Expense ratio of financial products

Mr Tan,

Can you tell us which of the following financial products has a higher commission/expense ratio – an annuity (which you love so much) or a structured product (which you disdain)? Is it a case of the kettle calling the pot black?

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REPLY:

According to my estimate, the expense ratio of a life annuity is less than half of the expense ratio of a structured product (to cover marketing expense, fees and profit margin).

A life annuity serves a useful function in the polling of longevity risk and achieving a satisfactory long term return for the customer.

A structured product usually produces a poor investment return to the customer (i.e. does a bad job at its primary role). But they do a good job at giving large fees to the financial institutions that design and market the product.