The charts above show that more than 65% of all new ILAS premiums paid in the first half of 2014 went into 25-year savings plans (or worse). The number was 47% in 2013. This is a major scandal, given that these plans defraud investors out of their first years of savings. (See here.)
The police and regulators would be negligent if they didn’t put an immediate stop to this.
5-Year Plans vs. 25-Year Plans
An adviser receives 5 years’ worth of commissions upfront when he sells a 5-year plan. He receives 25 years’ worth of commissions upfront when he sells a 25-year plan.
As the above data shows, advisers have a strong bias towards selling 25-year plans. This is unsurprising, given that the total upfront commission payout is five times larger.
The reason 25-year plans can pay five times more commission is because these plans defraud investors out of five times more money.
Given that advisers have a legal obligation to act in the best interests of their clients, advisers would almost certainly be screwed if a client ever tried to sue them for selling this toxic waste.
It’s also a miracle that the ICAC hasn’t yet started imposing fines and dishing out prison sentences, as the structure of these commission payments clearly violate the Section 9 of the Prevention of Bribery Ordinance.
A 5-year plan isn’t nearly as bad as a 25-year plan, but it is still a ripoff.
Non-contractual plans, like this one, do not defraud investors out of their first months or years of savings. It is the only type of ILAS product that should ever be sold, yet almost no advisers sell it, because it doesn’t pay several years of commissions upfront. Instead, these products pay commissions on a month-by-month basis. If a client decides to terminate such a plan, then the adviser stops receiving commissions. This commission structure forces advisers to earn their pay.
When an adviser sells a contractual plan, he locks in as much as 25 years worth of commissions immediately. The commission is financed by defrauding investors out of their first years of savings. 99.9% of advisers will never perform the service they were paid for. Most of them move to a different company or leave the industry within a few years. Even if they did stick around at the same advisory firm for 25 years, they are still virtually guaranteed to not have to do the work they were paid for. Nearly 100% of investors surrender 25-year plans early.
Index Funds & Fundsupermart
Non-contractual ILAS plans aren’t a scam, but they are still a rotten deal for most investors. The annual fees are unjustifiably high.
Hong Kongers have absolutely no good reason to buy funds through an insurance company. It just forces them to pay an additional and completely unnecessary set of outrageous middleman fees. Hong Kongers should always buy funds direct—not inside an insurance policy.
The vast majority of investors should buy low-cost index funds. The fees are literally just a tiny, tiny fraction of the fees charged in a non-contractual ILAS plan. Index funds also outperform the majority of actively managed funds (the type of funds offered in an ILAS).
If investors think they are smart enough to find the smartest fund manager, and they are determined to invest in actively managed funds, then they should use Fundsupermart—not ILAS.
Fundsupermart is similar to ILAS products in that it offers access to hundreds of funds with free fund-switching. However, Fundsupermart provides its service at a small fraction of the cost of ILAS. To learn more, see here.