Complex investment products

Complex investment products: Caution is advised

Be wary of complex investment products

Over the last few weeks I’ve had an increasing number of enquiries from readers about a new complex investment product offered by a life assurance company. Complex investment productIt offers access to low-cost, indexed investments with a fee structure that will apparently benefit investors. This is the latest in a long list of complex investment products created by life assurance companies to attract new investors. While I enjoy getting questions from readers, I always take a deep breath when they ask about new products from insurance companies.  I know that I will have to trudge through mountains of marketing-speak in trying to decipher if this new product will really be good for investors. So far, I have found that some of these complex investment products are better than others. But none of them have been compelling enough for me to place my or clients’ money in them.

Complexity is not an ally

If an investment product cannot be properly explained on one A4 page, you need to be very careful. If it takes a brochure of more than 10 pages, be extra cautious. It may just be a complex investment product. I am not implying that you are being scammed, but rather that there are potential pitfalls that you need to investigate and avoid, especially with complex investment products. The law does not protect you if a complex investment product provider can prove that you have been fully informed about an investment. This is why insurance companies issue massive contracts with their products and remind you repeatedly to read them. If anything goes wrong in future, they can simply refer you to clause 607 on page 724.

To me, simpler is always better with investments.

With complex investment products you, be aware of the implications of these products’ intricacies, as well as the usual investment risks. These are difficult enough to understand on their own. I cannot convince myself that complex investment products issued by insurance companies are totally favourable to you. I am more certain that they are good for the complex investment product provider. After all, they use teams of actuaries who spend time calculating probabilities of events and how the company can profit from them. I prefer to avoid dealing with investments created by actuaries because they understand the odds better than I do. I am not sure that I will always benefit to the same extent as the complex investment product provider.

Investment costs are declining

We all know that investment products have been too expensive for too long. Thankfully, I believe the tide is finally turning in consumers’ favour.

You can now buy a unit trust from an insurance company for a total annual fee of 0.59% per year, with no additional administration fees and a minimum debit order of R200 per month. (Don’t believe me? – Check out the SIM equally weighted Top 40 fund.) You can invest yourself, which means no initial fees or advice fees to insurance agents.

Five years ago I would never have dreamed of seeing one of SA’s largest insurance companies offering this type of investment. I feel this is a better bet than the Satrix Investment Plan, because I think the administration charges are too high for smaller investors. There are also high quality asset managers who will manage share portfolios for 0.50% per year and unit trust companies that will offer diversified unit trust portfolios with annual fees of 0.35% (to investors with more than R10m to invest). These are the fees that were being charged to multi-billion rand pension funds a few years ago.

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