EAC numbers from RA revealed.

PhreakBoy said:
For the sake of full disclosure before any of us here choose to put any weight into your opinion, could you advise whether you work in the industry and/or have a vested interest persuading people that the current fee structure is not too high.

I ask as your narrative is very similar to that of my FA that did not see any problem with taking a Financial Advisors fee of 3,42% and was willing to reduce this to 1,5% after I queried it.

Regardless to say I did not take him up on his very kind reduction of 60% in fees.
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I studied insurance but I'm not an expert. I'm interested in personal finance because I think it's an area that is completely ignored by our education system which means people are left vulnerable when they start working and earning.

It's always a good idea to shop around. Just make sure you read your policy document to avoid any surprises. It's especially important with new high tech companies as you need to know where you stand should things not go as planned.
 
fire2029 said:
The finance industry loves to complicate simple matters to justify their high fees!

Reg: new entrants.
Confusing & hidden fees have created a market gap. And a few companies (e.g. 10x) are using this to their advantage.
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If finance was simple it wouldn't need to be so heavily regulated. Just make sure their advantage is not to the detriment of policyholders.
 
themba990 said:
As Supersunbird has already mentioned commissions do make up quite a bit of the upfront payments but insurers are able to claw some of this back so the policyholder wouldn't be expected to cover all of the commission.
Technology is playing a big role especially in facilitating direct business. Companies are relying on investment in platforms that allow customers to effectively service themselves by going on online and changing policy details, capturing information etc...
That being said, financial products are inherently complex so most people would benefit from receiving advice before making their purchasing decisions or updating their cover.
Back to the issue of the new entrants, it would be difficult to say, with certainty, whether there are no hidden fees without seeing the terms and conditions of the actual policy.
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What drivel. All you need to do is choose your risk level... Heck if that's too much for you a robo advisor can do it for you for a paltry 0.1% fee...
 
backstreetboy said:
What drivel. All you need to do is choose your risk level... Heck if that's too much for you a robo advisor can do it for you for a paltry 0.1% fee.
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Note the word cover is used, thus not only talking about retirement savings, he has expanded on the topic, show me the life insurance robo advisor?
 
I'm 100% for buying all your policies/insurances yourself if you understand what you are buying. But the reality is that some of the financial products sold (whether bank rewards, ST insurance, LT insurance, medical aid etc) are too (unnecessarily) complex for the lay person to understand and that's where good advice can be invaluable given the typical South African is far from being financially literate.

Hell, I'm an actuary (not in life insurance), but I could barely understand Discovery's life insurance proposition and how the various integrators and paybacks work.
 
the eskimo said:
I'm 100% for buying all your policies/insurances yourself if you understand what you are buying. But the reality is that some of the financial products sold (whether bank rewards, ST insurance, LT insurance, medical aid etc) are too (unnecessarily) complex for the lay person to understand and that's where good advice can be invaluable given the typical South African is far from being financially literate.

Hell, I'm an actuary (not in life insurance), but I could barely understand Discovery's life insurance proposition and how the various integrators and paybacks work.
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There are benefits if policies are complicated. The more complicated a policy is, the more likely its premise is on a cross subsidy model. Which gives you an opportunity of gaming the system if you can understand it.

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beefymoocow said:
There are benefits if policies are complicated. The more complicated a policy is, the more likely its premise is on a cross subsidy model. Which gives you an opportunity of gaming the system if you can understand it.

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Never seen anything like this !. Please talk us through it. What kind of product is this ? Cross subsidy model ? Please elaborate
 
fire2029 said:
Never seen anything like this !. Please talk us through it. What kind of product is this ? Cross subsidy model ? Please elaborate
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Discovery. They have huge penalties if you decide to leave but gives you huge bonuses if you stay. One of the benefits is a 60% increase in your contributions every month plus growth on the bonus.

The caveat is your contribution must increase around cpi + 3-5% each year till you retire.

This is excluding their additional 15% contribution boost their implemented recently.

