A Mail & Guardian reader’s endowment policy recently matured. He was horrified to discover that after investing monthly for five years, he virtually got back what he had invested.
This is not an uncommon complaint and is specifically true of policies and investments sold in the late Nineties and early 2000s when the stock markets took a bath.
The sad result is that these types of policy returns, sold often with high costs and bad advice, have kept people from investing again and benefiting from the bull run in the equities markets from 2003 to 2006.
It all really starts with bad advice and bad investment choices. The reader, who had just finished university and was starting his first job, was approached by a life insurance salesman. He was told that endowments were a great product and that he should invest in one. No needs analysis was done or discussion about future goals.
The rand had just taken a beating and was at an all-time low. The reader was offered the opportunity to invest in an endowment that guaranteed his capital and gave him offshore exposure, which the agent told him would be a great investment. Nervous after the rand had collapsed, the reader agreed to the agent’s recommendations. After investing for five years, the reader made an annual return of 2,17%. The reader never heard from the adviser again.
According to Andrew Bradley, CEO of financial planning company Acsis, many people were sold inappropriate products around that time as agents took advantage of fear and invested opportunistically rather than developing a proper long-term investment strategy.
Few people ever heard from their “advisers” again — which is not surprising as, with the rand’s recovery and poor offshore growth, these investments performed horribly. If the agent had taken a longer-term view with appropriate asset allocation, it is unlikely he would have recommended that a 22 year old invest all his money offshore.
Then there are the costs. The reader invested a total of R11 713 over five years and paid R1 013 in costs. That is close to 10% in fees — which was not fully disclosed to the client. Some of this went to pay for the guarantee and 3% went to the agent, but the impact was that the fund performance dropped from a potential 5,87% to 2,17% a year.
Had the rand continued to fall and overseas markets outperformed, the 10% fee would not have been so obvious and there would be fewer complaints. Much of the anger around fees has come as a result of poor market performance, where investors can see the impact the fees have had on their contributions.
However, investors should not wait until after the event to calculate their costs. Bradley says it is important to understand the full cost implications of an investment up front and know exactly what you are paying for. There is nothing wrong in advisers being well paid, but the client must feel that they are receiving value for money. This can only be done if there is full disclosure of costs.
Bradley says that while endowments can be great investment vehicles for those who wish to take advantage of the tax structure, which taxes income in the fund at 30%, they can be very expensive and unnecessary if sold incorrectly. As the reader’s tax rate was well below 30%, he received no benefit from the tax structure.
One advantage of an endowment is that it creates a form of forced savings. Although the reader says he would have continued to invest even without the lock-in, there may always be the temptation to stop investing and take the cash when the going gets tough.
What could the reader learn from this? Firstly, at the end of the day the world is full of opportunistic people and investors need to spend more time understanding what they are going into. We only complain when an investment goes south — had the rand have continued to fall, these agents would be heroes. However, this roulette attitude to investing is bound to end in tears at some stage. An adviser worth paying will do a full needs analysis, which will determine the correct asset allocation and investment needs of the investor rather than what is hot or not at the time. As the investor you need to understand the rationale of the long-term investment and that it can go up as well as down — but if you are well diversified with the correct asset allocation you will benefit over the long term.
Secondly, with the new regulations coming into force you are entitled to understand the full cost implications and how much advisors will be earning. You can then decide if their service is worth it.
Thirdly, ask questions about investment structures. Any investment that is wrapped in a product structure will be more costly; you need to make sure the benefits offset the products. And finally, don’t let previous bad experiences prevent you from saving.