Why do insurers allow advisers to choose ARF commission rate?

This Dalbar stuff came up before and I vaguely remembered it. I have now got round to refreshing my memory,
The Dalbar methodology is totally in error. Guilty as charged.
There are many flaws. Perhaps the simplest to explain is as follows. Say we are looking at a 20 year period. Dalbar calculates the annualised return based on what 240k at the start would grow to after 20 years and expresses is it as an annual interest rate. Correct so far. It then calculates what investors actually got. For ease of explanation lets say investors actually invested 10k per month instead of 240k at the start. Dalbar still calculates the annualised return as if the 240k was invested at the start. (Please read the critique, it explains it much better than I).
Several questions spring to mind:
Why is the Dalbar message so popular with brokers?
Why when it is so damningly exposed do you shoot the messenger?
Why indeed did Dalbar and JPM duck the bullet in their response?

In any case, as the critique also pointed out, if indeed the majority of mutual fund investors do actually underperform the same mutual fund (itself a mathematical contradiction) the great bulk of these will themselves be professionals or advised by such.
 
Steven Barrett said:
It is so popular because a well know advisor, Carl Richards, launched a career on what he coined The Behavior Gap.

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The GG "like" indicates that indeed that is why brokers drool on Dalbar. It was Dalbar's evidence which GG cited and which @Sarenco 's link so clearly exposed only to get the GG response - how can JPM be wrong against those nobodys? I wonder did he read the critique or if he did, did he understand it.
As for Carl Richards I would like to see some technical back-up (any links?). Investments are owned by investors. If investments are up X then so too are investors up X. Also one presumes investors include those who are professionally advised. Who reaps the gap?
 

Okay so first you were quoting nonsensical claims from "a friend who knows the pensions business". Now you're making other claims about what "experience shows", again without a shred of evidence to back up such claims. Is this experience coming from the same friend? I'm happy to debate but I've no interest in debating points that seem to be works of fiction.
 
Duke of Marmalade said:
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.
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If you're not happy to pay a particular price for something (and personally I wouldn't be willing pay the figures you're quoting for the service you're using in your example), it's a free country - don't pay it and go elsewhere.
 
Dave Vanian said:
If you're not happy to pay a particular price for something (and personally I wouldn't be willing pay the figures you're quoting for the service you're using in your example), it's a free country - don't pay it and go elsewhere.
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The problem is that consumers are led to believe that in this space we are not a "free country". The consumer is plamassed with lots of fine words from the regulator about what should and should not be done. This to give confidence that unscrupulous operators do not have a "free country". I think we both agree that this is a false confidence for which the regulator and its industry are partly responsible.
 
Gordon Gekko said:
Straightaway, I’ve an issue with that…it’s too narrow…they need to have gone 100% to cash in the period.
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by the time an advisor would get to contact customers and get permission the shares would have reached the bottom by the time pot get moved to cash, I would say advisers would start with the well connected first not who was paying the most in fees,
I would say there is a good chance the people paying the highest fees get the least service,
 
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I'd agree that the regulator could do a lot more to improve both consumer protection and education in this area. My earlier idea of an obligatory simple one-page document detailing all the fees paid to all stakeholders in simple euros and cents format is just one example. It could include a line to the effect that charges can vary from one company to the next, from one fund to the next and from one broker to the next and that you're not obliged to go down a particular road. I'd like to see more explanation of the real meaning of risk being included. Many more examples if I sat down and thought them out. I'd like to see any agents, bank staff, brokers being compelled to follow the rules or be run out of the business.

But to go back to the very first post on this thread, we have both the Central Bank and the Pensions Authority to regulate this business. I don't see it as the responsibility of the product companies to police the regulations. By all means change and improve the regulations and then issue the new rules to the product providers to follow.
 
He's more a behavorial finance kind of guy, well known for the sketches that he did on napkins in a NYT article that he had for years.

