Zurich International and Friends Provident charge investment fees that would excite John D. Rockefeller.
And the guy has been dead since 1937.
In the world of investment products, low fees are good for investors. High fees are good for commission hungry salespeople.
Too many people buying insurance-linked investment products through Friends Provident and Zurich International don’t fully understand them. And based on telephone conversations I have had with Zurich and Friends Provident representatives, not all of their salespeople have a firm grip on the products either. They do understand one thing, however: these products offer fat commissions.
If you’re speaking to an investment rep (any investment rep) bring along a 14 year old kid. Have the representative explain everything to the child. If the child doesn’t understand what the rep is saying, it highlights a couple of things.
1. You probably won’t understand it either (although few people would admit that)
2. The salesperson might not understand it.
Don’t Fall For The “Investment Guarantee” Promise
I looked over three people’s investment portfolios during the week of November 2010; they purchased “Investments” from Zurich International (two of them) and Friends Provident. These companies often couple investments with insurance policies.
An investment product that’s combined with an insurance component is generally a bad deal. Buy insurance if you need insurance. Buy investments if you want to invest.
As an example, let’s examine the Friends Zenith: “A single premium life assurance policy specially designed to allow access to international investment opportunities.”
“Death Benefit Guarantees” That Don’t Make Financial Sense
If you die, your descendents receive the greater of two sums:
1. The actual value of your investments (known as the market value)
2. One hundred and one percent of your “cash in value” if the investments are worth less (upon your death) than what you initially invested.
At first glance, this looks like a fair deal. But let’s have a look at the specific details.
Assume that you made 7 percent a year on your investments with Friends Provident.
If you invested $2000 per month over 20 years, the market value of the investments would be $1,052,764. When you die (you won’t be creeping around 200 years from now) your heirs would receive the full value of the account (assume it’s $1,052,764) after all fees.
In the event that your investments don’t make money, your heirs would get 101 percent of what you invested. That sounds like a great guarantee, but don’t be fooled by it. If you invested $2000 per month for 20 years, you would have invested a total of $480,000 ($2000 per month X 12 months x 20 years = $480,000).
If your investments had tanked (and were worth less than what you deposited) your heirs would receive 101 percent of your “cash in value”. In other words, they would receive roughly $480,000 upon your death (not including fees to withdraw).
Don’t let the “101 percent” fool you.
If I loaned you $5 and you paid me 100 percent of it back, I’d still just be getting $5 from you. Marketing with numbers is an art.
Here’s the death benefit right from the company website:
In the event of the death of the Life Assured (or the last surviving Life Assured if the policy is written on more than one life) while the policy is in force, 101% of the cash-in value of your plan will be payable. … read the product summary
Think about what a chocolate bar was selling for 20 years ago. Inflation takes a bite out of everything. But a guarantee to receive back what you had invested, without an adjustment for inflation, is an unfair deal for investors.
And as they mention on the website, the company can change its fees at any time. Don’t believe me? Check this out:
Friends Provident International Limited reserves the right to change its charges at any time at its discretion upon three months’ written notice to you.
Investment Charges That Kill Returns
How about the “investment” charges for a group like Friends Provident?
They’re the highest fees I have ever seen. They rationalize these high fees (in all likelihood) by pointing to the merits of the Death Benefit above.
Again, right from the company website:
Administration charge 1.2% each year, debited directly to your unit value on the valuation day Bid/Offer spread Nil
Let’s deal with this one first. It’s a killer. Each and every year, your investments would incur a charge of 1.2 percent. In a year where your investments made 4.4 percent, you would be giving more than 30 percent of your profits to Friends Provident because they would take 1.2 percent of your account’s value each and every year. This fee alone, has Rockefeller digging his way out.
But the bleeding doesn’t stop with the administration charge.
There’s also an establishment charge, as pasted from the website below.
Establishment charge 0.4% each quarter (1.6% each year) of the premium for the first five years
For the first five years you invest with this company, they will take an administration charge of 1.6 percent annually. There’s a further rumble in the old capitalist’s graveyard.
When you add the administration charge to the establishment charge, your investments could make 5.6 percent a year for the first five years, and you would be giving away 50 percent of your profits to the firm.
These are heavy charges, but it doesn’t stop there. Salespeople for Zurich International and Friends Provident choose actively managed mutual funds for their clients.
Taken from the website again, these products have internal fees costing up to:
3.35% per year of the fund value, dependent upon the fund chosen
You feel that earthquake?
In other words (and this is where it gets very real) your investments could end up making 6.15 percent per year for the first five years, and you could end up making… nothing.
But there’s another reason these financial companies are so profitable…for themselves. If you start investing with a plan such as this, and if your sister’s house burns down, and she begs you for cash, the company will penalize you for trying to help her.
From the website again:
Early cash-in charge (applies for first five years only): of more than 10% of initial premium 5.0% of bid value of the amount of withdrawal or partial cash-in, in excess of the 10% withdrawal allowance, in year one, reducing by 1.0% each year to nil after year five.
Cashing-in Early cash-in charge (applies for first five years only): 5.0% of the cash-in value, in excess of the 10% allowance, in year one, reducing by 1.0% each year to nil after year five.
What’s that? You don’t understand the above language?
That’s the idea. Just hope that you never need emergency money during the first five years of your plan. If you do, you’re going to get fleeced.
The hapless Friends Provident account I recently saw had external fund charges (expense ratios) averaging 1.8 percent annually. Adding the annual admission charge of 1.2% provides an annual expense of 3 percent annually. I’ll ignore withdrawal charges, establishment charges and cashing in charges, just to be sporting.
If the investments make 6 percent annually, before fees, then the investor will make 3 percent annually. What would that cost you (in lost opportunity) over 30 years?
- $200,000 invested at 3% for 30 years = $485,452
- $200,000 invested at 6% for 30 years = $1,148,698
That little 3 percent fee would add up to $663,246!
If you’re feeling philanthropic, pick your charity. But don’t gift money to a company that prints it.
Costs in the Mists of Time: South China Morning Post
Royal Skandia’s high commissioned Investment Linked Assurance Schemes are similar to those sold by Friends Provident and Zurich International
Hong Kong Consumers Angry After Being Sold Complex Insurance Product ILAS: South China Morning Post
ILAS Products Under Scrutiny: International Advisor
The Real Cost of an Offshore Pension Plan: Noto Financial Planning
Tony Noto used to sell ILAS products (much like Zurich and Friends Provident’s) until he recognized how much they took from investors. In this article, he explains how they work.