Tan Kin Lian's Blog: Avoid complex financial product

Saturday, March 27, 2010

Avoid complex financial product

Dear Mr. Tan,
I purchased a Secure Retirement Plus (SRP) plan last year. This is a variable aunity which buys into one of the insurer's unit trust and offers lock-in of the unit trust value every 5 years (up to 85 years old). I have the option to top up my deposit within 1 year. This is a rather complex scheme, with 50% "virtual" bonus after 10 years, and 'virtual' lock-in of the account value of the unit trsut every 5 years.

'Virtual' means that the insurer is committed to honour the payout based on the 'virtual' account amount, but if client wishes to close the account, he/she will get back only the actual value of the unit trust. It sounded like a good deal since the downside risk is the survivability of the insurance company itself (which I think is finanically sound) and the upside is growth of value of the unit trust that the funds is invested in, thereby indirectly assure that the payout grows with inflation (inflation likely to flollow market growth).

I have the following question.
1) Is this SRP annunity better than the annuity offered by other insurance companies?
2) I wish to invest 40% of my retirement fund in this scheme (remaining money in unit trust, stocks and cash) Is this a good proportion?
3) Does MAS mandate that insurance company in Singapore must maintain a certain amount of capital to honor the annuity payout?

REPLY
I avoid complex financial products that are designed with features that are not clear to the consumer. This allows the product issuer to interpret the features to its advantage, and take a large share of the investment gains from the consumer. The product that you described falls in this category.

If you wish to invest in a variable annuity, you should just buy into the STI ETF and make a monthly withdrawal to meet your needs. If you withdrawal is modest, relative to the amount that you have invested, it is likely to last for your lifetime, and leave some balance remaining for your children. You will get the average market return, which is likely to be around 6% per annum. I am not sure how much you can get from this complex product after deducting the charges.

8 comments:

Ex-Con said...: I believe the original poster is referring to Manulife's Secure Retirement Plus, which is mainly an investment into a portfolio of Manulife unit trusts, structured with a Variable Annuity wrapper.

From all the "guaranteed" withdrawal benefits, lock-in of investment gains, loyalty bonuses after 5, 10 years, you can bet your ass that this is an expensive product, taking away at least 2%pa of your returns over the long run.

Info about SRP portfolios
I also am wary of the underlying unit trusts --- too much into US assets. No matter growth or balanced portfolio, at least 80% of your monies are invested into US equities, US bonds and US junk bonds. The managers are hedging from US$ to S$, but only 75% hedged. Also hedging cost money i.e. higher built-in costs for the unit trusts. The portfolios for SRP also lose out to their benchmarks/indices since inception. Although not stated, but I strongly believe the Total Expense Ratios for the portfolios is at least 2%pa.

Info about underlying unit trusts
It gets more interesting if you drill down into the underlying Manulife unit trusts. I'm not sure if you can buy these unit trusts using using CPF-OA monies. If cannot, then most probably the Expense Ratios are 2%pa or higher.
Look at all the graphs; almost all the funds cannot even beat their own benchmarks. The worse is the US Bond Fund (which is a major component of the SRP Portfolio). It behaves completely opposite to its bond index -- it actually crashed like stocks during the Financial Crisis!

So my conclusion:
1. High costs at underlying unit trust level, at SRP portfolio level, and at Variable Annuity level.
2. Low quality fund management, cannot beat benchmarks/indices.
3. Overly invested into US. More suitable for americans. At least they have much stronger financial watchdog. SEC will go after Manulife and help the customers if things don't turn out right.
4. Those of us here should avoid this. Anybody from Manulife or Citibank talk to you about this, you just give them a hard kick to the balls.; March 27, 2010 6:38 PM
Anonymous said...: The more complex the easier to con the customers, right?
The presentation can go on a long and winding maze to get the customer lost, giddy and confused and then go for the kill similar to the Revosave presentation. It seems common these days for insurers to roll out this type of products to con consumers and yet MAS cares 2 hoots about it.; March 27, 2010 9:58 PM
Anonymous said...: This product has already been taken off the market (i.e. it is no longer being sold); March 27, 2010 11:55 PM
Anonymous said...: The whole idea of complex products is to twist and turn and confuse. If not how to pass off as new products different from the old?
By now consumers should be familiar with insurers' tactics like the limited payment living plan and the anticipated endowment.And how do the insurance agents 'review' their customers' policies? An excuse like new product to promote.Some even make the consumers 'trade in' their old products for the 'new and better' product. These are the scumbags' ways of cheating their clients.
They need to be exposed by FISCA for their unethical practices.; March 28, 2010 9:38 AM
Concerned said...: Mr Tan said is very nicely. Avoid all complicated and complex products you don't understand. Do not be greedy and look for simple product you understand and should you come across any complex products with very enticing returns, thump your nose at it. If everybody were to co-operate, no financial institutions would dare to come out with complex products with enticing returns as there would be no sales. Only buy simple products with good returns.; March 28, 2010 10:17 AM
Anonymous said...: Most investors are aware that they should avoid invest in complex financial products.

But the problem is that many high risk complex financial products are marketed as low risk simple products. For example, minibond products were advertised as a low risk bond from the six leading banks with the return about the same as local banks’ preference share.

Most investors not aware that these are complex products because the newspaper advertisements, sales brochures and prospectus are drafted by a group of “talents” (financial and legal experts) so that it appears similar to those low risk simple products.; March 29, 2010 9:37 AM
Anonymous said...: I am surprised that non savvy investors are still buying into these products after the financial crisis.; March 29, 2010 11:38 AM
Anonymous said...: Complex products in the following...

1.structured deposit or notes
2.limited wholelife
3.anticipated endowment with cash backs
4.Variable annuity
5.Variable wholelife(regular ILPs)
6.Universal wholelife
7.Uninersal variable wholelife
You need experts to advise you if you are using the above products to address your goals. Never use an insurance agent to help you. Agents will help themselves to your commission.; March 29, 2010 12:23 PM