Insurance brokers have a legal and moral duty to provide unbiased advice and to prioritize their clients’ interests above their own. If ILAS is not suitable for a client, then a broker should not recommend it. In the rare event that ILAS is suitable, brokers have a duty to recommend the “best” ILAS product (i.e., the least bad one). The amount of commission that an ILAS product generates should play no factor in a broker’s decision to recommend it.
The Worst ILAS Products
The most dangerous, exploitative ILAS products are those with the longest lock-in periods. Longer lock-ins result in higher exit penalties and much higher risk of suffering those penalties. Well over 90% of people don’t survive a lock-in of any length, and virtually no one survives a 25 year lock-in.
The main reason lock-ins exist is to force investors to pay for commissions either through annual fees or else through an exit penalty. If an ILAS product has an excessive lock-in, that’s only because the salesperson was paid an excessive commission. A lock-in is basically just a means of transferring wealth from investors to salespeople. Longer lock-ins therefore add no value for investors—they drain value. Brokers, who have a duty to act in the best interests of clients, should never recommend a lock-in that is longer than necessary. To do so is arguably an act of theft.
The “Best” ILAS Products
The least dangerous, most flexible ILAS products are those with no lock-in. They necessarily pay lower upfront commissions. These are exactly the products which brokers should be recommending. If brokers aren’t mentioning these types of products to their clients, and they are instead exclusively recommending products with excessive lock-ins (i.e., with higher upfront commissions), then they are clearly not performing their duty of care and are setting themselves up for future lawsuits.
The Executive Wealthbuilder Account
The “best” ILAS savings plan I have ever seen is Skandia’s Executive Wealthbuilder Account (EWA). Compared to other ILAS products, it is, as its brochure cover claims, “a highly flexible investment choice”. It has relatively low minimum contributions ($2,400 HKD), no minimum contribution period, no lock-in, and the fees are totally transparent (7% upfront charge, 1% annual management charge). It was one of the first ILAS products to ever be authorized in Hong Kong (1991). A source tells me that the EWA was pulled off the market a few years ago because brokers wouldn’t sell it. However, it now seems to be back on the market. Its brochure was updated 9 months ago (Sept 2013).
During the time that the EWA was on the market, any insurance broker who failed to suggest it to clients was failing to do his job.
The Managed Capital Account
The second “best” ILAS savings plan I’ve seen is Skandia’s Managed Capital Account (MCA). The MCA has been available to investors since its authorization in 1992. It is practically identical to the EWA except that it has a slightly higher minimum contribution ($3,600 HKD) and a less transparent fee structure (in place of a 7% upfront charge, it has a 1.6% annual charge applied over a 5 year lock-in). The EWA and MCA ultimately cost the same amount of money, as their fee illustrations show:
Like the EWA, the main attraction of the MCA is that it has no minimum contribution period. This means investors can stop payments at anytime without penalty. This is why the MCA’s brochure cover claims that it is “a more flexible investment solution”.
The MCA & EWA Keep Brokers’ and Investors’ Interests More Aligned
Most ILAS products pay up to 30 years of commissions in advance. This leaves brokers with no incentive to care about the satisfaction of their clients. Once they’ve gotten paid for the work which they haven’t yet and likely never will perform, their primary concern is not about the fate of their client, but about the location of their next victim.
Commissions for selling the MCA and EWA are fundamentally different. They are paid to brokers on an “as premiums are paid” basis. This means a broker must ensure that his clients are satisfied with his quality of service. If his clients become unhappy, they can stop making contributions, and the broker will lose his commission stream. This incentive structure necessarily results in clients getting higher quality service from their broker.
Ironically, The “Best” Products Are Not Best-Sellers
As the “best” ILAS savings plans in Hong Kong, the MCA & EWA should be the most widely recommended, best-selling products.
Scandalously, public data shows precisely the opposite.
Notice how the worst finish first. Zurich International and Standard Life issue some of the most notoriously rotten ILAS products (Vista and Harvest 101), yet they are the most popular insurance companies among brokers. Sales of Skandia products are negligible.
The Entire Industry Has Failed to Perform Its Duty of Care
The above data indicates that the entire insurance brokerage industry has been systematically recommending ILAS products with excessive lock-ins in order to maximize commissions at the expense of clients. This means that nearly every broker in the city is guilty of professional misconduct, and hundreds of thousands of Hong Kongers have become unnecessarily trapped inside exploitative ILAS savings plans.
Because brokers have a legal duty to act in the best interests of clients, every one of these hundreds of thousands of victims would be justified in filing a complaint with regulators.
However, at the moment, complaints against insurance brokers are handled by PIBA and CIB, the industry’s self-regulatory bodies. Because the whole industry is guilty of misconduct, PIBA and CIB could not punish one broker without punishing nearly all brokers, probably including themselves. This is never going to happen, so filing a complaint with PIBA or CIB is utterly pointless.
Outside Intervention Is Necessary
Intervention by the Legislative Council, or perhaps a class action type of lawsuit, is the only hope that exploited investors have. Anyone interested in initiating such a lawsuit, please contact me.
Also, since brokers are clearly incapable of reining in their greed and selfishness, they are unlikely to stop their wickedness until the SFC bans abusive ILAS products, as it threatened to do last week. If the SFC doesn’t make good on its promise, then thousands more Hong Kongers will undoubtedly continue to fall victim to these heinous traps.
While urgently necessary, banning bad products is only a temporary and partial solution. The root of evil lies deeper than ILAS. Anytime one investment product pays a higher commission than another, brokers will have an incentive to sell that product. And as long as any investment product generates a commission, brokers will have an incentive to sell as much of it as they can, even if clients don’t need it. Thus, the only way to effectively deal with the problem of mis-selling is by banning commissions, as a growing number of countries are now doing.