Why do insurers allow advisers to choose ARF commission rate?

[Wollie]

People who use an advisor have far better outcomes on average than people who go it alone. We should all remember that when every second poster is trying to seek out the lowest cost self-chosen investment via the lowest cost pension structure.

There is reliable data from the US which indicates that people who manage their own investments make about 2-2.5% per year on average versus 5-6% for your typical 60-40 Equities/Bonds managed portfolio and 7%+ for a managed all-equity approach. Going it alone is a bad idea.

@Gordon Gekko, could you point us to where we can verify that assertion? A friend who knows the pensions business says that the opposite is the case, that brokers have made far more out of ARF's than their clients.
He says that, over the last ten years, total commission (initial and trail) paid by insurance companies to intermediaries exceeded gains by clients. That is despite strong stock market growth in the period. He may have qualified it by saying that it applied for ARF's under €1 million, because people with ARF's over €1 million were more prepared to invest in the stock market and were also better at avoiding trail commission.
Either way, my friend's claim seems preposterous. If it is false, the insurance companies (collectively or individually) should put the lie to it and publish the true figures. If it's true, then the Central Bank should force them to publish the figures.
My friend made the sarcastic comment that the introduction of ARF's spelt the end for annuities for individuals, but delivered a nice annuity income for intermediaries - in the form of trail commission!

 

[Dave Vanian]

Well we can play word games I suppose. The main difference is that commission actually detracts from the product. With Chanel perfume the customer gets the same product but to be sure some pay more than others for it.
The "product" that a life assurance company is selling is the potential to accumulate savings. A 0.5% p.a. extra charge seriously detracts from the "product" as others have pointed out (awaiting GG's source that this is not the case). The real issue is that life companies make this contamination of their product easy for unscrupulous brokers to implement.
AAM should campaign for people who have signed up to these OTT trail commissions to immediately cancel their commitment and instead seek advice maybe every 5 years, possibly on AAM.

Hardly word games. Let's say I tell you that you have two choices: (a) pay me 0.25% of your fund value per year as both a retainer for any queries you may have during the year and for regular reviews or (b) don't. Let's say you choose (a). Whether you pay me out of your bank account or the pension company pays me out of your pension fund makes no difference to me. Paying me from the pension fund means that I don't have to charge you VAT, so it's cheaper for you.

Do I believe that charges disclosure regulations should be a lot more consumer-friendly, so that all charges (broker, pension company, trustee, fund manager) would be displayed clearly in a much more obvious and easy-to-understand way than the regulations currently require? Yes I do. See my post #6 above.

Do I believe that it's the job of pension companies to police or dictate what brokers or agents charge their clients? No - we have a Central Bank and a Pensions Authority to do that job.

 

[Dave Vanian]

A friend who knows the pensions business says that the opposite is the case, that brokers have made far more out of ARF's than their clients.
He says that, over the last ten years, total commission (initial and trail) paid by insurance companies to intermediaries exceeded gains by clients. That is despite strong stock market growth in the period.

Sorry but that sounds like utter nonsense to me.

I've no idea what the majority of brokers are charging for ARFs. But let's assume that the average is 3% up-front and 0.25% trail. I know brokers who charge a lot less than that, but let's go with the higher figure. Over 10 years the 3% up-front adds 0.3% per year to the annual charge. So we're up to 0.55% per year commission. Now before an actuary scolds me because the 3% commission is paid up-front, let's really be generous and round up the effect of commission to 1% per year. Actual commission is 3% + (10 years x 0.25%) = 5.5%. I'm showing that as an average of 1% per year x 10 years.

Let's take the Irish Life Consensus Fund as a proxy for the average Irish managed pension fund, as that's what the fund is designed to do - replicate the average. Annual growth over the past 10 years on the Consensus Fund has been 8.44% per year AFTER deduction of the standard 0.75% annual fund charge.

So fund growth 8.44% per year. Sales commission 1% per year or less. Does your friend have any data whatsoever to back up his claim?

Either way, my friend's claim seems preposterous. If it is false, the insurance companies (collectively or individually) should put the lie to it and publish the true figures.

It certainly does seem preposterous. Why should any insurance company go to the expense and work of collating and publishing data to rebut a preposterous claim unless your friend published it with data to back it up? I can claim that the average broker only makes €1.24 for selling an ARF and that the average client makes 1,000% fund growth every three weeks. I wouldn't expect any insurance company to bother to rebut that preposterous claim either.

My friend made the sarcastic comment that the introduction of ARF's spelt the end for annuities for individuals, but delivered a nice annuity income for intermediaries - in the form of trail commission!

Your friend does know that annuities are still available to anyone that wants one, right?

