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Investors have never had it so good…

‘Those who are ignorant will never know they are being abused’.

Breaking some bread with a number of more mature investment advisors and financial journalists the other day, the subject of fee transparency and disclosure within the financial services industry came up.

As a consequence, I thought it best – especially for the benefit of a younger crop of investors and advisors – to take a trip down memory lane to the eighties and nineties when the world of financial advice was dominated by the large insurance behemoths, with Old Mutual, Sanlam and Liberty absolutely ruling the roost.

That was before the days of the Allan Grays, the Coronations and the Investecs and the massive surge in popularity of unit trusts.

Those were also the days when the immense advertising power of the Green, Blue and Grey – as these companies were described – could cause a shaking journalist to be brought before a newspaper editor, recently wined and dined by the PR manager of one of these firms, and hauled over the coals for writing “too much” about unit trusts, as happened to me.
They were the days of the ‘polis- smouse’ when any investment advice was wrapped up into a policy of some kind.

This is how it worked: someone with say R100 per month to invest, either into an endowment or retirement annuity (if there was a tax benefit to be had), would be be steered into a long-term insurance contract, the longer the term of contract the better … better for the advisor and the assurance company concerned, not for the poor investor, that is.

The reason was simple: the cost structure of the policy, which included the advisor’s commission plus the profit of the life assurance company, was determined by a simple formula: a factor (maximum of 85%) of the amount of premium times years of contract up to a certain level. Some of the actuaries of the insurance companies who still remember this could perhaps comment under this article as to how this was done.

The cost of the insurance policy (commission and profit) was ‘loaned’ to every particular policy and every subsequent premium into the policy was first used to repay this loan, plus the interest. Only
after several years would the policy start to acquire a value of any sort.

So any investment contract taken out with a life insurance company in SA started with a deficit equal to the loan on this policy.

The trick in the insurance industry was to extend the term of the policy to its maximum, up to a maximum of 28 years, to generate the maximum cost and commission. This was never stated in any policy document even given to a client, but contained in a master policy document which could be obtained on request. Even then you’d need to be a qualified actuary or serious number cruncher to even remotely understand how it all worked. But you could be sure of one thing: you were being royally screwed by the insurance industry.

Boetie gaan border toe
In fact, I have my own experience with two such 20-year endowments I took out on my first day in the army. I stood in a queue to get my boots, helmet and gun and lo and behold, at the last table in the row was a man representing one of the colours referred to above.

Such was his power of persuasion that I took out a savings policy for which the monthly premium of R22 was more than my army stipend at the time. I had to borrow money from my mother to make the payments, but I did after all, make her my beneficiary. As the advisor said to me: “You are going to fight on the border, boetie, and you might not come back and then who is going to look after your mother?” Sniff, sniff…where do I sign?

Such was my first-time experience with the mighty assurance industry in South Africa. Its marketing and distribution power was unrivalled probably anywhere in the world.

About seven years later, when I needed some cash, I did a quick back-of-an-envelope calculation- and thought, with a bit of growth I could cash in about R2 000. But that was not to be, as the letter I got back, posted from somewhere in the Cape, said: Sorry, this was a 30-year endowment and you still actually owe us money in terms of the loan agreement.

I had no cash in my pocket but was immensely wisened by this experience.

Journey with no end
And thus began a journey which still has no end in sight.

It also reminded of me of the quotation in the book ‘The Sovereign Individual’ by William Rees-Mogg, former editor of The Times which reads: “Those who are ignorant will never know that they are being abused.” Truer words have never been written and that for me summed up the whole investment advice industry in SA as it was in the eighties and nineties.

For a while I used my public plartform as a journalist to try to expose these malpractices being foisted on the investing public. It was also a small baton that I handed over to Bruce Cameron who ran a much greater and durable race than I could ever try to.