The thing is some people need a financial advisor to advise them on their money and others don't. I have spoken to people who have had the same policy for decades and haven't changed funds through all the ups and downs over the last 20 years. But if an advisor didn't show them where to put the money in the first place, they wouldn't have done it.

Then on the other side of the coin, is the advisor who thinks he's Warren Buffett and feels that he needs to change around clients portfolios every year to justify his ongoing fee. How much are they costing their clients by switching funds all the time and going for the new best fund? GARS was great for a while and then fell off the cliff and at 1.35% amc, you were certainly paying for underperformance. Then something else comes along. MSCI do a perfectly good job of building a basket of stocks to represent the world stock market and until I have convinced myself that I can do it better, I'll let them carry on building client portfolios for me for free.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Gordon Gekko said:
Straightaway, I’ve an issue with that…it’s too narrow…they need to have gone 100% to cash in the period.
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97.5% of self-directed Vanguard pension investors didn’t make a single trade during the Corona crash.

And of that small minority that did trade, the majority bought equities!

The idea that self-directed investors are a panicky lot that are more prone to selling during a correction is a myth.
 
@Steven Barrett. I too enjoyed the story of Lyndon Johnson trying to make his opponent deny he had sex with a pig. It's a sad lookout, though, if you consider that a request for insurance companies to ascertain customer outcomes is in the same category as Johnson's opponent having sex with a pig. Do you not agree that both providers and advisers should be doing studies of this type on an ongoing basis? There is a constant barrage of figures showing comparative returns for this, that and the other fund, but nothing - zilch - about actual customer outcomes. We need to change the focus, to measuring actual outcomes for customers, then seeing how we can improve them.
Dave Vanian said:
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?
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Let me put it differently. Why shouldn't insurance companies complete studies to ascertain how their customers have done, and compare the results with the amounts paid to brokers. For example, it would be good to know if high rewards to intermediaries translate into high rewards for customers, or the opposite. After all, we are all told to cherish our customers.

Dave Vanian said:
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.
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We are now in the era of DC pensions. DB pensions are dying or dead. In future, anyone on a half decent salary will have a DC pension fund of over €1 million. That's what the industry should be preparing for. Instead, it tries to justify ridiculously high charges and commissions.
@GSheehy, Where do you get those figures? They are absolute rubbish.
The only figures I can get my hands on are from a 2015 paper by a Working Group of the Society of Actuaries. I quote the following paragraph from the paper:
"Data supplied to us by some life assurance QFMs indicate that in respect of some €2.6bn of AMRF and ARF funds, the two most popular asset allocations were:
• Cash or cash like funds (capital protected) : 44%
• Managed type , where the asset allocation is determined by the fund manager : 44%
• Single asset type fund : 12%
This analysis varied little by ARF size."
The figures are dated, but I have no reason to believe that the proportions in various asset types since then have changed that much. For that reason, I would be very interested in learning the source of your claim that "the vast majority" is in Multi-Asset/ Mixed Asset Funds.
GSheehy said:
There is no evidence whatsoever to support a claim that intermediaries are biased towards cash/bonds.
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In the light of the above, are you still saying that, or have you changed your tune?
Is the above (in bold) sufficient evidence that "experience shows" where ARF customers are advised to put their money? Show me why my claims are works of fiction. I wish others could produce some hard facts to support their self-serving arguments.
Do you not agree that companies should try to look after their customers? Why should they wait until the CBI or the Pensions Regulator pushes them into doing it? Sadly, too many insurance companies see the broker, not the final consumer, as their "customer". They keep trying to find new ways of paying more to brokers, not caring that the 'real' customer is the one who suffers as a result.
It's great to see an adviser talking sense. Well done!
 

That's in the US and I would argue that the average US small investor is streets ahead of the average Irish small investor in terms of the basics of investing dos and don'ts. I'm not talking about the regulars here on Askaboutmoney who are, by and large, pretty clued in, which is why they come to a website like this in the first place. I'm talking about the butcher, the baker, the candlestick-maker who knows her own business very well but very little about investing.

