In the dictionary, fraud is defined as “deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage.“
Fraud is a kind of theft, and it is illegal. According to Section 16A of the Theft Ordinance, the penalty for committing fraud is up to 14 years imprisonment.
Because fraud is illegal, it logically follows that:
It is illegal for insurance companies to profit by using deceptive fee structures, promotions, advertisements, and terminology in order to trick consumers into entering an agreement in which they unwittingly give away months or even years of their savings.
If insurers commit fraud, then they ought to pay the consequences. No one has a right to steal.
This essay is long and covers several issues in deep detail, so I will outline the main takeaway points here at the beginning:
- A type of investment-linked assurance scheme known as a contractual savings plan is an outright scam. These products defraud consumers out of as much as 2 years of savings.
- The policy documents of contractual savings plans are loaded with deceit and trickery designed to hide extortionate charges while creating a false appearance that the plans are attractive. For example, many of the plans claim to have no upfront fees, which is a lie, since as much as the first 2 years of savings are predetermined to be eaten by fees. Most of the units which are purchased in the initial period do not belong to investors (they belong to insurers), yet the account value is based on the total value of these units, thus giving the account an inflated and misleading value. Many plans also offer a large percentage of “bonus” units, which are bogus, since most of these units are guaranteed to be reabsorbed by fees.
- Insurance companies have clearly broken the law and should be charged with fraud. Hundreds of thousands of contractual policies must be annulled, and insurers must return all the money they have stolen from policyholders.
What is a Contractual Savings Plan?
To use the industry’s jargon, a contractual savings plan is a type of ‘regular premium’ investment-linked assurance scheme (ILAS). Investors sign a contract to make payments for 5 to 30 years. Insurance companies invest the payments into a variety of mutual funds chosen by investors (or by their incompetent commission-hungry “advisers”). The fees and conditions are tantamount to robbery, but insurers use a number of dirty tricks to obscure this fact.
Investors have no reason to invest through a contractual savings plan. At least one insurer, Royal Skandia, offers a non-contractual savings plan which doesn’t have any hidden upfront charges. Investors can also invest in funds directly (not through an insurer), or they can use a fund platform like Fundsupermart, which offers more funds, much lower fees, and no hidden charges.
Because contractual savings plans have zero appeal, insurance companies incentive their sales force to flog these products by paying obscene upfront commissions that are deceptively taken out of investors’ first months or years of savings. The salesperson’s commission depends entirely upon how long he can con an investor into agreeing to make payments. A 25-year contract generates a commission five times larger than a 5-year contract, which requires insurers to defraud investors out of five times as much money in order to pay the larger commission. In a previous essay, I explained why these commissions violate Hong Kong’s anti-bribery laws. The penalty is up to 7 years imprisonment.
More than 2 million regular premium ILAS products have been sold in Hong Kong over the past 14 years. Not all of them are scams, but most of them are. Given that Hong Kong’s population is only 7 million, it’s a safe bet that at least 1 in 10 adults have been swindled, although the number could be twice that.
‘A Crock of Shit’
I recently spoke to a veteran financial adviser who remarked that contractual savings plans are “a crock of shit”. Dictionary.com defines a “crock of shit” as “a mass of lies and deception worth no more than dung”.
Another adviser devoted an entire book to exposing these products. He titled it The Great Expat Financial Planning Ripoff. In the book’s preface, he calls contractual savings plans “a worldwide scam of breathtaking proportions”, so expansive that it would make the “infamous Nigerian scammers green with jealousy.”
Don’t Judge a Book by Its Cover
When insurers market these products as “savings plans” or “investment plans”, they are being deceitful, since flushing two years of savings down the toilet is neither.
Many contractual savings plans are given grandiose names suggesting they are intended for the intellectual and economic elite. This sends a subliminal message along the lines of, “If you buy these products, you are smart, and you will become rich.”
Here’s a few examples of ludicrous product names:
If investors are duped into believing this rubbish, it’ll be one of the worst decisions of their lives. Rather than set themselves on the road to riches, they’ll have become instantly poorer.
So Complex that Advisers Can’t Explain Them
The cover of an ILAS brochure is designed to induce feelings of trust and comfort. The inside is meant to inflict confusion.