So apart from these long-dated endowment and retirement annuity policies (the longer the better) there were also other toxic investment products which were very popular, such as the back-to-back product (a lump sum investment used to purchase a term annuity which gets reinvested into another ten-year endowment policy), the tax-bucket investments (lump sum investment from
which a loan of 90% is taken each year which is then reinvested into another ten-year endowment and so on).

And then you have products such as the ‘revisionary bonus’ portfolio which no one really understood. I once attended a luncheon at a large insurance company where, after this topic came up, I witnessed the actuary and CEO of the said company have a full-blown disagreement about how this product actually works.

All these products, to my view, were created to ensure maximum profits and commissions for all concerned and with the least regard for the individual investor.

Benefits all the same
And then there was the other beauty of the insurance industry: the benefit illustration agreement (BIA). This was simply the crudest cartel-like type of behaviour in any industry in any part of the world.

What this meant was that for any investment product, for illustration purposes, the expected returns over time as well as cost structures were identical. It mattered not where you went to in the assurance industry, they all had (a) the same illustrated performances and (b) the same cost structures, which today we know were both bollocks.

Thankfully, around the turn of the century this practice was seen for what it was and stopped, but only after immense pressure from the media and the public who were wisening up very rapidly.

Many of the historical behaviours and market conduct of the large insurance companies would today land those directors of companies in jail, so bad and toxic they were.

When I discuss these products and other practices (5% upfront commissions on lump-sum investments; new fees on any change in the portfolio; exit penalties etc.) with the youngsters in the practice, they are absolutely gobsmacked that this was allowed to happen.

In a certain sense the insurance industry created such a groundswell of rejection of its practices and products, that it opened the doors for the unit trust industry to explode. Its offer is significantly better in terms of greater transparency in costs, fees and performance.

Happen it did, but thankfully we have a much more transparent and better-regulated industry than a generation before. Much of it is due to the immense power of the internet which has, for want of a better description, democratised the knowledge and workings of investment products.

SA investors today have total transparency on fees, costs and rebates. All to the better.

*Magnus Heystek is the investment strategist at Brenthurst Wealth. Send him your suggestions and ideas to



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The frustration is that today there are still many Green, Blue and Grey “signed contracts” out there, with many years to go to maturity and with the investor stuck with a “loan” he/she was duped into, which one can’t get out of without hefty penalties. And these companies are still being supported!

The irony – Now Magnus has become this era’s polis-smous, pushing the expensive, by now old fashioned actively managed unit trusts from Allan Gray/Coronation and refusing to acknowledge the value of passive low cost unit trusts.

Sanlam, Old Mutual and Liberty were basically doing the same to the public then, as what the Guptas are doing today…..Then it was sanctioned by the Broederbond. Now it is sanctioned by Luthuli House.

The public can only be liberated from this form of slavery by exceptional and fearless journalists. A free press is crucial element in the protection of the public.

The ignorant still support these companies, they are being preyed on as they have no knowledge of finance.
As I have always said never put someone else between you and your money, do it yourself.

Its unbelievable that no one from the life assurance industry has been criminally charged. It was pure fraud.

Yes. Put all actuaries in one of the World Cup stadiums and shoot them.

@Phil a bit… Extreme, but point taken 😉

Magnus – why don’t you write a column for the Voice or similar tabloids? then you will reach the market that really needs the information!!! those people aren’t reading Moneyweb!!!!

I highly doubt that that same target market from those tabloids are even saving/investing…

Democratisation of information is a wonderful thing, but terrible for sales-people trying to maximise commission.

I too was suckered into a Sanlam policy in my first month of work. About 10 years later I decided that I would take the pain and cancel these policies. I lost about 30% of the value in cancellation penalties but at least i am no longer paying their massive fees.

Me too. Worth it. 10/10 would do again.

Bravo Magnus …. yep so many of us went through that same process of being talked into premiums that if escalated at the rate the insurance companies wanted, after 20 years, no-one would have money left at the end of the month to buy a loaf of bread.

