johnkieran
Registered User
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Read a piece the other day (The Money Advisers web site) that claimed insurance companies are under reporting fund performance.
"I suspect the life company is under-reporting fund returns or not declaring the true cost of fees associated with running the fund. By that I mean that the rate of growth stated on your half-yearly and yearly statements is lower than the actual rate of growth."
Surely they can't be ripping us off as suggested here?
Here's the full article (can't post link):
Complexity Does Not Add Value When Investing
To quickly recap, Peter is a 65-year-old about to retire with €546,000 to invest in an ARF. As a result of a 20-minute conversation with an intermediary whom he has never met before, Peter is recommended a pretty generic low-risk managed fund from a leading life company. He agrees to it, not because it will meet his financial needs for the next 25 years, but because the adviser offers him an enhancement equating to 4% of his fund value, in this case €21,840.
You can read the full story from last week’s newsletter here.
But today I want to look at a question a few of you asked during the week: how can the fund provider (the life company) afford to pay so much for the business?
Remember, the life company paid 5% of Peter’s fund value to the intermediary. €27,300 to secure €546,000.
It so happened that in Peter’s case the intermediary gave 4 of the 5 percentage points to Peter in the form of the enhancement, but he was under no obligation to.
The first thing to say is that rewarding brokers and third parties for bringing in business is completely normal practice. That’s the way the industry works; the life company gets a customer, the broker earns a living.
Ever thought to ask who pays for those commissions?
Peter does.
How does Peter pay?
I’ll get to that.
First, let’s look at the annual management charge (AMC).
The life company charges Peter 0.9% pa to manage the fund. This is an openly advertised annual management charge (AMC).
Not all of this 0.9% is going into the life company’s coffers. Let’s say it costs 0.3% to avail of the services of the various third parties that life company needs to run the fund. That leaves 0.6% to cover the costs of running the business and contribute to the bottom line.
The generic ‘low-risk’ managed fund would be expected to grow modestly annually but by the time you take into account the AMC and Peter’s withdrawals for living expenses (€30,000 plus inflation pa), it will more than likely decrease in value every year, which means a smaller and smaller fee for the life company.
Based on average year-on-year returns for the fund, it will take over 10 years years for the life company to recoup the equivalent of the commission it has paid, in Peter’s case, €27,300.
That’s if the life company even manages to hold on to Peter for 10 years.
After five years, there is no early encashment penalty, so Peter could just take his money somewhere else, and with it, the life company’s hopes of ever making back the commission it paid the third-party adviser.
That doesn’t add up.
Particularly when you consider that the life company in question reported a high double digit increase in operating profits last year.
“Why would the life company engage in loss-making business?
It wouldn’t.”
Here’s what I suspect is happening.
I suspect the life company is under-reporting fund returns or not declaring the true cost of fees associated with running the fund. By that I mean that the rate of growth stated on your half-yearly and yearly statements is lower than the actual rate of growth. If it’s true, then Peter is unknowingly paying for that enhancement in the form of a poorer return than he should be getting.
Let’s say they under report by a mere 1%. It would take just four years for the life company to recoup the €27,300 enhancement.
To me it seems that under-reporting returns is the only way that these companies can be sustainable.
Very few in the industry are asking this question because this is the way the industry works.
Look, there may be another explanation – perhaps the managed funds side of the life company’s business is being propped up by the protection side …
Even if that is the case, the conflicts of interest I pointed out last week still stand. The client’s interests are totally subservient to the corporation’s.
Remember that the next time you are sitting across from your broker.
"I suspect the life company is under-reporting fund returns or not declaring the true cost of fees associated with running the fund. By that I mean that the rate of growth stated on your half-yearly and yearly statements is lower than the actual rate of growth."
Surely they can't be ripping us off as suggested here?
Here's the full article (can't post link):
Complexity Does Not Add Value When Investing
To quickly recap, Peter is a 65-year-old about to retire with €546,000 to invest in an ARF. As a result of a 20-minute conversation with an intermediary whom he has never met before, Peter is recommended a pretty generic low-risk managed fund from a leading life company. He agrees to it, not because it will meet his financial needs for the next 25 years, but because the adviser offers him an enhancement equating to 4% of his fund value, in this case €21,840.
You can read the full story from last week’s newsletter here.
But today I want to look at a question a few of you asked during the week: how can the fund provider (the life company) afford to pay so much for the business?
Remember, the life company paid 5% of Peter’s fund value to the intermediary. €27,300 to secure €546,000.
It so happened that in Peter’s case the intermediary gave 4 of the 5 percentage points to Peter in the form of the enhancement, but he was under no obligation to.
The first thing to say is that rewarding brokers and third parties for bringing in business is completely normal practice. That’s the way the industry works; the life company gets a customer, the broker earns a living.
Ever thought to ask who pays for those commissions?
Peter does.
How does Peter pay?
I’ll get to that.
First, let’s look at the annual management charge (AMC).
The life company charges Peter 0.9% pa to manage the fund. This is an openly advertised annual management charge (AMC).
Not all of this 0.9% is going into the life company’s coffers. Let’s say it costs 0.3% to avail of the services of the various third parties that life company needs to run the fund. That leaves 0.6% to cover the costs of running the business and contribute to the bottom line.
The generic ‘low-risk’ managed fund would be expected to grow modestly annually but by the time you take into account the AMC and Peter’s withdrawals for living expenses (€30,000 plus inflation pa), it will more than likely decrease in value every year, which means a smaller and smaller fee for the life company.
Based on average year-on-year returns for the fund, it will take over 10 years years for the life company to recoup the equivalent of the commission it has paid, in Peter’s case, €27,300.
That’s if the life company even manages to hold on to Peter for 10 years.
After five years, there is no early encashment penalty, so Peter could just take his money somewhere else, and with it, the life company’s hopes of ever making back the commission it paid the third-party adviser.
That doesn’t add up.
Particularly when you consider that the life company in question reported a high double digit increase in operating profits last year.
“Why would the life company engage in loss-making business?
It wouldn’t.”
Here’s what I suspect is happening.
I suspect the life company is under-reporting fund returns or not declaring the true cost of fees associated with running the fund. By that I mean that the rate of growth stated on your half-yearly and yearly statements is lower than the actual rate of growth. If it’s true, then Peter is unknowingly paying for that enhancement in the form of a poorer return than he should be getting.
Let’s say they under report by a mere 1%. It would take just four years for the life company to recoup the €27,300 enhancement.
To me it seems that under-reporting returns is the only way that these companies can be sustainable.
Very few in the industry are asking this question because this is the way the industry works.
Look, there may be another explanation – perhaps the managed funds side of the life company’s business is being propped up by the protection side …
Even if that is the case, the conflicts of interest I pointed out last week still stand. The client’s interests are totally subservient to the corporation’s.
Remember that the next time you are sitting across from your broker.