The pages are densely-worded and loaded with manipulative jargon and difficult equations that allegedly “illustrate” a deliberately complex and deceptive fee structure. These brochures are intimidating, difficult to comprehend, and easy to misunderstand. They are designed to thwart average, inexperienced investors from discovering how badly they’re about to be screwed.
In a recent radio interview with RTHK, Jasper Moisewitsch, a journalist from SCMP, said, “We’ve tried to take [ILAS] brochures and then break them down and explain them to readers, and they just defy explanation. We’ve even brought in once an IFA to look at this and explain it, to kind of reverse engineer these things, and you just can’t. It’s impossible. It’s just super complicated.”
To illustrate his point, have a look at this excerpt from a Zurich Vista brochure:
Although the above equation is construed as a penalty charge calculation, it is actually the key to determining the true value of one’s investment. Even if some people are able to do the math, few will understand what the solution really means. One has to be clever enough to see through the deceptive terminology.
A Rube Goldberg Machine
According to Wikipedia, “A Rube Goldberg machine…is a deliberately over-engineered or overdone machine that performs a very simple task in a very complex fashion”. The phrase originated from the drawings of a cartoonist named Rube Goldberg.
Contractual savings plans are like Rube Goldberg machines, except their deliberate complexity is intended to obfuscate and deceive, not to entertain. The key to reverse engineering them is to determine the “very simple task” which they perform in a complex manner. That task is to separate investors from large portions of their money as quickly as possible without investors realizing it.
A Rube Goldbergian Upfront Charge
All of the complex machinery of a contractual savings plan is best understood as a deliberately over-engineered upfront charge. The complexity makes it virtually impossible to precisely calculate the size of the charge. It also allows investors to believe they are genuinely saving and significantly profiting from “free” bonus units, when they’re in fact being swindled. The upfront charge is so well-concealed that many insurers have the audacity to claim that the charge doesn’t exist. Here is an excerpt from Zurich Vista:
Adding to the confusion, almost every insurance company uses a different fee structure and a unique vocabulary to describe its plans.
However, the differences are superficial. The core structure of most plans is basically the same.
A Summary of the Complex Structure
(If some readers want to skip this section, I totally understand.)
Many investment products have a single account value and a single easy-to-understand management fee.
Contractual savings plans, on the other hand, are monstrously complex. In place of a transparent upfront charge, they have:
an initial contribution period (in which all contributions are guaranteed to be consumed by fees), an initial account (with a misleading and grossly overstated value), initial units (which are mostly if not totally worthless, since these units really belong to insurers), bonus units (which are bogus), an administration charge (which is deducted from worthless initial units), an exit penalty (which is really an entrance fee), and a target contribution period (which is really an exploitative lock-in period).
The initial contribution period (ICP) ranges from several months to a couple of years, depending on the length of the lock-in. All premiums paid during this period are called initial contributions, and this money is supposedly invested in real fund units, which are designated as initial units deposited in the initial account. Usually, “free” bonus units are also placed in the initial account. All units in the initial account are subjected to a very high annual administration charge and sometimes other charges as well. If policyholders request to cash in units from the initial account before the end of their target contribution period, they’ll be slammed with an exit penalty, which can be as high as 100%.
These deceptive upfront features are in addition to accumulation units (which are bought with premiums paid after the ICP), an accumulation account (which holds the accumulation units), an investment administration charge (applied to units in the accumulation account and sometimes also to units in the initial account), a policy fee (which is like an ongoing upfront charge applied to every monthly contribution), underlying fund charges (which are collected by fund managers and sometimes by the insurance companies), and a death benefit (so small it is meaningless).
This convoluted, complex mess is obscenely superfluous and accomplishes nothing but confusion and misunderstanding, which is exactly what it was designed to do.
A Fraudulent Account Statement
An ILAS account statement typically says nothing about fees or their inevitable impact. The statement only shows a phony account balance, which is the only thing that most investors will ever look at and can hope to understand, as the policy brochure is beyond their comprehension.
Below is a copy of my girlfriend’s Harvest 101 Investment Plan annual statement. It shows that she has profited by about 18.5%, mainly because of “free” bonus units. (She invested $12,000 of her money, and Standard Life supposedly invested $2,400 of theirs.)
On the surface, it looks like she made a great investment. An 18.5% profit!!!