And the “gladdabek” salesmen got rich …

I recall many a sales person from the “big” green going on extravagant overseas trips for achieving/exceeding sales targets – meanwhile in conjunction with their bosses/company they were destroying wealth when they were supposed to be increasing one’s wealth. Prior to going on retirement I divested myself from every single product that I had with the company. Thank goodness I did, as their figures have proven to be nothing short of disasterous

Here’s a story. I was in life assurance admin all my life. (I blush to mention that I flogged a few policies to friends). The focus was always on the brokers and they were royalty. The policyholder was left out entirely. Why should the company worry about them while the brokers are omnipotent and omniscient? Like one smart-ass who didn’t even have a bank account to pay his commission to. We had to give him a cheque (remember those things?) which he cashed at the corner store. This is true! They were always as poor as church mice, despite professing to do “financial planning”. Most of them could not get to the end of the week without their comm. Several of them wanted very frequent payment. Normally TWICE a week. There was one who brought in proposals from his clients (not all real people in a lot of cases!) and sat and waited for a cheque each time. In many cases, the apps needed underwriting. His attitude (supported with genuflection by our sales and marketing team) was comm first underwriting later. Policies were “put in force” a month or so after the proposal, but no wait for the broker – comm up-front NOW.
The up-front (annualised) commission was up to 85% of the first year’s premium for a 27+ year term (and it was amazing how many 27 year terms were sold despite it being apparent it was unsuitable). We also had a “broker” who refunded his clients half of the commission as an incentive. He would do this several times a month, thereby rolling over his total commission in a sort of Ponzi scheme. Like Madoff, he made off with the boodle, but wasn’t able to keep it going. Policies lapsed as the clients weren’t getting their 50%, so commission was reclaimed, but he didn’t have the moolah, went bankrupt and shot himself. I could write a book on this, it was horrible and fascinating at the same time. Ugh!

What you describe here is essentially what the ANC has to live with every day. A corrupt system incentivise all participants to be corrupt. The ANC painted themselves into the corner. Their glory days are over. They are as dead as a retirement policy.

And some pay such cretins to give advice? Surely there’s something not in good faith here.

Excellent article Magnus! Articles like this one should be published more often, they greatly benefit the average man in the street. Anyone taking out a RA through a life assurance company in SA should think twice – you’ll be suckered into a term commitment and face the same issues. Rather go to a leading asset- or fund manager, where you’ll have no term commitment and lower fees.

There are still offshore advisory companies like deVere marketing the same old-fashioned products to ignorant investors, provided by the offshore life assurance companies. The exact same product characteristics as those insurance products of the 80s and 90s. They’re banned in the UK, but flogged just about everywhere else.

A friend of my klater father worked for Big Greeny back in the early 50’s. He commented that the easiest way to impoverish yourself was to buy a geen policy.
Later with the demutualisation of Greeny and Bluey, the money that shoukld have beeen paid out to beneficiaries was distributed to the later clients and obviously the main manne. Generations of South Africans were screwed with government protection.

And then there are the microlendenders. And there is a big story for you Magnus. The way that these are managed is to ensure that the poor will remain poor and eternally indebted. I once said to one of the (then) smaller banks that the only difference between him and the Red, Green and Blues was that at least the latter stole from the ‘rich’. I have experienced much of the legislated malpractices through employee tragedies (that’s what the outcome is of every microloan – and the old policies is).
On the other hand it is human nature to covet what you cannot afford, so those who feed the microlenders are not totally innocent.
However, as an outoppie like you i agree.
What about the current cartel amongst the so-called financial advisers and asset managers./I retired 10 years ago and been through 3 of these companies. Each one charged me 2.65% and none provided any better growth than the previous. I have kust yesterday moved again to a ’boutique’ partnership (all with respectable backgrounds at many of the technicoloureds). Difference? From 2.65 to 0.89 inclusive of LISP. And my adviser says, “We make a good living nonetheless”. Private Share portfolio, so none of those iniquitous unit trust ‘fees plus bonus plus warra warra warra’.
Ignorant and abused indeed. It’s actually a crime against humanity.

