Do you own a life insurance / Retirement / College Education plan from a “famous” company?
I’m going to ask you one question, which will define if you’re wasting your money or not: do you know what a mirror-fund is? Because this is most probably where your money is being invested. More than 90% of the “famous” insurers use them. And you’re being fooled, all the way till retirement.
An article published by This is Money‘s Philip Scott on February 5, 2008 in the U.K., based on a research from WFP: Worldwide Financial Planning, said “Life offices such as Friend’s Provident, Canada Life, AIG (ALICO, which is now MetLife ALICO), and Scottish Mutual offer Mirror Funds”. There’s also Allianz-SNA, Axa Life, and many others. And they still do offer mirror funds in 2015.
If you bought a plan to secure yourself or your family in the future, then you’d better keep on reading.
If put simply: you know that your life/saving policy is supposed to invest part of your premium in top reliable mutual funds, created by fund houses like Vanguard, JP Morgan, BlackRock BGF, HSBC, Fidelity U.S., Templeton…
In your mind this means that your money is actually being invested in these famous mutual funds, and getting all the return they offer. The investment should end up with a good average over the years for you to beat inflation, and accumulate a decent amount of cash for you. Right?
Life insurance agents do create your offer based on an expectation of 6%, and most even 8% return, don’t they?
Well if your insurer is using a mirror fund, which is most probably the case, they’re holding the money in-house, only exposing it to such investments through “replicas” that they created of those funds. And over and above the poorer performance, they charge you double the fees! most of which are hidden costs. It’s like buying a fake watch, but for double the price of the original one.
A study was made by Financial Express for Schroder, simply comparing funds and mirror “versions” of these funds. It found that all in all, performance and charges combined, the mirror fund generated between 7.07% and 16.34% LESS return than the original fund.
I know what you’re thinking: how much profit can a fund generate in the first place, to have its mirror version kill between 7 and 16% of that return?? And you’re right.
Consulting firm Boal & Co. issued a Reduction in Yield study of most saving plans. The RIY simply shows how much the cost of the plan affects its return. When plans with original funds showed an RIY of 1.24, plans using mirror funds have an RIY that goes up to 3.02. That’s double the cost impact on the profit.
Now you know why most of the stories you hear about people owning life insurance & saving plans are disappointment stories. Because, beside companies hiring unqualified hungry salespeople who are not actual financial advisers, most of the plans they’ve been selling, at least in our region, invest in mirror funds. And since you probably bought the plan from one of their salesmen/agents, they have no other options for you, and they will do anything to sell you the one plan they have, so that they can survive.
Actually companies can pay advisors so much more when they sell mirror funds. Some of the modern providers, although they now offer original funds, still offer advisors more commissions when they allocate part of their client’s investment in the company’s mirrors.
According to a Financial Times article “A 23-page report published by wealth management firm Bestinvest exposed the widespread use of mirror funds by the pension industry, which often puts personal pension clients into copies of well-known funds.”. They found that 98 per cent of the mirror funds generated a significantly lower return than the original fund, and the charges in all cases are significantly higher.
You may also want to read on FT.com: “Mirrors aren’t a fair reflection of top funds”
YOU’RE ACUALLY BLIND:
Have you ever understood your statements of account? Beside what people think, these statements are meant for you, the client, aren’t they? They should be clear and easy.
The fact is that they will never show you what they’re doing. Most mirror funds have a zero transparency policy. Unless you get fooled by the graphs that they “create” for you, or display on their websites; or the very unclear statements of account that they send to you, with no possible control from your side.
I used to offer these plans once. Graphs and studies brought forward by the insurer showed very good returns. Motivated us to sell. But then one day I woke up to the truth, and had my clients check their policies. I found out that whatever the plan was called, and no matter when it was started, or what its investment structure is, among all the mirror plans my clients owned, not even one of them generated an average return higher than 4-4.5% per year. While the illustration of these plans didn’t make sense at all at that rate. That 8% projection seems like a fake promise that will never be fulfilled.
When you buy a policy that offers original funds (or direct investment), the insurer is not at all related to the investment part. Your money is fully invested in the funds you choose, with the famous fund houses you know. You will only be charged what the fund itself will charge anyone. You can check your net asset value, get a live valuation anytime, and see the details of your investment, with full transparency on return and charges. And of course, when the insurer is allowing you such access to direct investment, you will have a wide list of at least 50-100 funds of all kinds to choose from, because there is no way that over 30 years, a small exposure to the market would be enough. You will need choices. A sound strategy modified every few years.
Also, when an insurer offers original funds, they can’t have hidden costs anymore. Their terms and conditions are very clear, and results can easily be monitored and controlled by the client and his advisor. Which encourages these companies to seek good IFA’s. Independent Financial Advisors.
Meanwhile, companies that offer mirrors cannot create more than a few funds, usually three to five, and offer them to their clients. This helps them easily recruit much more people, and have much less education requirements. If you sell mirrors, you don’t need a real qualified advisor, you just need a good hungry salesman. And then you can give him all the titles you want, but he will always be just a good salesman.
You see, Mirror Fund plans have been exposed for having a very high potential of being the closest thing to a hoax. It turns out it’s nearly impossible to get a decent result, that is if the eventual cash-out at retirement, or your child’s university isn’t negligible after all the poor performance and the high charges. Add to that the risk of market crisis, and you’ve got yourself a struggling account.
YOU’RE BEING HELD BY THE NECK:
Put yourself in their shoes: if you agree to buy a plan where you cannot see or control what’s they’re doing, they can charge you whatever they want, direct the investment the way they wish, give you the return they choose, and you can’t do anything about it. Add to that a very severe exit penalty structure, and they’ve got you held by the neck.
Most clients do not know that on top of all the charges and weak performance, mirrors have Bid/Offer Spread (like when you buy or sell currencies, the cost is higher when you’re selling), and the most hilarious one: “Recoupment Charge” when you want to exit a plan.
WHAT YOU SHOULD DO:
People have got to stop buying policies from fake advisors and salesmen of single companies. Even if some of them might be good. The risk of falling into a trap is too high. And these salesmen, even if some may be trustworthy, have no control whatsoever over their companies, as they have been immersed into the system so much that they have found a way to convince themselves to live the lie.
Actually such good agents should leave these companies and convert to financial advisors, and even better: Financial Architects. But it takes a lot of courage to leap.
Only a Financial Architect who is loyal only to the customer, and has a wide reach into multiple companies, has the power to give you a choice between Guaranteed Interest policies, and Original Fund policies. The only two choices where you have full control over what’s being done with your money.
You might even have a chance to get your existing mirror-fund plan fixed. Surely not by the salesman or agent who sold it to you.
If you agree that life is full of challenges and surprises, then you know that this plan that’s taking a small part of your income today might one day turn out to be the only thing you have to rely on for survival. And you might then be too old to do anything about it.
If there’s a tiny chance that that’s possible, then you’d better look again and do this right while there’s still time.
Hire a Financial Architect. The main purpose is to shift control over to the client’s side, and be able to guide on all levels of personal finance. Not just savings and insurance.
It amazingly brings a lot of peace, it’s tremendously cost-effective. And the advice is free of charge.