BOLD END--><hr></blockquote><!--EZCODE QUOTE END-->

Wouldn't it be wonderful if such a Holy Grail existed. 

Thankfully, RIY hasn't really caught on here as much as on the Mainland.  We all secretly acknowledge that QLD has the keenest charging structure but companies who have huge back-ended loyalty and terminal bonuses beat it hands down in the RIY stakes.  

Why?  Because since very few stick around to get them, these bonuses cost the company practically nuffn' yet it minimises the RIY.:rolleyes 

Some RIY junkies whose heart is in the right place <!--EZCODE ITALIC START-->_ (as opposed to the originators of the concept who simply wanted to duck early encashment disclosure)_<!--EZCODE ITALIC END--> now recognise that one RIY at a term way out into the future is entirely misleading.  These have suggested giving a Table of RIYs at each duration - not very handy for league tables. 

Have I a solution?  Yes - it's called <!--EZCODE BOLD START-->* LARIY*<!--EZCODE BOLD END-->.  Lapse Adjusted RIY takes the RIY at each duration and combines them into one <!--EZCODE BOLD START-->* LARIY*<!--EZCODE BOLD END--> by using a standard lapse rate.  

Thus say we chose 10% per annum as a standard lapse rate, the first year's RIY would get 100% weighting, second year 90% weighting etc. etc. with the 20 year RIY getting a 15% weighting.  This would approximate to the charges that the company is actually getting from the policyholders as a Group.:hat


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## Liam D Ferguson (21 Nov 2001)

*LARIY*

Fair 'nuff.  It's a good idea.

But is it one that your average (non AAM reading) punter will understand and therefore be protected by?

Let's not lose sight of the fact that such things are there to make it easier for the consumer to understand the effect of charges.  

Which would be easier for the consumer to understand?


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## Troy (21 Nov 2001)

*LARIY*

<!--EZCODE ITALIC START-->_ Liam_<!--EZCODE ITALIC END-->,

I envisage that LARIY would become like APR.  Very few punters would understand the detailed methodologies behind either - they just have to trust that this is a fair benchmark of the overall "rip-offability" of the product.:| 

LARIY would probably be explained as follows:

<!--EZCODE ITALIC START-->_ "<!--EZCODE BOLD START-->* LARIY*<!--EZCODE BOLD END--> is an average of all the charges expressed as a percentage of the fund after making various assumptions as to future growth, inflation and on average how long people stay"_<!--EZCODE ITALIC END-->

Okay, <!--EZCODE ITALIC START-->_ Empey_<!--EZCODE ITALIC END--> would be totally lost but is he up to RIY in the first place?


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## CM (21 Nov 2001)

*LAIRY*

Even with the proposed LAIRY isn't it still necessary to assume a standard projected growth rate - something which is, in itself, somewhat contentious and prone to being read as some sort of guarantee.


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## Troy (21 Nov 2001)

*LARIY*

You do need a growth rate for the calculations, that's true.  

Two choices as to communication:

<!--EZCODE BOLD START-->* 1) Don't bore the customers with the details.*<!--EZCODE BOLD END-->  

For example, you might read in a car magazine that MPG is 35.  This will be based on many assumptions such as average speed which might be 50 mph.  Try telling the average Dub that they might do 50 mph on average!

<!--EZCODE BOLD START-->* 2) Use a conservative growth rate.*<!--EZCODE BOLD END-->  

A conservative growth rate understates the absolute level of charges as mentioned earlier in this thread but LARIY actually gets <!--EZCODE UNDERLINE START-->bigger<!--EZCODE UNDERLINE END--> on conservative growth assumptions because non fund related charges become a larger equivalent fund management charge.  <!--EZCODE ITALIC START-->_ (Too conservative (such as 0%) might affect behaviour and force companies more towards fund charges when some element of non-fund charges might be fairer for policyholders.)_<!--EZCODE ITALIC END-->