Anyway, while these US Vanguard customers may be self-directed, it's not clear how many of them are acting on professional advice.
 
Wollie said:
Show me why my claims are works of fiction.
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You claimed that your "friend who knows the pensions business" says that brokers have made far more out of ARF's than their clients.

Also...

"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."

Then you claimed...
Wollie said:
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.
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but when asked to show where this claim came from you admitted that the only figures you could get your hands on to back it was from 2015, showed that 44% of the surveyed ARFs were in cash in 2015, which doesn't in any way prove that brokers in 2021 have a "strong bias" toward directing older clients towards so-called "safe" options like cash and bonds.

Have you any evidence to back up your claim that brokers in 2021 have a strong bias toward directing older clients towards so-called "safe" options like cash and bonds.
 
Dave Vanian said:
Have you any evidence to back up your claim that brokers in 2021 have a strong bias toward directing older clients towards so-called "safe" options like cash and bonds.
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Put it the other way round, have you any evidence that brokers changed their approach between 2015 and 2021? If anything, the fact that we have had six years of growth since then would have made them more likely, not less likely, to be pushing people towards "safe" options now than they were six years ago.
Show me even a single shred of evidence to indicate I'm wrong.
You also query my claim that brokers made more in commission over the last ten years than their clients made on their ARF investments. I refer you to my earlier post on this thread:
The return in this example is €5,000 a year for the broker and €3,067 a year for the client - and that's before allowing for a cent of initial commission to the broker. It's open and shut as far as I'm concerned. The insurers and brokers should be equally ashamed of how poorly they have served and are serving their clients.
 
Wollie said:
Show me even a single shred of evidence to indicate I'm wrong.
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You did that yourself. The only actual figure you were able to offer was from the 2015 paper. Do you have a link to that paper, by the way?

It showed that, instead of the "strong bias" you claimed, only 44% of ARF assets that they looked at were in cash. How many of these ARFs were in cash only? That will be interesting to see if we read the actual paper. And how much of that 44% cash figure was in ARFs that had a portion in cash and more in other risk assets. Do you see your claim of "strong bias" slipping away when faced with actual facts?


Large problem with this example. A broker cannot get €5,000 per year commission from selling an annuity. That's not how annuities work with Irish Life or any other pension company.

Wollie said:
It's open and shut as far as I'm concerned. The insurers and brokers should be equally ashamed of how poorly they have served and are serving their clients.
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You came to this conclusion based on a fundamental lack of understanding of how annuities even work, so perhaps you need to acknowledge that your conclusion is therefore wrong.
 
Dave Vanian said:
The only actual figure you were able to offer was from the 2015 paper. Do you have a link to that paper, by the way?
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I'm blue in the face trying to tell you it's the only figure I can find. Can you give me a more up-to-date figure? As I said, the likelihood is that brokers have gone even more cautious since 2015, given how the market has powered ahead in the last few years. Therefore, if they thought it was overvalued in 2015 and advised clients to go into cash, it's even more overvalued now.

I tried to post a link to the paper, which is on the "Past events" section of the Society of Actuaries website, but for some reason I wasn't allowed to paste it. The paper was presented in November 2015.
Dave Vanian said:
It showed that, instead of the "strong bias" you claimed, only 44% of ARF assets that they looked at were in cash.
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Are you serious when you write "only 44% in cash"??? Remember too that there's another 44% in "managed type". I presume at least 20% to 25% of that will be in cash/ bonds. That brings us up from 44% to 55%. Then there is another 12% in single asset funds. Some of those single asset funds will be bonds only, the performance of which I compare with cash at the present time. Bottom line: there was well over 50% in cash, as I stated. Repeating what I wrote above, the proportion could be higher now.