 

[Gordon Gekko]

@Gordon Gekko, could you point us to where we can verify that assertion? A friend who knows the pensions business says that the opposite is the case, that brokers have made far more out of ARF's than their clients.
He says that, over the last ten years, total commission (initial and trail) paid by insurance companies to intermediaries exceeded gains by clients. That is despite strong stock market growth in the period. He may have qualified it by saying that it applied for ARF's under €1 million, because people with ARF's over €1 million were more prepared to invest in the stock market and were also better at avoiding trail commission.
Either way, my friend's claim seems preposterous. If it is false, the insurance companies (collectively or individually) should put the lie to it and publish the true figures. If it's true, then the Central Bank should force them to publish the figures.
My friend made the sarcastic comment that the introduction of ARF's spelt the end for annuities for individuals, but delivered a nice annuity income for intermediaries - in the form of trail commission!

So it’s Page 76 of the JP Morgan presentation below, which is based on work undertaken by Dalbar:

Guide to the Markets

The J.P. Morgan Guide to the Markets illustrates a comprehensive array of market and economic histories, trends and statistics through clear charts and graphs.

am.jpmorgan.com

Dalbar is an independent investment research firm based in the US. They produce an annual ‘Quantitative Analysis of Investor Behavior’ report, or ‘QAIB’. Their research studies overall investor performance in mutual funds.

This summarises it all quite neatly:

Dalbar QAIB 2022: Investors are Still Their Own Worst Enemies

The latest update of this research series analyzes fund performances by investment behavior versus actual returns.

www.ifa.com

 

[Sarenco]

Dalbar is an independent investment research firm based in the US. They produce an annual ‘Quantitative Analysis of Investor Behavior’ report, or ‘QAIB’. Their research studies overall investor performance in mutual funds.

The Dalbar report has been widely discredited at this stage -

 

[Duke of Marmalade]

Paying me from the pension fund means that I don't have to charge you VAT, so it's cheaper for you.

This is the payment by the life company to you (the broker) on behalf of the customer for services rendered to the customer. It is a VATable expense no matter how the customer pays for it. But of course life companies would not avoid VAT so it is not after all a payment for services provided to the customer but a crude commission from the life company for services provided to it, the life company, by the broker. The latter is of course the correct interpretation hence no VAT but its presentation to the customer as a service to her is a deception facilitated by the life company.

Let's say I tell you that you have two choices: (a) pay me 0.25% of your fund value per year as both a retainer for any queries you may have during the year and for regular reviews

For sake of argument let's stay consistent with the parameters of the debate. You are being asked to pay €5,000 a year for a retainer to answer any queries and provide regular reviews. I have my GP as retainer to answer questions on my health but I ain't going to pay him €5,000 a year for it.
This is open and shut. 0.5% of €1m as a retainer to answer questions and provide 6 monthly sexy updates on your Sharpe Ratios is a rip off and it is being made easy and respectable by the providers.

The CBI spew out their honeyed words about the consumers' best interest and turn a blind eye to this massive consumer con trick. Gimme a break.

 

[Gordon Gekko]

The Dalbar report has been widely discredited at this stage -

Did you even read the link you posted?!

It’s one guy, who actually states that he could only find two other people criticising the Dalbar methodology!

Hardly “widely discredited”

Dalbar and JP Morgan versus some keyboard warrior

And Dalbar actually refute his assertions in writing!

 

[Duke of Marmalade]

I think the Dalbar point is that folk are their own worst enemy. They should stick with the program and ignore their irrational whims. All very wise and indeed your typical GP will have the same whine - I keep telling them to go easy on the fags and the booze. And of course she is right as many surveys have shown. But she doesn't charge a retainer of €5,000 per annum to regurgitate the mantra. What I meant was she doesn't insist that her patient signs a contract with the GP's preferred hospital to charge the patient €5,000 per annum and pass it on to the GP - think of the VAT saving!

 

[Sarenco]

Dalbar and JP Morgan versus some keyboard warrior

Professor Wade Pfau is hardly a key board warrior! He's a highly respected academic.

His analysis on the DALBAR report has been cited with approval by Jonathan Clements in the Wall Street Journal, amongst other commentators.

But hey, read the analysis - and DALBAR's response (included at the end of the link) - and make up your own mind.

I think it's clear that the DALBAR report uses junk maths and definitely does not constitute "reliable data".

 

[Gordon Gekko]

I think the Dalbar point is that folk are their own worst enemy. They should stick with the program and ignore their irrational whims. All very wise and indeed your typical GP will have the same whine - I keep telling them to go easy on the fags and the booze. And of course she is right as many surveys have shown. But she doesn't charge a retainer of €5,000 per annum to regurgitate the mantra. What I meant was she doesn't insist that her patient signs a contract with the GP's preferred hospital to charge the patient €5,000 per annum and pass it on to the GP - think of the VAT saving!

