Appropriate advice?

Appropriate advice?

Consider the following – what would you advise the client?

  • Client A took out an insurance based RA in 2003 (23 year term). She started a debit order of R450 pm (escalating at 10% pa).
  • The current fund value is R63500
  • The company claims a return of 11.8% pa on the funds but the maths shows that she has had about 6% per annum.
  • She now wants to move the RA to a unit trust RA (where there is no contractual obligation and no initial fees). This will be done via a Section 14 transfer and the company can (legally) penalise her 30% of her fund value if she moves.
  • Her R63500 will then reduce to R47000.
  • Should she go or should she stay? What is appropriate advice in the situation?

I have not been a fan of moving this kind of policy but a quick look at the maths reveals quite a lot and has got me questioning things:

  1. If she stays where she is and continues to receive 6% per annum for the next 15 years she could have ±R602000.
  2. If she moves, incurs the penalty and invests the R47000 (no fees) but then gets a 10% return for the next 15 years she could have ±R802000.
  3. That’s R200000 more inspite of a 30% penalty!

How could anyone not make a case that it is completely appropriate for the client to incur the penalty and move the funds elsewhere? I am pretty sure that as long as this is well documented and motivated, the FAIS Ombudsman would find no fault with this.

At issue for me are 2 things:6a00d8341c500653ef00e54f0f05ac8833-800wi

  1. How can the insurance companies continue to claim performances on their portfolios which bear little or no resemblence to the reality on investor’s funds?
  2. How can the industry still actively promote the continued selling of these awful contractual savings products, especially when there are substantially better products available. It is my contention that in years to come there will be a flood of complaints at the FAIS Ombudsman from people who have been sold these contractual RA’s instead of the cheaper and better unit trust alternate. There can be only one reason that they are still sold and that is commission!