Beware of your financial adviser asking you to move your investments

financial adviserIt is not uncommon for investors to move their investments from one insurer or asset manager to another. Whether it is because of the promise of better returns, to lower costs or just not being happy with the current company, investors do move their investments from time to time.

But what happens when you move your existing retirement annuity to another insurer on the advice of a financial adviser promising better returns but the exercise ends up costing more money?

First of all, as an investor, you are allowed to move your retirement annuity from one insurer or asset manager to another via a Section 14 Transfer. If you have a retirement annuity with Liberty, for example, and you transfer the retirement annuity to Allan Gray, there will not be any tax incurred, since you are transferring from one approved retirement fund to another. This transfer can also apply to preservation funds.

Listen to Maya and Mapalo discussing this and other stories on the My Money My Lifestyle podcast

At the end of 2018, I did a coaching session with a 42-year-old client whose financial adviser advised her to move her existing retirement annuity to another insurer. The adviser recommended this move because according to her, with the new insurer, the client would end up with more money at retirement age.

Now lets examine the client’s case:

The client’s retirement annuity value was R627 000 and she was contributing R5 000 per month.

Huge penalty

Because she was exiting the retirement product earlier than agreed on the contract, she would have to pay a penalty fee of R91 000. Yes, you read that right: R91 000!

It doesn’t make sense to decrease your retirement fund value from R627 000 to R536 000 in the name of better returns in the future. The client didn’t just lose R91 000, but she also lost out on the compounded returns that R91 000 could have yielded.

If you take R91 000 and invest it over a period of 13 years (assuming the client wants to retire at the age of 55), with a growth rate of 9% it would be worth R278 988.

Therefore, by paying the penalty fee, the client didn’t just lose R91 000 but potentially lost out on almost R300 000! But it doesn’t end there… on top of that, the adviser charged a 1% upfront advisory fee (R5 360) and other ongoing costs. (see NOTE UPDATE at end of article)

The product which the client was moving to was not much different from her existing product, with both products having a total expense ratio of between 2.1% and 2.3%.

It made no sense that the client was advised to transfer her retirement annuity. The only possible reason that her adviser would suggest the move, is the benefit that she would get in terms of the upfront fee plus the ongoing advice fee.

Before you transfer any investment, your adviser has to provide you with a detailed analysis and you have to look at the cost-benefit ratio.

How much lower do the fees need to be?

You must ensure that the lower fees or potential higher returns with the new product will compensate you for any penalties associated with the transfer.

In this case, if the client moved to another provider and reduced her annual fee by 1% per annum, over 15 years that saving would have resulted in approximately R300 000 more in retirement, even after paying the penalty.

However, if the new investment reduced the annual fee by only 0.5%, then she would have had less in retirement than staying with the original product due to the penalty fee.

(Here I did a simple calculation using 10% per annum return with the fees reducing the return to 9% or 9.5% respectively)

In this particular case there was virtually no annual cost saving and the upfront fee would have diminished the returns even further. It clearly made no sense for the client to switch.

What other options do you have if you feel like you are not getting the most out of your current retirement annuity?

  1. First look at what it will cost you to transfer the retirement annuity. There are penalty fees on exit (life assurers charge penalties to recover the commission they paid to financial advisers when the policy was taken out) and also potentially upfront fees charged by the adviser or new product.
  2. Should the cost be too high, you can opt to cancel the debit order (make the policy paid-up), which I am afraid can sometimes come with a penalty as well, although not as high as transferring the entire fund. But again, do an analysis to see if the benefit outweighs the cost.
  3. Then for the same amount, start contributing to a new-generation, low-cost retirement annuity.

Don’t get me wrong ‒ there are brilliant financial advisers who do look out for their clients but the onus is still on you the investor to also do your homework. Don’t become complacent about the advice given, ask questions, educate yourself and even get a second opinion on these matters.

After all, no one should have more interest in your money than you!

Mapalo Makhu is a financial planner and finance coach. This article first appeared in City Press.

NOTE UPDATE: Although the quote showed an upfront fee of 1%, because this was a section 14 transfer from another Retirement Annuity the upfront fee would not apply to the existing funds and only on the new investment amounts. It is important to note, however, that effectively the client had paid those upfront fees on new contributions as this forms part of the surrender penalties. The old policies priced in all fees for the full term of the contract

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