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I’m unhappy with the performance of my RAs. What recourse do I have?

You can transfer your retirement annuity to a Lisp-based retirement annuity with the same provider.

Shortly after I started working, in my early 20s, I got a financial advisor and took out a retirement annuity (RA) with a large, well-known institution. A few years later, my advisor explained that my RA would no longer be Regulation 28 compliant (based on its composition), so I took out another RA with the same provider.

I recently had a look at the statements for both of these RAs. Ten years ago, when I got my first RA, I was rather ignorant (to say the least) about investments and not really in a position to make sense of fees, risk and so on. However, now that I’m older (and hopefully wiser), the returns are shocking. 

My annualised rate of return on one of the RAs is 1.92%, while the effective annual cost is 4.7% over one year, 4.5% over three years, and 3.7% over the term to maturity. The commission portion is 5.7% of my monthly premiums. In effect, after inflation, I’m worse off now than I was when I started investing – and I paid a premium for that! It feels like 10 years’ worth of retirement planning down the drain. 

It goes without saying that I’m not a happy camper. What can an investor do in this scenario? Do I have any recourse other than taking my money to someone else? Should I instruct the provider to move the existing investments into a more cost-effective fund and stop contributing to these RAs in favour of another product somewhere else? 

For context – my personal portfolio is largely invested in ETFs [exchange-traded funds], and I have a few actively managed preservation funds. I’m perfectly happy to put a fair chunk of my RA into passively managed funds.

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Dear Reader,

Thank you for posing this question and for being as honest as you have been with the detail you have provided.

Your question is multi-faceted and requires a somewhat detailed response. I have provided this response to you, but I must add that in order to provide in-depth advice one would have to know more about your personal circumstances and your existing portfolio and financial situation.

Thus, please read this response as a guide as to what you could explore to remedy your retirement annuities and not as formal investment advice.

I am going to respond to your questions in the order in which they have been posed, and will also provide opinion and comment in places for the benefit of some younger readers and those who may not have had the opportunity to understand how investments work the way you have.

Shortly after I started working, in my early 20s, I got a financial advisor and took out a retirement annuity with a large, well-known institution. A few years later, my advisor explained that my RA would no longer be Regulation 28 compliant (based on its composition), so I took out another RA with the same provider.”

In my investment advisory career, I have come across a number of cases where investors were a little badly advised in their early working careers, but in most cases such as this, the worst that has happened is that the investor has missed out on better performance but at least some form of a portfolio has been built over this time.

A retirement annuity can become non-compliant to Regulation 28 when the assets in the underlying fund grow to such a point that the value on that asset is greater than the Regulation 28 limit. Regulation 28 refers to the Prudential Investment Guidelines for Pension, Preservation and Retirement Annuities where the most well-known guidelines are that the limit for equity (listed shares) exposure is 75% of the capital value or that offshore-based assets cannot be more than 30% of the capital value. When this happens one can (depending on the type of retirement annuity) adjust the underlying portfolio so that the total regains compliance with Regulation 28.

However, from an investment perspective it is at times advantageous to start a new retirement annuity in order to leave the assets allocation in the original retirement annuity invested in assets that are providing growth and not dilute that growth by adding more capital into the asset allocation.

My annualised rate of return on one of the RAs is 1.92%, while the effective annual cost is 4.7% over one year, 4.5% over three years, and 3.7% over the term to maturity. The commission portion is 5.7% of my monthly premiums. In effect, after inflation, I’m worse off now than I was when I started investing – and I paid a premium for that! It feels like 10 years’ worth of retirement planning down the drain.

I would like to comment on the second part of your paragraph here where you state that it feels like 10 years of retirement planning has gone down the drain. In a way what you are saying is true, you have missed the opportunity of enjoying higher returns than the ones you have experienced in these retirement annuities.

You mention that you initiated the first retirement annuity when you were in your early 20s and this is now 10 years later, thus I imagine you are in perhaps in your mid to late 30s, so you still have some time (15 to 20 years perhaps) to correct the investment performance you have experienced thus far. In addition, let’s focus on what the retirement annuities have already provided as a benefit to you, in that you have enjoyed a tax deduction on the contributions to the retirement annuities and you have begun building up capital in some form for your retirement. So all is not lost, it’s a matter of making some adjustments and moving forward.

Going forward, if I were to be advising you as your investment advisor, I would suggest that you consider the following:

The first retirement annuity you embarked on: This will have a capital value and I would suggest you consider doing a Section 14 transfer (this is a cost-free, tax-free transfer between retirement annuities) to another provider where you can adjust the underlying fund allocation to funds that are (a) Regulation 28 compliant like a ‘Balanced unit trust’ or where you and your advisor can build a fund allocation made up of different funds from different fund managers where the net result is that the fund allocation is then Regulation 28 compliant. In this way, should a fund underperform, then you would be able to switch to another fund. Many modern investment product providers allow this to be done on their platforms with many allowing a number of free fund switches per year.