The March before last, people who manage their own money were running for the hills turning temporary declines into permanent losses.

People with advisors in situ were being told not to panic, and to stay the course.

It’s stating the obvious to argue that people who manage their own money typically underperform.

 

[Gordon Gekko]

Professor Wade Pfau is hardly a key board warrior! He's a highly respected academic.

His analysis on the DALBAR report has been cited with approval by Jonathan Clements in the Wall Street Journal, amongst other commentators.

But hey, read the analysis - and DALBAR's response (included at the end of the link) - and make up your own mind.

I think it's clear that the DALBAR report uses junk maths and definitely does not constitute "reliable data".

We’ll have to agree to disagree.

JP Morgan vs a lone wolf…I’ll take the JP Morgan and Dalbar side of that, thanks.

They’ve analysed mutual fund flows and concluded that investors who do their own thing do pretty badly; I note that the opposing view isn’t that the investors do well, it’s to do with IRRs and dollar cost-averaging.

 

[Duke of Marmalade]

The March before last, people who manage their own money were running for the hills turning temporary declines into permanent losses.

People with advisors in situ were being told not to panic, and to stay the course.

It’s stating the obvious to argue that people who manage their own money typically underperform.

Doesn't cost €5,000 p.a. You can get that advice for free on AAM.

It is quite common for comparison between medical advice and financial advice - brokers are particularly fond of it.
Both make a big point of behavioural advice, and so they should. But the comparison in charges is staggering and facilitated by the hospitals, I mean life insurers.

 

[Dave Vanian]

Oh come now @Duke of Marmalade - I'm sure you know very well that the average DC pension fund in Ireland is far less than €1 million. Sounds to me like you're inflating the realistic figures to make a point.

To use more a realistic example, if I offer you ongoing service at a cost of 0.25% of €300,000 or €750 per year, you can choose to turn it down. Or you can choose to accept it.

And yet you continue to use emotive language like "massive consumer con trick" and "rip off".

 

[Sarenco]

JP Morgan vs a lone wolf

JP Morgan, like all financial advisers, have an obvious vested interest in citing the DALBAR Report.

Academics have no vested interest in critiquing the DALBAR methodology.

Neither does the Wall Street Journal.

Neither does the Irish Times -

‘Dumb money’ acting smart while institutions jump ship

Ordinary investors not panicking in coronavirus crash, data strongly suggests

www.irishtimes.com

 

[Duke of Marmalade]

Oh come now @Duke of Marmalade - I'm sure you know very well that the average DC pension fund in Ireland is far less than €1 million. Sounds to me like you're inflating the realistic figures to make a point.

To use more a realistic example, if I offer you ongoing service at a cost of 0.25% of €300,000 or €750 per year, you can choose to turn it down. Or you can choose to accept it.

And yet you continue to use emotive language like "massive consumer con trick" and "rip off".

We're discussing ARFs here. €1m has been cited. That is good for an index linked annuity of about €24,000 p.a., not Jeff Bezos country. Fees of €5,000 p.a. are about 20% of the pension earning power of the ARF.

 

[Wollie]

@Duke of Marmalade You have just (maybe inadvertently) provided support for my earlier comment:

over the last ten years, total commission (initial and trail) paid by insurance companies to intermediaries exceeded gains by clients

@Dave Vanian disagrees:

Sorry but that sounds like utter nonsense to me.

To prove my point, suppose we look at a level rather than an index-linked annuity. The website pensionchoice.ie tells us that a €1,000,000 lump sum will buy a level pension of €36,400 a year for a 66-year old male.
Now suppose our 66-year old male decides that the alternative to buying the annuity is to stick the money under the mattress, and take out €33,333 a year, on the assumption that he'll live another 30 years (until he's 96).
Therefore, the extra return he's getting for doing business with the insurance company and the broker is the princely sum of €3,067 a year, which is far less than the €5,000 a year that the broker is getting from the sale.
Now, before you tell me that he's taking an ARF, not buying an annuity, note that @Marc and others assure us, after treating us to some sophisticated stochastic calculus, that the 'safe' return from the ARF is around the same as the €36,400 he would get from the annuity. We end up at the same place.
@Dave Vanian The error in your logic is the assumption that a broker would advise a retiree to put their money in an Irish Life Consensus Fund. Experience shows that they don't, that they have a strong bias toward directing older clients towards so-called "safe" options like cash and bonds. That's how they demonstrate the added value.