Obviously this is not sustainable if everyone does it but if you can be an outlier than you sorted.
 
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supersunbird said:
All good and well, until life circumstances make you being unable to pay each month for some reason...
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100% true. That’s why I started with a low % to income contribution. Ie around 6%. It’s gonna ramp up pretty fast in my last couple of years. The plan is invest and save a crap load now. Hopefully will have enough to cover my contributions by the time I’m 40.
 
themba990 said:
I studied insurance but I'm not an expert. I'm interested in personal finance because I think it's an area that is completely ignored by our education system which means people are left vulnerable when they start working and earning.

It's always a good idea to shop around. Just make sure you read your policy document to avoid any surprises. It's especially important with new high tech companies as you need to know where you stand should things not go as planned.
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Thank you. I think your motivation is sincere and fully agree with you that financial education is neglected in our country and that far too many people are left vulnerable.

However, I do not agree with your approach of generalisation and vague fear mongering. I am in the process of switching my products to a different supplier and as such I am very invested in this topic too. Unless you have specific examples of why the likes of 10X, Easy Equities or Sygnia should not be considered, you should refrain from discouraging people from considering their services.

I also note like SSB that the thread has gone off topic and that RA and insurance products are being confused.

Further I encourage you to reevaluate your perception regarding the reasonability of the fees charged by some of the more established providers as this narrative is being spread by them to protect their revenues.

In my opinion there is no way that the upfront costs could justify a percentage based fee for the full term of the product. In a scenario whereby someone could retire at age 65 with R5,000,000 - at the age of 64 the fee for that year alone is R150,000 (3% of R5mil) and I'm fairly sure that there are people in this situation today who have been paying those fees from the 1990's already. This example only covers the fees for that one year, take some time to consider the fees for the other 30 - 45 years and the effect that the loss of compounded growth had on those investments.
 
Agreed. The impact of fees should be one of the most important factors when choosing an RA!

Taking an EAC of 3.3% as an example. If you were to move that to e.g. 10x, then you would be paying +/- 1.1% EAC.

1582098453578.png


Assuming a conservative 7% market return, a 2.2% fee saving will give you 35.6% more over twenty years. And a rodonculous 85.9% more if invested for 40 years. That is a saving of R11.7m due to fees.

YearsFuture Market Values
3.3% fee1.1% feeDifference due to fees
5 yearsR 1.4mR 1.5m+ 9.5%
10 yearsR 2.3mR 2.7m+ 17.6%
15 yearsR 3.5mR 4.4m+ 26.1%
20 yearsR 4.8mR 6.6m+ 35.6%
30 yearsR 8.5mR 13.4m+ 57.9%
40 yearsR 13.7mR 25.4m+ 85.9%

Every marketing ad talks about the magic of compounding investment returns. But few will tell you about the evils of compounding fees. These work against you. So much so that, you will need to work longer to play catch up to reach the same value had you invested in a lower fee charging investment.


How much longer will you need to work?
If your EAC fees are 3.3 % & your retirement is 40 years away, it will take an additional 14 years of working hard & contributing R10.0k per month to catch up to the same value ( 25.4m) had you invested in a Retirement Fund charging 1.1% . That means, it could be the difference between retiring at age 65 vs retiring after 79 !

It is somewhat less the closer you are to retirement. If your retirement is 30 years away, it will take an additional 9 working years. And if your retirement is a mere 20 years away, then it will take an additional 5 working years to reach the same retirement funds had you invested in a Retirement Fund charging 1.1%.
 

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themba990 said:
If finance was simple it wouldn't need to be so heavily regulated. Just make sure their advantage is not to the detriment of policyholders.
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I'd argue that heavy regulation exists because it's in many an FSPs best interests to make finance complicated, not because finance inherently isn't simple.