Dave Vanian said:
Large problem with this example. A broker cannot get €5,000 per year commission from selling an annuity. That's not how annuities work with Irish Life or any other pension company.
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I suspected that my argument was a bit too subtle for some people. I was right. Read the post again, in particular the following.
Now has the penny dropped? If not, ask @Marc where he would advise a client to invest an ARF to assure themselves of an income of €36,400 a year for life. He sure as hell would not be advising them to put their all in the Irish Life Consensus Fund. He would be advising them to put a high proportion of it in bonds and other "low risk" assets - after showing them lots of fancy graphs, of course.
 
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Wollie said:
I presume at least 20% to 25% of that will be in cash/ bonds. That brings us up from 44% to 55%.
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You presume. Or in other words, you made up that figure.

If you believe that a paper published in 2015 showing that 44% of ARFs surveyed then were in Cash (which presumably includes many ARFs that are in Cash AND risk assets) backs up your claim that brokers in 2021 have a "strong bias" towards cash and bonds, good luck to you.


Sorry - I did indeed misunderstand that particular example. You quoted an annuity rate, but seem to making a point about what @Marc would advise. I think I'd have to leave @Marc to answer that one. I'm not going to comment on what he might or might not do.
 
Wow what a lot of knots you have all got yourselves into but I see my name being quoted so feel the need to make some points here

some themes

why do insurers allow brokers to select commission rates? - legally the broker is the agent of the insurer not the client.
If you want your advisers to represent you, you will need to pay them a fee.

this is a really good example of this point

Physician heal thyself - Everlake

The GMS Pension is administered by Mercer and most Doctors and GPs will contact Mercer for advice on their retirement options. We believe that such an important decision warrants objective Independent Financial Advice.
globalwealth.ie



dalbar - this is the difference between time weighted and money weighted returns. We actually report both so our clients can actually measure the value of our advice given over time.

we also report actual client returns net of fees over time

In Search of the Perfect Investment Portfolio - Everlake

Many investors find it difficult to achieve returns offered by the markets due to a misunderstanding of investment risk, costs and taxes.
globalwealth.ie

And the positive impact of our intervention during market volatility in March last year

Coronavirus one year on - Everlake

We don't subscribe to any market timing strategy because we don't possess a crystal ball but from time to time it is clearly appropriate for a nudge on the tiller and to trim the sails.....
globalwealth.ie


a fund manager reports time weighted returns - the return of a fund over a time period. It’s perfectly possible that they had next to no money in the fund when they had their best returns - a good example is standard life Gars

money weighted returns are the actual returns earned by an investor and reflect their actual purchases and sales.

in aggregate investors must be making poor timing decisions or markets wouldn’t lurch around.


think tech funds in 1999 a lot of money was invested at the top which made negative returns for investors yet the fund can still report an average annual return over time. It’s just that most investors never received the good years - they were too late.

This is the behaviour gap. People buying things once they become aware of them are typically too late to the party.

now to what extent an adviser is able to influence poor decision making in aggregate is of course another matter but there is certainly evidence to support the fact that it (poor decision making) must be happening at the macro level.

there is also plenty of evidence during my quarter century actually advising clients that clients working with an adviser typically do better than those without and this is especially true as we get older and in particular if we lose mental capacity (I made this point before in the context of an ARF and was shouted down so I won’t labour that particular point) but to my mind this is the real risk faced by ARF investors - as you age your pot is declining and so is your cognitive ability. The last person on the pitch is likely to be the adviser.

but the hurdle you face day after day is the annuity you didn’t purchase at outset

Key Post - People should consider buying an annuity on retirement

Why an Annuity matters to an ARF investor How should one approach investing an ARF? As we set out in our [broken link removed] for retirement planning in Ireland, an investor’s risk tolerance is only one of several factors that go into the decision to go into an ARF. A far more appropriate...
www.askaboutmoney.com

and it is for this reason that most people should actually reconsider their ARF strategy

Do You Need to Review Your ARF Strategy? - Everlake

More people invest in an Approved Retirement Fund (ARF), over the certainty of an annuity. But do you need to review your ARF strategy?
globalwealth.ie
 
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