In addition, modern investment product providers – referred to as linked investment product providers (Lisps) – will have lower fees than the old-style life insurer based retirement annuity where the fees for the investment are taken off upfront for the term of the investment.

Under a Lisp retirement annuity you can negotiate the advisor’s fee with them, and in the underlying fund many fund managers charge a performance-based fee where simply if the fund does not perform over the fund’s benchmark, the fund manager does not earn a fee.

For the newer retirement annuity, I would advise that you contact the product provider to see if you can transfer the retirement annuity to a Lisp-based retirement annuity with the same provider. Many life insurers have both options in their product lines. For example, Momentum has a life-based retirement annuity under its ‘Investo’ range but can also offer a Lisp-based retirement annuity through its ‘Momentum Wealth’ platform.

This type of transfer can sometimes be affected without a penalty as the life insurer considers this an ‘internal transfer’; research by an advisor (or you) must be conducted here. I need to add in here that you should also be aware that in many cases the product provider charges a penalty fee when an investor makes their life insurance based retirement annuity ‘paid up’, so the penalty fee must be compared to the current value of the retirement annuity and a decision must then be made to make this retirement annuity paid-up or not. If the penalty fee seems to be too high, then consider making this retirement annuity paid-up at a later stage when the penalty fees are not so large. I would also consider cancelling the annual increases.

Lastly, one should at times not be too alarmed at lower investment performance, one should consider what investment return is possible under current investment market conditions. If we consider where the financial markets are at the moment as an example, interest rates are lower than they have been for many years, and stock markets around the world are very volatile during this current Covid-19 affected world which has resulted in lower investment performance.

“It goes without saying that I’m not a happy camper. What can an investor do in this scenario? Do I have any recourse other than taking my money to someone else? Should I instruct the provider to move the existing investments into a more cost-effective fund and stop contributing to these RAs in favour of another product somewhere else?”

I can understand your unhappiness, in terms of what you can do in this scenario, I would advise that you begin with what I have mentioned above.

“For context – my personal portfolio is largely invested in ETFs, and I have a few actively managed preservation funds. I’m perfectly happy to put a fair chunk of my RA into passively managed funds.”

I am firstly glad to hear that you have “a few actively managed preservation funds” which tells me you have been disciplined in not accessing your retirement benefits when you have changed employers. This is VITAL in building up a portfolio of retirement planning assets during one’s working career. For many employees, it is too tempting to avoid accessing the retirement benefits to buy new cars, pay off debt or pay off the home loan when changing jobs. It might make sense to access your retirement benefits when you change jobs in the short term but please do not do this because it impacts the probability of providing for yourself when you are no longer able to work when you reach retirement age!

Secondly, for the benefit of other readers, ETFs or exchange-traded funds are pooled investments similar to unit trusts, but these are traded on a stock exchange such as the Johannesburg Stock Exchange. In most cases, an ETF is a fund which tracks an index through a ‘passive’ or algorithmic controlled automated process, where there is no real fund manager.

The idea is that because many fund managers battle to outperform an index, it is therefore better to invest in the index (such as the JSE All Share Index). This is cost-effective but the disadvantage is that in an ‘actively’ managed fund, a fund manager can protect the downside when he sees that the market is becoming negative, whereas the ‘passive’ fund will simply continue to follow the index. Neither of these two styles of investing is better or worse than the other, it can be advantageous to have elements of both.

You could, as you have suggested, invest the retirement annuities in passively managed funds, if retirement annuity products you are invested in provide passive funds in the range of funds they have available to you. If you follow the advice I provided to you above, then one should research if the Lisp you are considering has passive fund options, which most Lisps do.

I hope this advice I have offered helps you in making a decision about your underperforming retirement annuities. You would be welcome to contact our offices where these discussions could be continued in detail.

Thank you for this opportunity.

Do you have any questions you would like answered by registered financial planners?

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It is daylight robbery that annual fees in this RA average to a long term 3.7% when the etf provider across a balanced asset allocation can charge a weighted 0.5%. The difference compounded fir 30 years is half your money GONE. The real answer we need is to find the very cheapest RA and then living annuity wrapper provider. I gave up on Old Mutual and ended up at Sygnia fir this, but nowhere could I find objective comprehensive cost comparisons. It’s just in no one’s financial interest to publish such research of course…!!!

Go check this guy’s stuff out. He has comparisons for a couple of things.

Very nifty calculators on Walter’s site here:
Twitter: https://twitter.com/ratecompare
Site: https://www.mymoneytree.co.za/

Specifically this:
https://www.mymoneytree.co.za/calculator/retire-after-80
https://www.mymoneytree.co.za/calculator/ra/

Hope this helps someone, it helped me to move my RA from Old Mutual to Sygnia. 1 month in already very happy. I just need to do a Section 14 transfer for the funds still at Old Mutual to be transferred to Sygnia.