The truth is that she has been swindled out of almost all her money. Even though her account shows a balance of more than $14,000, its real value is less than $1,700. If she cashes in “her” fund units, Standard Life will claw back the “free” bonus units and apply an 86% exit charge to the remaining initial units.
Just one month before this annual statement was issued, her investment was totally worthless, as Standard Life applies a 100% exit charge prior to the plan’s first year anniversary.
Initial Units are Not ‘Locked Up’ for Your Benefit
Many ILAS policyholders and ILAS salespeople are under the false impression that initial units are “locked-up” like MPF funds (Hong Kong’s mandatory retirement savings scheme).
Salespeople often construe the “lock-in” as a type of forced savings, which prevents investors from spending their money before they need it in the future, such as for retirement or a child’s college expenses. They think investors won’t lose any money if they wait to cash in their funds at the end of the lock-in period.
This is not true.
Initial units are not “locked up” to incentivize savings. They are “locked up” to guarantee that they’ll be totally, or almost totally, consumed by administration charges. This allows insurers to “lock in” their profits.
Because most people are usually so distracted by the big scary exit penalty, and they have so much faith in their phony account balance, they usually don’t notice how they’re being slowly bled dry.
Damned if You Exit, Damned if You Don’t
An ILAS lock-in period is an amount of time long enough for insurers to extract at least as much money through annual administration charges as they can extract from a one-time exit penalty. Insurers are guaranteed to keep most, if not all, of initial contributions, whether or not policyholders hold their policies till the end of the lock-in. This fact is far from obvious, and I have only seen it disclosed in one ILAS brochure, that of Generali Vision. However, Generali’s disclosure is omitted from the Key Facts Statement, and it consists of only a few sentences buried in a bunch of gobbledygook. Many investors probably overlook the disclosure, and those who find it may not comprehend what it means.
All other ILAS brochures I’ve seen disclose even less than the Vision. Investors are given a matrix of fees whose meaning, purpose, and full implications are deliberately obscured. Most people, including salespeople, are unlikely to have the time, motivation, or ability to make sense of it.
I’ll attempt to cut through all the smoke and mirrors and explain a couple of policies in plain language, starting with Generali Vision, since it contains a semi-disclosure about the devastating impact of its insane fees.
Example 1: General Vision
A 30 year Vision policy requires the first 28 months of premiums to be “invested” in initial units. Exactly 100% of those initial units are predetermined to be consumed by fees. They are either nibbled slowly by administration fees or swallowed whole by an exit penalty. This means that all initial units, in effect, belong to Generali. As far as investors are concerned, their first 28 months of payments are flushed down the toilet, eaten by fees and commissions.
Here’s how it’s explained in the Vision brochure:
Example 2: Harvest 101
Standard Life’s Harvest 101 Investment Plan is more deceptive than Generali’s Vision.
Unlike Vision, Harvest 101’s fee structure isn’t designed to consume all initial units. Instead, it’s designed to leave a small fraction of initial units remaining, both at the end of the lock-in period or after an exit penalty. If the surviving initial units grow in value fast enough, it is theoretically possible (but highly unlikely) for investors to receive an investment return which is equal to or greater than the amount of money they paid during the initial contribution period. This makes it seem plausible that initial units are “locked up” like MPF, even though they’re not.
Here’s how the Harvest 101 administration fee and exit charge are presented in the policy brochure:
One way to quickly estimate how much Harvest 101’s 6% administration charge will cost investors over 25 years is to simply multiply 6% by 25 years. The answer is 150% of initial contributions, which is equivalent to 3 years of savings. (This estimate assumes the value of the initial account has a growth rate of 0%.)
Another way to get a sense of the impact of the 6% administration charge is to compare it with the annual reduction in exit penalty, which is 3 to 4%.
Think of it this way: Every time 3 to 4% of initial units are “given back”, another 6% has been taken away via the administration charge.
Investors are screwed no matter what they do. Their best option is usually to take the pain and exit as quickly as possible. By cutting out the middleman (the insurer) and putting their remaining money directly in unit trusts or low-cost index funds, they’ll be guaranteed to get better returns.
Initial Units Are Not Yours
In the case of Vision, its immediately clear that 100% of initial units belong to Generali. In the case of a 25-year Harvest 101 plan, calculating takes some time, but it’s possible to determine that more than 75% of initial units (including so-called “bonus” units) belong to Standard Life. The chart below illustrates:
The chart shows that even if investors avoid the exit penalty, less than 25% of initial units will remain at the end of a 25-year lock-in. Those remaining units are the only ones that ever really belong to investors, despite what the account statements suggest.
