We are about to enter into “RA season”…before you purchase an RA consider the following:

A man walks into the client services centre of an insurance company and tells the consultant that he would like to move his RA to another company. The consultant asks him why, to which he replies that he has lost faith in the ability of the company to manage his money because after 13 years of paying the premiums he has had a compound return of around 6% per annum. The consultant tells him that there will be a penalty to do this and gives him a quote that shows him what the penalty will be. The quote implies that the penalty relates to the un-recouped expenses on the policy that they would lose if he cancelled it before it matured and that this justifies them charging him R165000 on the total fund value of R550000! A quick calculation will show you that the penalty is exactly 30% which also just happens to be the maximum penalty that an insurer may charge under the agreement reached between the industry and Trevor Manual when he was still minister of finance. To say that the penalty is outrageous and that there is no way it relates to the actual costs still owing on the policy would be an under-statement.

It turns out that he has been in a “closed fund” (a fund from an insurance company that was taken over by the current one and now no longer exists) and so he asked them if there were any alternate options where he would not incur the penalty. According to the consultant, he could move the RA to their new range of RA’s (with greater fund choice) and there would be no penalty to do this. He stated he would like to consider this option and was duly provided with a quote from the company and this is where it gets interesting. According to the quote, the total amount of un-recouped expenses on the old policy that will be transferred across and applied to the new one was just under R47000. This is less than 1/3 of the penalty that would have been applied if he had moved to a new company (lies, damn lies and actuaries!).

We are still waiting for an explanation from the company for this massive discrepancy but I don’t think we are going to get one as there is no explanation other than that this industry (which is sadly still dominated by the insurers) is vrot to the core! And the FSB and National Treasury appear to be paying lip service to the idea of cleaning it up. If they were serious, this kind of experience would not be happening on a daily basis and clients would be getting a better deal. These products would have been banned ages ago and companies that still tried to flog inferior products would suffer heavy penalties.

What I would like to know is why in 2013, anyone in their right mind would enter into an RA with an insurance company, knowing that there will be penalties if/when they change the premium when they could get a better RA* where there are never ever any penalties? The simple answer, I guess, is that the industry is still dominated by sales people and that these people are better incentivised to sell the insurance based RA’s. I don’t think it will be long, however, before a disgruntled client takes a test case to the FAIS Ombudsman on the following grounds. “Mr Advisor, you knew that there was a very strong probability that I would not be able to stick to the contractual obligation of this RA and yet you still advised me to go into it, knowing full well that I would be penalised when I did that. And all the time you also knew that there was an alternate (better) RA where there are never any penalties ever! There can only be one reason that you did that, and that is because of your own pocket. I want my money back!” It would be very interesting to see how the Ombudsman ruled on a case like this – I think it would be very difficult for any advisor to justify why he/she still continues to use the inferior RA’s in the current legislative environment. Perhaps, if the FSB and Treasury cant stop the insurers providing these archaic products for their salespeople to sell, the Ombudsman could?

Note: for a better RA consider either an RA through a unit trust/LISP company or an RA that invests in index funds!