Ask for full disclosure on that 0.89%. You’re either being deceived or they’re not disclosing everything. Check for conflicts of interest too. Your adviser likely works for the product provider and LISP.

Hi Green Jacket (I hope that isn’t OM green!)
Full disclosure. It is a Personal Share Portfolio for local equity/property running on the Momentum LISP platform. They also will provide me with an offshore ‘note’ PSP @ 0.71%; managed by them in South Africa, using my annual travel allowance.
So only LISP (0.32%), 0.15% securities fee and 0.35% Advisory fees. So actually 0.94% (i omitted VAT from one of the fees). Plus of course 0.71% for the offshore portion of the portfolio, which is separate. They are a completely independent company made up of senior execs who left a substantial brokerage when the principal sold out to one of the biggies.
Innovative, smart and cost-effective. There are a couple of them that have emerged in the past 2 years or so. These guys, however, were the only ones to provide the PSP, thus avoiding the exorbitant CI Fund fees.
They have provided me with the portfolios, local and offshore, and the allocations and counters are wisely constructed. They have been managing my family’s fortunes down on a Karroo farm for some years (starting off with the original company) and have provided consistent wealth growth.
It took me 10 years to find an honest service provider.

Haha! No, definitely not OM green! Think I must change my name!

It’s good that you’re using people who you know and trust. It also sounds like you’ve got a sizable portfolio, hence some reduced fees, like the Momentum platform fee. But don’t forget to factor in brokerage on share transactions, which will be significant, and check whether there are buy and sell fees for direct shares too. Also look a bit closer at the note, it’ll probably carry its own internal fees, perhaps custodian fees too. If it’s held on a platform then offshore capacity and international admin fees may apply too. Especially if you’re comparing these against CI fund fees, you need to factor everything in, even if they’re internal product costs.

Your portfolio managers will be making money out of you elsewhere if they’re only getting 0.35% for advice, so just make 100% sure that they’re disclosing everything and ask them what the brokerage fee is too.

I work at a wealth manager and we provide similar structures, just to give you a heads up on some of the other costs:

– Life insurers Asset Swap fee – 0.35%
– Brokerage – it is only once off and of course during trading – 0.5%
– Safe Custodian fee, this varies across international brokerages, but safe to assume 0.25%
– FX fee, purchasing foreign shares – 0.5%

If you purchasing a note this is just wrapped up in the return,

I still think it is one of the better ways to access offshore shares, considering you are “direct” and managed, but a local PSP with offshore trackers may be just as effective.

“Those who are ignorant will never know that they are being abused.” So true.
No insurance or finance company has ever been in that business for the benefit of their clients.
Never get involved in ANY agreement where there is a middleman agent involved, as the middleman is capitalizing on your ignorance. This indicates where you should educate yourself, to be able to avoid them.

My brother and I recently inherited R700k each from our late father’s Living Annuity. I cashed my share in and took the pain with the rather exorbitant lump sum tax believing I could invest it better elsewhere. Kleinboet is not so good with money so got him to agree to leave it as a Living Annuity and draw down the minimum 2.5% p.a. on the basis that he couldn’t access the cash and blow it and he would pay minimal tax on the annual drawdown not being a high income earner.

Really regretting this. Having a look at his latest statement and see that in addition to his R1,400 monthly drawdown stipend there are also the following deductions:
– R204.64 Monthly Admin Fee
– R341.07 Ongoing Financial Planning Fee
– R 68.22 Fund Access Fee

A whopping monthly total in charges of R613.93!

It only works out to about 1% of the total value which doesn’t sound so bad but in Rand terms this is quite steep and I find this hard to justify. Now he is locked into this blasted product until thy kingdom come, along with the monthly charges, unless he starts drawing the annual max of 17.5%, pays the tax and I try and invest on his behalf in index trackers etc.