Regulation protects the customers whose best interests would be disregarded otherwise. For example, the fact that EAC reporting had to be forced via regulation because certain companies would hide behind obscure and confusing layers of fees so that clients never knew what they were actually paying, while companies like Sygnia and 10x were reporting EACs long before they were required to because their business models thrived on transparency. This wasn't a case of "finance is inherently not simple" but rather "our profits require us to make this look complicated otherwise clients would wise up and go running for the hills".

beefymoocow said:
Discovery. They have huge penalties if you decide to leave but gives you huge bonuses if you stay. One of the benefits is a 60% increase in your contributions every month plus growth on the bonus.

The caveat is your contribution must increase around cpi + 3-5% each year till you retire.

This is excluding their additional 15% contribution boost their implemented recently.

Obviously this is not sustainable if everyone does it but if you can be an outlier than you sorted.
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People need to be careful of this type of thinking. Run the numbers with the same contributions, in similar asset allocations, at an EAC of 0.5-1% compounding annually. Then you'll realise the "bonus" is actually not a "bonus", they're just giving you back some of what you lost to fees, years after you've lost the compounding benefit, while they held onto and invested that money. And they got to keep all the gains from the growth on that money that they enjoyed in the meantime. It's not a bonus/boost, it's a refund less the time value of money. Not to mention that all those "monthly bonuses" disappear if you ever do decide to leave before maturity, which means you have nothing concrete unless you buy into the sunk cost fallacy and mental accounting that keeps you tied in to those ever-increasing premiums.

Sanlam has a similar scam running with their Echo Bonus rubbish. And this is all assuming that you never default and can always afford the premiums, which their actuaries know every client believes they will despite that not matching up with the data. Everyone believes they will be an outlier. Only the outliers are, and we only know who they are at the very end. Buyer beware. It's rarely a good idea to mix insurance with investing. I really hope it works out for you even though statistically it won't.
 
Mylky said:
I'd argue that heavy regulation exists because it's in many an FSPs best interests to make finance complicated, not because finance inherently isn't simple.

Regulation protects the customers whose best interests would be disregarded otherwise. For example, the fact that EAC reporting had to be forced via regulation because certain companies would hide behind obscure and confusing layers of fees so that clients never knew what they were actually paying, while companies like Sygnia and 10x were reporting EACs long before they were required to because their business models thrived on transparency. This wasn't a case of "finance is inherently not simple" but rather "our profits require us to make this look complicated otherwise clients would wise up and go running for the hills".



People need to be careful of this type of thinking. Run the numbers with the same contributions, in similar asset allocations, at an EAC of 0.5-1% compounding annually. Then you'll realise the "bonus" is actually not a "bonus", they're just giving you back some of what you lost to fees, years after you've lost the compounding benefit, while they held onto and invested that money. And they got to keep all the gains from the growth on that money that they enjoyed in the meantime. It's not a bonus/boost, it's a refund less the time value of money. Not to mention that all those "monthly bonuses" disappear if you ever do decide to leave before maturity, which means you have nothing concrete unless you buy into the sunk cost fallacy and mental accounting that keeps you tied in to those ever-increasing premiums.

Sanlam has a similar scam running with their Echo Bonus rubbish. And this is all assuming that you never default and can always afford the premiums, which their actuaries know every client believes they will despite that not matching up with the data. Everyone believes they will be an outlier. Only the outliers are, and we only know who they are at the very end. Buyer beware. It's rarely a good idea to mix insurance with investing. I really hope it works out for you even though statistically it won't.
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My fees are about 0.4% per annum and will get cheaper every year since my contributions are CPI + x. That’s pretty cheap since most of the portfolio is actively managed. Yes true you won’t get your bonus if you lapse your policy and that what I mean by cross subsidy model. They are people who will not be able to meet their commitments. But if you are able to commit. Discovery is penalizing those people and sharing the profit with you.

I guess having a finance background or a very good financial advisor can mitigate that risk. Before I even signed up. I did a sensitivity analysis if I stay on diamond or blue and forecasted my contributions till retirement. I know I’m gonna struggle in my penultimate years before retirement. That’s why I started fairly low and started investing in other assets to be able to meet my commitments in the years to come. I think I’m my last years of retirement will have to put away about 60k a month.
 
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