I made the above chart with Harvest 101 in mind, but the numbers are roughly the same for other policies with similar charges.
For example, Friends Provident’s Premier also has a 6% administration charge. The only difference is that the ICP is 18 months instead of 24 months.
Zurich International’s Vista plan is more complex because initial units are subjected to 3 different charges. Two of the charges are collected by selling units. The other charge is collected by reducing the dollar value of units. The charges add up to 5.5% per year, so they will cause almost the same amount of damage as Harvest 101’s 6% administration charge.
A Dirty, Deceptive Accounting Trick
Since insurers absorb most (sometimes all) initial units through fees, it raises the question: Why do they go through the trouble of buying them? Wouldn’t it be more efficient if insurers simply put initial contributions straight into their pockets via a transparent upfront charge, rather than go through the administrative headache and extra expenses of buying fund units, keeping track of their value, and selling off a small portion of them every month until most or all of them are gone—only to achieve the same result?
To any sane person, this slicing and dicing and juggling of units looks absurdly futile and costly, like something out of a Rube Goldberg cartoon. (Someone please draw it!) However, it clearly serves a purpose.
By putting initial units into investors’ accounts, insurers misrepresent these units as belonging to investors. This causes investors’ account values to be artificially inflated, which gives investors the impression that they are genuinely saving money and even profiting from growth in units that don’t belong to them. Due to faith in the integrity of their fraudulent account statement, and due to an inability to comprehend the complexities of their policy documents, investors never realize that they are being swindled.
Do Insurers Secretly Pocket Initial Contributions?
(Some Insiders Think They Do)
Several months ago, I received an anonymous message from someone who claimed, in essence, that some insurers just stick initial contributions in their pockets. They don’t really invest the money in funds selected by investors. If true, it means that investors’ account statements are even more of a fraud than I had previously thought. Here’s what the source said:
“The account statement that an ILAS provider issues in which they show the number of units they hold for you (which is inclusive of the bonus units) is completely false/incorrect/misleading. The provider is issuing you and other customers a knowingly false/incorrect/misleading statement because in reality they do not hold the number that they mentioned in the statement. In fact, they hold a much lower percentage (25-40% only). All you need to do is ask the provider to confirm if the contents of the statement are correct, and when you do not receive a clear answer, then you can approach OCI or court (as issuing a false/incorrect/misleading statement is an offence in HK).”
Actually, I’m not sure that this person was referring specifically to initial units. He or she may have been talking about accumulation units as well. But I assume he or she meant initial units, since this claim is entirely plausible. To illustrate why, let’s look at Generali’s Vision plan again:
We know that all initial contributions are guaranteed to eventually go into Generali’s pockets, except in a small percentage of cases when a policyholder dies, which obligates Generali to pay out a death benefit (equal to the account value + 1%). Thus, if Generali wanted to, it could falsely claim to purchase funds with investors’ initial contributions while actually using this money for other purposes, such as for paying commissions. If Generali did this, it’d still be able to give back all the money owed to investors, as long as it set aside a bit of money to pay an occasional death benefit, and a so-called loyalty bonus.
One of my acquaintances has been contacting Generali for months, repeatedly asking whether or not they use initial contributions to buy real fund units. Generali has thus far refused to give him a straight answer.
I personally contacted Standard Life to see if they would confirm whether or not they use 100% of initial contributions to purchase real fund units. The person I spoke to on the phone said that, yes, all the money was used to purchase real fund units. So either the rep was telling a lie (perhaps unknowingly), or my anonymous source doesn’t know what he or she is talking about.
I also called Zurich and spoke with two different reps. I asked, “How can Zurich pay 25 years worth of commissions upfront and still afford to invest initial contributions plus a 125% bonus into underlying funds? It seems mathematically impossible!” Both reps finally admitted that they did not know the answer.