I’ve always believed it’s better to own the shares in the Life Assurance companies than buy their products and this to me is now proof.

PS, the annual fund performance (which I assume is before costs) is 10.22%.

If only we could turn back time…

It sounds like he’s not getting any (or decent) financial planning, so he should stop that fee immediately, which he’s quite entitled to do. It’s worth paying that fee only if he’s getting good, independent advice. A “fund access fee” sounds fishy, he won’t have such a cost via a decent platform. It’s definitely a good idea for him to consider transferring the living annuity to another provider – Allan Gray or Investec allow access to unit trusts from various top fund managers and their fees are very competitive. AG can assist with suggesting a decent adviser too. Fees are only meaningful when considered alongside net returns, make sure your brother understands that, or he’s likely to learn a hard lesson. Cheaper is never a reason to invest in anything.

To whom is he paying the Ongoing Financial Planning Fee, and why?

Funds annual performance is actually pretty good (and this performance number is post fund TER’s). I can only assume there is some Allan Gray balanced fund in the LA. The ongoing fees are actually not that high, when you compare it to the market place. One way to reduce the fee is look at a tracker fund based platform (10X, Sygnia), however you then wont have the advisor, and it sounds like he needs one.

You can move to AG and have zero admin if investing in AG funds, however your total fees are quite high as the TER alone on the balanced fund ranges from 1.2%-2.2% – yes this is performance dependent.

The LA is like a trust, so manage it like one. You can place 100% offshore through an asset swap, or purchase direct shares in a Personal Share Portfolio. So your brother needs to fully understand his options.

The broker’s commission on a Living Annuity is 1% usually, sometimes less. This is in perpetuity. It may seem like a small amount, but it certainly isn’t. If your brother is drawing down 2.5%, then the total draw down is 3.5%. Living Annuities are an excellent Pension Plan for brokers. Living Annuities have been drawing the crowds because the remaining capital after the death of the annuitant goes to the heirs. The brokers stress this fact. What they don’t stress is that it is also their Pension Plan.

Those fees mentioned adding up to about 1% pa do not even include the fund management fees, which could easily be another 2% pa.

You can move a LA to another provider. The cheapest out there is Sygnia if you invest in their Boutique option. The Skeleton Balanced 70 fund is a good balanced option, and will cost 0.4% pa – na admin/platform/adviser or any other fees.

You agreed to be ripped off. You’ve been had. Plain and simple. End of story.

There is a reason why they are called insurance companies. So only invest with them for insurance, not for financial/retirement purposes. And grow your wealth by doing so.

Yes completely right. They are useless for investment, but did very well for themselves and their so-called “brokers” when they added investments (like endowments) of the most opaque character. They should have stuck to the knitting which they had been doing for the last 300 years or so (marine at Lloyd’s was the beginning). The first life policy was issued in London around 1710.

If this product RA is with who I think it is based on the cost description you would be moving from a choice of over 800 funds into say a 50 odd funds other than Allan Gray funds if he moved there. Paying 1% for such a choice of funds is not bad at all. There are hundreds of great funds not offered by AG. I cannot comment on the choice at Investec.

To make matters worse, the inflation rate in the 80’s and early 90’s was around the 15%+ mark and policies taken out with these insurance companies would inevitably contain an annual premium escalation clause in that region. With inflation decreasing over subsequent years , the premiums would in many cases become unaffordable and because of the contractual nature of these policies any reduction in premium would be penalised. And so the Green,Blue and Grey teams score yet again!

I agree wholeheartedly with the lack of transparency and hidden costs associated with Life Assurance Companies products. However, I must also inform you that a Liberty Life Endowment taken out 30 years ago at R50pm with no annual increases recently paid me R471 000. My total contribution was R50pm x 12 =R600pa x 30 Years = R18 000 outlay and I received R471 000!! I am very happy with that return.

End of comments.



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