Did you use a financial advisor to do it for you or did you contact Sygnia directly who did it for you.

Do a Section 14 transfer of your RAs to a low cost index provider or lower cost managed provider of your choice. While performance might still be flatish (depending on what SA economy does) going forward, at least you will not be in the negative.

Here are what mine has done (after fees):
Coronation – 4.9% pa since inception 1 March 2013
10X – 6.0% pa since inception 1 Jan 2013

Many of us have been through this journey. Good on you for discovering the issues so early on!

I moved my RA stuff from OM to a provider where the underlying unit trust can be chosen. Now I prefer Sygnia as I can choose from their range of ETFs.

If you are investment savvy (which you appear to be), do this on your own, sans advisor. Good luck.

This post fails to answer the main question in the headline: “what recourse do I have?” Recourse is the legal right to demand compensation or payment. These so called “financial advisors” are con artists and should not be allowed to exist as they rip off innocent victims under the guise of providing a professional service. It is highly unethical. My retirement has been set back several years because of selfish “advice” from a selfish financial advisor. In my opinion it is criminal. There ought to be a way to punish both the financial institutions and their “salesmen” and claim for dammages.

theres always recourse through violence 🙂

“….the disadvantage is that in an ‘actively’ managed fund, a fund manager can protect the downside when he sees that the market is becoming negative, whereas the ‘passive’ fund will simply continue to follow the index.” – WHAT AN ABSOLUTE LOAD OF BOLLOCKS!! I’ve yet to come across a fund manager that makes any sort of ‘active’ change whatsoever, when the market becomes negative.

NEVER invest with any of the “insurance companies!

And NEVER trust the advice from any of their advisors either.

Together, the above act in concert to profit for themselves off your financial naivete at your great expense. This is an industry of professional con-artists.

Credit must go to Sygnia and 10x for shaking up this dishonest industry and providing a viable alternative.

“Ten years ago, when I got my first RA, I was rather ignorant about investments…” And they saw you coming. At university, I was also hoodwinked by this guy from the bank who sold me this stupid Charter Life 5-year savings plan to repay my student loan. He said any interest earned on a 5-year savings plan is tax-free. Little did I know that the first R34,500 of interest per annum is tax-free in any case. For that you need to have R1,061,538 in the bank earning 3,25% interest p.a. What student has that sort of money??

What a horror story…
Do a section 14 transfer to SYGNIA.. Their fees are low and performance great. I moved my 2 RAs from two large managers and have never been happier. Alternatively, convert RA to a Living annuity, with SYGNIA, and invest in ETFs.. Mostly offshore. Depends on your tax state.. Good luck!
And dump your financial advisor.. He got rich with your money!!!

Can only convert RAs to LAs if you above 55 of course…

Then it is a good plan to go global, agreed

Yes.. 55

Financial advisors a.k.a policy hawkers are the biggest skelms and most morally bankrupt individuals known to man. They don’t give a rat’s derrierre about you and your financial wellbeing, they only care about their commission and their new BMW – STAY AWAY! If you absolutely need to use one, use one that charges you a fee for their time and not commission.

First off, appreciate the fact that you live in a second-world country run by largely uneducated, reckless people who know next to nothing about economics and are mostly hell bent on self enrichment at any cost. After you’ve come to terms with this fact, then open an offshore online trading account, commit to moving the bulk of your wealth offshore, and purchase low cost ETFs such as Vanguard S&P 500, or Vanguard World ETF. Don’t use any local provider. They are all hellishly expensive, and all you are doing is funding their annual eight week Plettenburg vacation.

I would recommend transferring your RA to Sygnia. You have been ripped off completely. Sygnia has low fees and their funds perform decently. Also cancel your financial advisor and attend a Sygnia webinar and ask them how they would invest in a RA. Also use their roboadvisor.

Having just personally converted 2 RAs and 1 LA from 3 different fund managers (the usual suspects) to Sygnia living annuities, I have reduced their mean total expense ratio of 1,9 % to about 0,6 % for the Sygnia products – the equity components of the new Sygnia policies (75%) are all offshore.

If you are going to DIY, a word of warning:
The process took 2 & 1/2 months, and a lot of e-mail and telephonic correspondence with Sygnia, but finally is almost in place.

To date, Sygnia’s admin team has been underwhelming (Magda, are you listening ?…) and I’m still waiting for policy documents.

Nevertheless, the saving in fees makes the lengthy process worth the effort.

My financial advisor was unamused to be cut out of the income stream, and hasn’t spoken to me since.

Hi

We are so sorry that you are experiencing problems. Please send your contact details to admin@sfs.sygnia.co.za. so we can help you as soon as possible.

Here to help,
The Sygnia Team

.. so Sygnia actually responded to this on Money Web. In this day and age (being used to a dysfunctional South Africa) I am indeed impressed.

I have an old fashioned way to deal with non performing investments,
I transfer them or cash out.

It is my money and make it very clear when some companies forget that.

End of comments.

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