Also, you would spell out that the growth assumption is not guaranteed.  APR is calculated on the assumption that current interest rates remain unchanged - that is potentially very misleading - yet nobody appears to be misled.?hat


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## BILLY (27 Nov 2001)

*Should Illustrations be banned.*

Let's get back to the original debate. 
I feel that I must stand up for the whole principle of quoting illustrations.
Firstly, there has been the issue of using Illustrations to mislead potential customers.  Uberrima Fides (Utmost of good faith) is assumed in many of the facets of the Life and general insurance industry.  I don't think banning illustration due to their potential misuse by rogue a small minority would be very progressive.  In any event, there has been continual change to legislation which is minimising the scope for their misuse.
Secondly, can anyone doubt the usefulness of making the information contained in illustrations available to potential customers?  Projected future values, reduction in yield, broker remuneration and from 2002 projections of renewal premiums on whole of life contracts all assist the client in their future financial planning.
No one guarantees these projections will come to pass (anyone who takes much notice of illustrations would hopefully read the accompanying notes)  but they are generally accurate and a best attempt by experts to give a potential client an accurate picture of what we can expect to occur in the future.


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## Mithrandir (27 Nov 2001)

*Yes but*

Still doesn't answer how squillions in investment can be taken in by other investment sectors, differing only in how they do their asset book keeping for punters...and with sod all illustrations of future values?

So long as this fact exists, the very notion of an illustration standard is surely questionable. Isn't it more of a case that if you took away the 'stuff', life insurance salesfolk would need to explain the investment, as it is, a bit better?


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## Henbit (27 Nov 2001)

*Illustrations*

Disclosure of charges - a must.
Disclosure of commissions - absolutely essential.

Illustrations of potental benefits???
Totally misleading.
Pure marketing hype.
What about inflation?
The chances of the illustration being within even 30% of the actuality are remote.
RIY has been rubbished elsewhere on AAM.
Vermillions are spent each year on the stockmarket and never an illustration produced.:|


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## UDS (27 Nov 2001)

*Re: Illustrations*

If disclosure of charges is a must, and disclosure of commissions is absolutely essential (and I agree with both of these) then I do think there is a role for illustrations.

Suppose product A has an initial charge of x%, a monthly policy fee of £y and an annual charge of z%.  Policy B has an initial charge of a% and an annual charge of b%.  Which is cheaper?  Even if we are told the values of a, b, x, y and z we cannot answer the question; we need to know how much is being contributed each month and for how many months, how long the investment will continue, and what growth rate will be earned.  In other words, to compare the effect of different charging structures, we <!--EZCODE ITALIC START-->_ have_<!--EZCODE ITALIC END--> to project the performance of the product.

Why should the consumer have to do this himself?  Standardised illustrations based on uniform assumptions are a useful tool in identifying which charging structures are cheap and which are expensive.  So long as the consumer knows that that is <!--EZCODE ITALIC START-->_ all_<!--EZCODE ITALIC END--> they are useful for, they are A Good Thing.


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## Java (27 Nov 2001)

*Illustrations*

Anyone receiving an illustration for equity based investment products should file it under 'fiction' and remain confused.

RGDS,

Java


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## Henbit (27 Nov 2001)

*Charges Disclosure*

<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> So long as the consumer knows that that is all they are useful for, they are A Good Thing. <hr></blockquote><!--EZCODE QUOTE END-->Absolutely agree.  

Unfortunately, for the reasons you state, <!--EZCODE ITALIC START-->_  UDS_<!--EZCODE ITALIC END-->, the full illustration of the <!--EZCODE UNDERLINE START-->effect<!--EZCODE UNDERLINE END--> of charges does require a projection of the surrender value of the policy under certain investment assumptions.  If it was left to me I would have simply shown the premiums and charges columns in the Illustrative Tables and omitted columns such as investment return and surrender value (even though these were a necessary part of the calculation). :jem


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