 

[TheGoodTheBad]

Insurance companies allow brokers apply trail on other products too not just ARF. They also allow brokers to select their own commission structure which is also a major issue. How can someone justify the massive Commissions they can make for really just getting a client to sign a piece of paper.
Take your example of 1,000,000, a broker can get up to 5% commission (3% without affecting allocation). Can you justify a broker of FA getting minimum 30,000 to just sign a new client with a million euro pension. Regardless of how that pension peforms that broker has being paid. The markets could crash the following month and does not impact the broker.
At least with a trail the brokers payment is dependent of the performance of the pension. If the pension isn't doing well the brokers income isn't doing well. For that reason it may make the broker actually give a real interest in what is happening especially when things aren't going so well.
How many Financial Advisors or Brokers would you say got in touch with their clients in Feb/March of 2020 and were proactively trying to help their clients. I would say there was a lot of brokers who had their commission suddenly became harder to get in touch with or didn't get in touch with their clients when the equity markets fell.

 

[Steven Barrett]

Insurance companies allow brokers apply trail on other products too not just ARF. They also allow brokers to select their own commission structure which is also a major issue. How can someone justify the massive Commissions they can make for really just getting a client to sign a piece of paper.

There is a lot more work involved than just getting a client to sign a piece of paper. But I have seen plenty of instances where that is literally what happens, usually from the bigger firms who manage group schemes. When it comes to a member retiring, they send them a proposal form to complete in the post and earn 3% commission, no advice. This is wrong.

Take your example of 1,000,000, a broker can get up to 5% commission (3% without affecting allocation). Can you justify a broker of FA getting minimum 30,000 to just sign a new client with a million euro pension. Regardless of how that pension peforms that broker has being paid. The markets could crash the following month and does not impact the broker.

I am told there are some brokers that do take that size commission but there are not that many. There is no circumstance where a broker can justify earning €30,000 for setting up an ARF. And that isn't free money, the client is paying for it through higher management fees but probably being told that the insurance company is paying for it so it is free to the client. The world of personal finance products is very opaque and most people won't be aware of all the different charging structures, so it is very easy for a broker to hide fees. I am aware of one who targets directors as you don't have to disclose fees for executive pensions. So he doesn't and he charges very high fees.

How many Financial Advisors or Brokers would you say got in touch with their clients in Feb/March of 2020 and were proactively trying to help their clients. I would say there was a lot of brokers who had their commission suddenly became harder to get in touch with or didn't get in touch with their clients when the equity markets fell.

This is the time where an advisor earns their corn. We don't have to have a weekly involvement in someone's life but when things start going wrong, you need to hold people's hands. Being in constant contact with clients, letting them know what is going on, we have been through this before, you have cash on hand if needed so there is no need to panic. If you had €1m in equities, you would have seen it fall to €670,000 in March 2020. That is going to scare anyone and if you aren't talking to them and reminding them of the quality of their investment assets, they are going to pull the plug and crystalise those losses.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Steven Barrett]

A friend who knows the pensions business says that the opposite is the case, that brokers have made far more out of ARF's than their clients.
He says that, over the last ten years, total commission (initial and trail) paid by insurance companies to intermediaries exceeded gains by clients. That is despite strong stock market growth in the period. He may have qualified it by saying that it applied for ARF's under €1 million, because people with ARF's over €1 million were more prepared to invest in the stock market and were also better at avoiding trail commission.
Either way, my friend's claim seems preposterous.
[/QUOTE]

[/QUOTE]
This is nonsense.

I've heard so many people say "my pension is rubbish". No it's not. Where is your money invested? If it's invested in low return assets, you are getting what you signed up for, which isn't much of a return.



[QUOTE]
If it is false, the insurance companies (collectively or individually) should put the lie to it and publish the true figures. If it's true, then the Central Bank should force them to publish the figures.
[/QUOTE]

Reminds me of the story of Lyndon B Johnson wanting to circulate the story that his political opponent had sex with a pig. His campaign manager replied "You can't say that, it's not true!" "I know it's not true" replied Johnson, "but I want to hear him deny it"

 

[GSheehy]

The average private pension maturity pot in Ireland is less than €150,000, so €112,500 ARFable.
Folk can buy ARFs without initial commission.
Folk can buy ARFs without trail commission.
The vast majority of ARF money is in Multi-Asset / Mixed Asset Funds and I would say that if they are invested in those funds for the last 10 years they probably have an annualised return (net of all charges) of circa 7% and 12% (roughly).
There is no evidence whatsoever to support a claim that intermediaries are biased towards cash/bonds.

Gerard.

www.prsa.ie