I contacted the Insurance Authority to see if anyone there knew the truth. They said they couldn’t tell me even if they did know. If anyone would like to try to make sense of their reply, here it is:
“Due to the secrecy provision in the Insurance Companies Ordinance, we cannot comment on individual insurance companies. However, please note that under the current legal and regulatory requirements, authorized insurers must set aside sufficient reserves to meet their insurance liabilities arising from the policies. They must also have adequate assets to match with these liabilities (in terms of currency, amount, duration etc) based on sound actuarial principles and practices. An insurance policy is a contract between an insurer and a policyholder. Insurers must fulfill their contractual obligations in accordance with the terms and conditions of the insurance policies. In the case of ILAS, insurers have the contractual obligations to pay the specified benefit to the specified beneficiary in case of the death of insured, or pay the surrender value / maturity proceeds to the policyholder in case of surrender / maturity of the policy.”
My takeaway from the Insurance Authority’s reply is that insurers must do what they say they will do in the policy documents. Most, if not all, policy brochures explicitly say that insurers purchase real fund units corresponding to all units in the account. If insurers are not investing initial contributions, then they are violating the terms of the contract, and the contracts should be annulled.
Here is an an excerpt from the Generali Vision brochure in which Generali claims to invest all contributions, including initial contributions:
Previously, I thought units in an ILAS policy were designated as “notional” to highlight the fact that they are owned by the insurer, rather than the investor. Perhaps the truth is that ILAS units are labeled as “notional” because they are literally notional, i.e., imaginary and not owned by anyone. I was recently talking to a smart guy who had some insightful thoughts on this issue. He said:
“Personally, I don’t think insurers invest initial contributions – they had to pay all those commissions upfront, which means it’s a known expense equal to the first year’s contributions. Imagine they invest that money in 2007, and then watch it fall in half, or worse, since a lot those advisors selling their funds pick incredibly aggressive portfolios, including funds that go bankrupt. Advisor commissions are safe and the insurance company loses? I don’t think so! Insurance companies’ expertise is in managing risk – and the last thing they’d want to do is risk their money on a bunch of unqualified advisors throwing darts at random funds.”
I agree with him, but I can’t prove he’s right. If anyone knows the truth and can provide supporting evidence, please contact me.
A Measly Death Benefit Does Not Legitimize a Fraudulent Account Statement
Usually, an ILAS death benefit equals “101% of the account value”. Many ILAS policyholders incorrectly believe that, if they die, their loved ones will get all the money in their account, plus an extra death benefit of “101% of the account value”. This misinterpretation is entirely understandable, given that the truth is so surprising.
If a policyholder dies, their loved ones will get all the money in their account, plus a measly 1%. When insurers say the death benefit is 101%, I think they are being deliberately ambiguous, in order to mislead people.
Here’s how the death benefit is shown in the brochure of the Harvest 101 Investment Plan:
As its name suggests, the “Harvest 101 Investment Plan” is an investment plan. It’s not a genuine life insurance product. No one would want to buy it for its paltry 1% life coverage, which is merely a small fraction of the annual fees. (My girlfriend paid over 13% in fees during her first year.)
The only thing investors care about is the value of their investment, and they expect this to be accurately expressed in their account statements. However, as I’ve already explained, the account statements of contractual savings plans are a total fraud.
This is why I believe that, in an attempt to legitimize fraud, insurers made the death benefit roughly equal to the phony account value. This allows them to argue that the account value isn’t phony—it is an accurate representation of the death benefit.
The problem with this argument is that no one cares about the puny death benefit, and no one intends to die to make use of it. The account value should tell investors how much their investment is worth now, not how much it is worth if they are dead.
If insurers wanted to be transparent, they could calculate the death benefit in multiple different ways that don’t involve a phony account value.
For example, the death benefit could be equal to:
A) contributions + 1%
B) a non-phony account value + 1%
C) the greater of A or B
These alternative death benefit calculations would generate a payout roughly similar to the confusing 101% payout, but it wouldn’t mislead investors about the real value of their investment.
Insurers simply have no good excuse for their accounting shenanigans. The 101% death benefit is merely a fig leaf, and it does not cover up the fraud. It is part of the fraud.
A Phony Exit Penalty Scares Investors into Giving Insurers More Money
An ILAS “exit penalty” is not an exit penalty. It is an abuse of language. First of all, the damage is done upon entrance, not upon exit, since initial contributions are predetermined to be annihilated by fees as soon as the contract is signed. Second, because there is no escape from the fees, insurers can do nothing more to “penalize” investors. In most cases, investors have nothing to lose or fear by “surrendering” their policy. They can achieve superior returns by moving whatever money is left into a cheaper investment vehicle where growth won’t be annihilated by fees.
