FAnews Online readers provided plenty of comment on the topics of Reduction in Yield (RIY) and the LOA decision to abandon projected maturity values (PMV) on policy quotations... We include a selection of these responses to further the debate:
Reduction in yield is open to abuse
The RIY method is open to abuse by assurance companies. The projected maturity values method, imperfect as it is, is, I believe, the only way a policyholder had of getting an idea of his or her position at the payout, be it retirement or earlier. Now the intermediary will be tasked with doing projection calculations, which virtually absolves the life insurance company of anything in writing to perform. My guess is the public will say, "Why doesn't company X want to put down an expected payout value what are they trying to hide?"
If I use the CI tables to give a value and it doesnt happen, can the client sue me? The LOA is lauding their initiative in this regard. As usual they blunder ahead without even meaningfully consulting the very people who have to interact with the public.
Great if you get it 100% right
Reduction in yield is great if it is right. The problem is I doubt it is. Consider doing a quote where the choice of underlying portfolio is Allan Gray Equity (with a current TER of 3.52%). What are they going to use for the reduction in yield, specifically since TERs change almost monthly on funds with performance bonuses. Once again I argue that over time all fund performances move towards the index cost is going to be the differentiator!
Don't forget its people versus actuaries and thats a bit like sending the remedial class to battle it out with the school quiz champs!
Unintended impact
Clearly the LOA have painted themselves into such a corner that they would rather scrap the Illustration agreement than have it questioned by legal precedent.
I predict that what will happen again, as it did in the past, is that advisors will be forced to show prospective clients the latest returns in various portfolios, and the client will unwisely choose the portfolio based on past returns.
The well meaning intentions of the "Risk Analysis" will have little meaning, as a client will not like the compounding effect of a 10% return portfolio compared to one which has been doing 80% pa, its just human nature.
The near "panic" by the LOA to appease legislators has resulted in products which reduce the liability as far as the LOA are concerned, and increased the liability for the advisor.
Not really a good move for advisors, but certainly OK for the LOA.
Tell it like it is!
Somebody is too clever for himself again, imagining a client buying a R1000 a month saving plan from me on the following information. Sir, I have a Sanlam, Mutual, Momentum, and Liberty quote for you, pick your pick which company you like the best for no one will give an indication of what we can expect at the end. Can you imagine what the FSB will do to me!
The alternative would be to base the future value on that products real performance result over the previous 3, 5 10, ext. years, which the companies will never do.
The simple solution is just to print the present maturity values as EXPECTED MATURITY VALUE AT 4% AND 10%. Surely a client cannot claim to misunderstand that, especially if he signs the quote as well.
More PR for Life Companies
I myself have never over emphasized the projected maturity values on endowment policies, but have used it mere as an indication of what you could expect, if the rates should stay the same.
The last couple of years Assurance Companies were brutally and rightfully exposed for taking unfair profits and that was partially due to questions being asked if the projected value differs a lot with the real values.
The only means to determine that was by looking at the original quotation, yes we still have them, and to the real maturity values.
I believe the reason for wanting to take those values away is just another way of hiding information from the clients and protecting their greed from being exposed.
How do they think will there be endowments/ RAs sold if they are not prepared to give an indication of expected values? Is this not merely another case of the LOA protecting their members from being exposed to bad performances and high costs?
Remember, they cannot blame the intermediary anymore than has been addressed by legislation. Also remember the LOAs loyalty lies with the Assurance Companies, nowhere else, and they are getting paid to do that. The LOA is merely a PRO arm of the Assurers and must be exposed as such.
Strong comments, surely, but I stand by them.
Client needs an expected value
I don't think they should be removed totally. A client/prospective client wants an indication of what they can expect.
How will planners be able to show their clients at proposal stage how their investments could look at retirement for example. What rate of return does one then use to recommend solutions? I accept certain assumptions of returns have to be made and would err on the conservative side.
I think this will be another reason for clients not to want to invest as they will have no/very little idea of what their investment R's are estimated to give them one day.
There must be some indicator of future values. Interesting to see where this is going!
Never use PMV to sell a policy
Of course I can understand a lot of people being upset about the removal of these figures, but Id like to tell you that I have not used such values for at least 10 years, simply because they are totally inaccurate and create unrealistic expectations in a clients mind. Illustrative future values are no aid at all in determining which supplier will give the best return in the distant future.
If one needs such a figure for purposes of calculating how much one needs to start putting away now, in order to arrive at a future figure, it is easy to determine that with a simple little spreadsheet, if you dont have a financial program that already does that for you!!
I am really relieved to know that no more of my clients savings and retirement annuity policies will be churned on the basis of illustrative values as happened in the recent past.
Now the next good thing the LOA can do is disband itself, so the Life Assurance Companies can no longer sit and conspire about how to bend the laws in their favour, and teach their disciples how to hide bad ethics behind compliance. Dont forget, and I have been saying this for years, that it is they who have created the breeding ground for all the abuses that have taken place and are still taking place.
PMV helps with FNA
I think that illustrative maturity values are important since how can a financial planner do an FNA without them? I feel that more emphasis needs to be placed on the explanation of what a PMV is and how it impacts on effects of market fluctuations where applicable. In short, I'd NOT like the PMV to be removed.
If the PMV is removed, how do we answer the clients question what will this RA be worth when I retire?
Plenty of questions remain
I have one or two questions at this stage:
Will there now be new regulations or legislation to prevent one financial advisor to project at a higher rate than another advisor? There are still investors and potential clients who get more than one opinion before deciding which advisor to use. May this tempt some advisors to project at higher rates to secure business? Is leaving this to the adviser a safer solution for the client?
It may be that the financial needs analysis programme of one company assumes that the inflation rate is 4%, the other one 4.5% the other one 5% and so forth.
Will there now be new rules and regulations forcing each provider to make use of exactly the same assumptions? I am thinking about existing formulas in the sophisticated needs analysis programmes mentioned. For example inflation, life expectancy, expected return on investments, etc.
A quotation is meaningless without a value
I would prefer to still see the projected values on the quotes. It goes without saying that it should be suitably qualified and also explained to the client.
Just yesterday a client (an advocate nogal) said to me that a quotation without projected values would be meaningless to him.
Maturity estimates are essential
I think this is totally ridiculous. How on earth can a financial adviser do a retirement or investment planning for a client without an estimation of the maturity of a specific product?
I just can not see how this is going to help South Africans to start saving if the client can't at least have any expectation of what he or she will save over a specific term. The LOA should have their heads read.
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