Why do insurers allow advisers to choose ARF commission rate?

@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!
 
Last edited:

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.
 

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?

Wollie said:
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.
Click to expand...

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.

Wollie said:
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!
Click to expand...

Your friend does know that annuities are still available to anyone that wants one, right?
 
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
 
Gordon Gekko said:
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.
Click to expand...
The Dalbar report has been widely discredited at this stage -
 
Dave Vanian said:
Paying me from the pension fund means that I don't have to charge you VAT, so it's cheaper for you.
Click to expand...
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.
Dave Vanian said:
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
Click to expand...
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.
 
Sarenco said:
The Dalbar report has been widely discredited at this stage -
Click to expand...
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!
 
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!
 
Last edited:
Gordon Gekko said:
Dalbar and JP Morgan versus some keyboard warrior
Click to expand...
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".
 
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.
 
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.
 
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.
 
Last edited:
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.
 
Last edited:
@Duke of Marmalade You have just (maybe inadvertently) provided support for my earlier comment:
Wollie said:
over the last ten years, total commission (initial and trail) paid by insurance companies to intermediaries exceeded gains by clients
Click to expand...
@Dave Vanian disagrees:
Dave Vanian said:
Sorry but that sounds like utter nonsense to me.
Click to expand...
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.
 
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.
 
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.

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.

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)
 
 
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
 
You must log in or register to reply here.
Menu
Log in
Register