I believe insurers created the so-called “exit penalty” for two reasons. (1) In conjunction with the administration fee, it disguises the charges which are imposed upfront. (2) By construing losses as being triggered by an exit, rather than as a condition of entrance, insurers are able to exploit a powerful feature of human nature known as loss aversion.
Research suggests that the motivational force of fear of loss is twice as powerful as desire for gain. This means insurers can keep investors under their control far more effectively with the threat of punishment (even if it’s imaginary), as opposed to using other tricks, like the temptation of distant loyalty bonuses.
The exit penalty does its work by deceiving investors into fearing they will lose initial units (which actually don’t belong to them) if they “surrender” their policy early. To avoid this imaginary loss, investors keep their money under the management of insurance companies, which allows insurers to keep collecting high annual management fees. In the most exploitative cases, investors are manipulated into sending even more money to insurers to avoid the phantom penalty.
Take Zurich Vista as an example. If investors suspend payments for 3 consecutive years, an exit “penalty” is automatically triggered. The only way to avoid the “penalty” is by sending Zurich more money.
Promotion Scam: Bogus Bonus Units Lure Investors Into a Trap
Many insurance companies offer investors free fund units as an enticement to buy policies, sign longer contracts, and contribute larger amounts of money.
Zurich Vista pays bonuses as high as 125% of the first year’s contributions. Below is an excerpt from the Vista brochure showing Zurich’s standard rates. Zurich often (maybe always) pays bonuses which are higher than the standard rates listed in the brochure, so that they can con investors into thinking they’re getting a special limited-time offer.
At first glance, these promotions look like great bargains, like free money, since the bonus units can be cashed in at the end of the lock-in. However, if one does the math, one will find that nothing is free, and the offer is a scam.
Bonus units are usually placed in the initial account. As explained earlier, about 75% of these units will be reclaimed by administration fees over 25 years (or by an exit penalty), which means these units never really belong to investors.
To illustrate, let’s suppose an investor buys 100 units because an insurance company tells him he will get 20 bonus units for free. In the investor’s mind, and on his account statement, he owns 120 units. However, 90 of those units (75%) are predetermined to be eaten by fees. This means he actually owns about 30 units. The gift of 20 free units is just a fantasy that exists only on paper. The mathematical reality is that he was swindled out of 70 units!
A Bigger Bonus Means Bigger Upfront Losses and Higher Risk of Early Termination
Investors are told that by signing a longer contract, they will get a better deal, because they will get more bonus units. This is a lie.
Longer contracts mean proportionately higher commissions for intermediaries, which means clients are stuck with longer ICPs, more initial units, longer lock-ins, and higher so-called exit penalties to pay for those extra commissions. In other words, clients are tricked into flushing a lot more of their money down the toilet upfront.
When investors are tricked into signing a longer contract, they are exponentially increasing the likelihood that they will surrender their policy early and not receive the decades of service which they unknowingly paid for in advance.
Insurers are experts at pricing risk, so they know they are ripping off investors when they offer phony bonus units in exchange for taking on the extraordinarily high risk of signing a longer contract.
It’s unreasonable to expect anyone to be able to commit to anything for 25 years, let alone making monthly payments to a parasitic insurance company. Inevitably, most people run into problems, such as a job loss or a medical emergency, and they will need all their spare cash. But more often, policyholders figure out they were scammed, so they terminate their plan and move their remaining money elsewhere.
Bonus Units Facilitate Policy Twisting
For some salespeople, swindling a client once is not enough. Twisting is an industry term for convincing a client to sell one policy to raise money to buy another policy. This generates a second commission. Bonus units are a handy tool for pulling off this feat. I’ve heard stories of advisers claiming that the bogus bonus units of a new policy are so generous that they more than offset the phony exit penalty losses incurred from selling the old policy. Because policy documents, fee structures, and account statements are so full of smoke and mirrors, investors don’t realize how badly they’re getting screwed when they fall for this trick.
Bonus Units Conceal a Sinking Account Value So Investors Don’t Panic and Rush for the Exit
My girlfriend’s Harvest 101 plan was clobbered with more than 13% in fees during her first year of contributions. She had to pay:
- a 6% policy fee
- a 6% administration charge
- underlying fund charges greater than 1%
For an ILAS savings scam, this is not unusual.
Due to extortionate fees, investors’ phony account values will almost always decline in the first year, as stocks rarely increase in value by more than 13%. Seeing immediate losses after the first month or two of contributions would likely cause many investors to consider terminating their plan.
To prevent investors from panicking and heading for the exit, or at least to prevent them from complaining, insurers give investors enough bonus units during the ICP to more than offset the downward pressure exerted by fees. This gives investors the impression that they are earning easy profits. Once the ICP is finished and investors are totally “locked in”, the bonus faucet shuts off.
Reality usually doesn’t sink in until years down the road.
Bribing Advisers to Swindle Investors:
The Secret Purpose of “Target Contribution Periods”
Target contribution periods (TCPs) typically range from 5 to 30 years. Sometimes the TCP is called a “contribution payment term”. Insurers pretend that this range of “targets” exists for the convenience of investors who have different investment horizons.
A 30-year plan is supposedly the best option for a young person, and a 5-year plan would be suitable for someone who is 5 years away from retirement.
Standard Life tells investors, “You may choose the duration of your Contribution Payment Term…to suit your investment needs.”
The truth is that longer payment terms aren’t made to suit younger people’s investment needs. They are made to swindle victims out of more money more quickly, to satisfy insurers’ lust for profit.
“Target” period is just a code word for “lock-in” period. Longer lock-ins guarantee that insurers earn more money, either through administration fees or through higher exit penalties (usually the latter). Longer lock-ins generate higher profit margins, but their main purpose is to boost sales volume. Insurers accomplish this by passing along most of the profits to their salespeople, in the form of gargantuan upfront commissions. This creates a very strong incentive for salespeople to flog savings plans, especially those with maximum contribution periods.
South China Morning Post recently reported that brokerage commissions for contractual savings plans are equal to 4.2% of all the money that a client is supposed to contribute throughout the TCP.
A 25-year TCP thus generates a commission which is 5 times larger than the commission generated by a 5-year TCP, and hundreds of times larger than the upfront commission generated by a non-contractual plan.
I created a chart that illustrates how much profit insurers and brokerages can earn from TCPs of varying lengths. Clearly, longer TCPs result in larger immediate profits for everyone except the client. I rounded some numbers and made a few estimates, but I believe the chart below is roughly accurate.
When insurers and salespeople make larger upfront profits, the profits come straight out of investors’ initial contributions. TCPs are therefore nothing more than a tool for deceptively transferring wealth from investors to swindlers.
As I mentioned at the beginning of this essay, when insurers pay decades worth of commissions to advisers in advance, even though investors haven’t paid more than a single month of premiums, insurers and advisers are clearly breaking Hong Kong’s anti-bribery laws.
Advisers have a legal duty to prioritize their clients’ interests above their own. They thus have no justification for swindling clients with longer TCPs. If they do, and they accept large commissions for doing it, then they and insurers are engaging in corrupt transactions which are forbidden by Section 9 of the Prevention of Bribery Ordinance and are punishable by up to 7 years imprisonment and a fine of $500,000 HKD.
I believe it’s only a matter of time before the Independent Commission Against Corruption (ICAC) starts cracking down. Maybe they already are.
Whether in brochures or on company websites, insurers typically exaggerate or misrepresent the few benefits of ILAS products while minimizing or omitting the drawbacks.
Below is a screenshot from Standard Life’s website. If something seemed manipulative or misleading, I circled it in red and numbered it.
Starting from top to bottom, here’s why the claims in the above webpage are misleading:
- Investing through ILAS has no “major benefits” for Hong Kongers. At best, the benefits are minor, and the disadvantages are overwhelming. The vast majority of people have no reason whatsoever to touch these products.
- Combining “investment with life protection” is a huge ripoff because it allows insurers to collect extortionate middleman fees for an unneeded “management” service that adds no value. Moreover, the life protection that most ILAS products offer is so small it’s meaningless (usually only 1% of the account value).
- Claiming that ILAS offers “flexibility of investment” is a bold-faced lie. Most of these products lock up investors for 5 to 30 years, and early exit triggers extortionate penalties. (Actually, as I explained early, the lock-up and exit penalty are phony. Their purpose is to hide upfront charges.)
- Claiming that ILAS offers “transparency of investment” is another bold-faced lie. It’s not even clear whether insurers are using investor’s money to buy real fund units.
- Claiming that ILAS offers “transparency of investment cost” is a third bold-faced lie. The account statements are fraudulent, and the fees are so complex that only mathematicians can calculate them.
- ILAS doesn’t offer a truly “wide range of investment choices”. Most, if not all, of the available funds are actively managed funds and have high fees. Low fee index funds are conspicuously absent.
- ILAS fees are so high it’s absurd to call any of its features “free”, including fund switching. Plus, the bid-off spread—a kind of switching fee—is not waived on all funds.
- Rather than “enhance the potential return”, bonus units cause larger losses since these units are used to convince investors to sign longer contracts, which means flushing more money down the toilet upfront.
On its website, Zurich boasts about Vista winning an award for ‘best regular premium investment product’ (i.e., best ILAS savings plan). The award was received at the International Life Awards, which is sponsored by the trade publication, International Adviser.
If investors don’t know anything about ILAS, this award might sound impressive.
But if they knew all the facts, they would be disgusted.
Almost every single product in the ‘regular premium’ category is as a scam. The only exception that I know about is Royal Skandia’s Managed Capital Account, since it’s the only one that doesn’t defraud investors out of years of savings.
Interestingly, the Managed Capital Account didn’t win an award.
Maybe you are wondering, “Why would a trade publication like International Adviser offer an award for best savings scam?”
The answer is eloquently explained in the book, The Great Expat Financial Planning Ripoff, in a chapter called, “The Questionable Role of the Financial Press”.
“A number of specialist publications cater to the Financial Advisory industry in general and several to the Offshore Financial Advisers in particular. Most of these journals are distributed free. For income and profit they clearly rely heavily on the advertisements of offshore product providers such as banks, building societies, mutual fund companies and inevitably, the offshore Life Assurance Companies. From time to time these magazines will publish appraisals of products offered by the Offshore Insurance Companies and a favorite gimmick is the awarding of prizes to winners in various product categories. Awards the Insurance Companies then use for promotional purposes.”
“Let’s get the above clear. A Financial magazine sets up an ’independent’ panel to assess the value of a number of Offshore Insurance Company products. The panel pronounces on which it considers best products. Awards are handed out, back-slapping all round. Then the winning Offshore Insurance Companies pay for advertising in the self same magazine that began the process, quoting the Best Product awards they have just received as evidence of how wonderful the products are. Is this an incestuous relationship or what?”
“Are these eminent award panel members a bit short of ability in the simple arithmetic department? They may be specialists in financial matters but they seem unable to recognize what anyone of average intelligence, claiming no specialized expertise but in possession of all the facts, can clearly see as a rip-off.”
“These contractual products are structured for no other purpose than to create scope for unjustifiably big commissions for Financial Advisors who care little or nothing for their clients. The ‘experts’ should take that into account. It may be nice to pop champagne corks at the award ceremonies but by not recognizing and acknowledging all these shortcomings those who give their stamp of approval to such rubbishy products make themselves part of the long chain of participants in what is little better than a multi-million dollar world wide scam.”
The last time I checked, International Adviser was displaying a large advertisement purchased by Friends Provident.
One of IA’s editors explains that the International Life Awards “honour excellence in product design” and the judges are “a carefully selected group of IFAs representing the cream of the industry.“
Presumably, “cream” is a reference to the best salesmen, not the best fiduciaries. Salesmen like products which are easier to sell, so “excellence in product design” must mean excellence in con-artistry.
The winner of the Readers’ Choice award is voted upon by readers. However, if readers are policyholders, then they are banned from voting. Only salespeople are allowed to vote. According to the entry form:
“We will only accept responses from financial advisers or wealth managers who recommend cross-border life products to their clients.”
That’s very convenient for insurers. I’ve never met an informed and happy policyholder.
Take Action Now
If you have read this entire essay, then you should understand why contractual savings plans are a scam.
I have created a petition asking the Hong Kong police department to charge insurers with fraud. If you agree that the police should do this, then please:
Millions of people have been swindled worldwide, not just in Hong Kong. Any lawyers, politicians, or concerned citizens who are interested in helping victims get their stolen money back, please contact me. My email is firstname.lastname@example.org.