Thursday, November 6, 2008

Manulife IncomePlus Hard Sell

A member of my extended family I’ll call Don has been hit with a hard sell to buy into a Manulife Financial’s IncomePlus annuity. This makes the recent articles from Canadian Capitalist about the cost of IncomePlus, comparing it to an all-bond portfolio, and the importance of stock dividends in the IncomePlus analysis quite timely for me.

IncomePlus is essentially a portfolio of mutual funds with very high MERs combined with an insurance component that adds even more fees. For an overall cost of about 3.5% each year, Don is guaranteed payments each year for the rest of his life of at least 5% of his original investment. For the first 20 years, this is just a guaranteed return of his inflation-ravaged capital.

If Don’s portfolio happens to grow despite the 5% withdrawal and 3.5% fee each year, there are defined times every three years when the portfolio locks in the gains, and Don’s guaranteed yearly income rises to 5% of the new portfolio size. Don would be counting on such gains just so that his income would keep up with inflation.

For Don’s income to match inflation, the mix of investments in his mutual funds would have to grow in value each year by inflation plus the 5% withdrawal plus the 3.5% fees. With a 75/25 mix of stocks and bonds, and if bonds beat inflation by 2% each year, stocks would have to beat inflation by about 11% each year. This is not likely over a long period of time. So, Don is not likely to keep up with inflation unless he dips into his capital and reduces future guaranteed returns.

Even using investments such as low-cost exchanged-traded funds (ETFs), it is difficult to design portfolios that provide investors with complete peace of mind due to longevity risk, inflation risk, and the risk of declining stock prices. Insurance companies can have a role to play in eliminating longevity risk, but any benefits to investors in the case of IncomePlus are more than offset by the ultra-high fees.

Seeing a bar chart of income stretching on indefinitely without ever going down is comforting only as long as you don’t think about inflation. If these charts were changed to take into account a plausible level of inflation, they would cease to be persuasive.

Canadian Capitalist asked “why then are advisors pushing their clients to buy these products?” I suspect he knows the answer, and it became clear to me after listening to Don. Don is contemplating a last decision about all of his savings. This includes not only the money controlled by the advisor who is pushing IncomePlus, but also his other retirement accounts. This advisor is going for the chance to get control of all of Don’s money for the rest of his life. That would give the advisor a big commission immediately and additional trailer fees indefinitely.

As far as I’m aware, Don hasn’t made a decision yet. I don’t like to tell people what to do with their money, because they know their business better than I do. But, it’s not hard to tell where I stand on IncomePlus.

10 comments:

  1. Great post.

    I have only recently started reading and participating in a few financial blogs. What I really like about this media is the ability to exchange information with other informed investors who aren't trying to make money off of my investments.

    It really bothers me, though, that the average person doesn't stand much of a chance against the financial services industry. Even the book store isn't much help. Someone trying to educate themselves is more likely to pick something from Gordon Pape on picking mutual fund winners than the few lonely copies of William Bernstein's "The Four Pillars of Investing".

    This IncomePlus scheme still gets my blood boiling. The average low-risk investor gets a pitch for IncomePlus which, as Michael James point out, will provide payouts that will likely be ravaged by inflation. Is that in the client's best interest? Obviously not.

    But does the average financial advisor educate their clients that to provide safety for a portion of their portfolio (the bond portion), they could phone a discount broker and get quotes to construct their own bond ladder of real return bond strips which would provide a fixed, inflation adjusted income stream? No, since no fees would go to the financial planner for that option. And by the way, you won't find any information or quotes for this on-line.

    Are they informed that they could call an insurance company and get a quote for an inflation adjusted fixed annuity, with options for guaranteed payment periods and survivor benefits? Nope. And again, you won't find much information or quotes for this on-line.

    Anyway, that's enough ranting. Btw, for U.S. residents, you can get an on-line quote for an inflation adjusted fixed annuity here:

    http://www.aigretirementgold.com/vlip/VLIPController?page=RequestaQuote

    ReplyDelete
  2. Iwonder: Thanks. Most people, including financial advisors, are basically decent, but they have to eat. Advisors tend to be unaware (or willfully blind) of better alternatives for their clients. Some advisors invest their own money in high-cost investments. When clients hand over full responsibility for their investments to someone else, they can't expect to be directed to low-cost choices.

    ReplyDelete
  3. Thanks for the links Michael. I looked into this product for pretty much the same reason: a friend was pitched this product, though she already works with a fee-based planner. I agree with you that this product just offers the illusion of safety because the chances of the income stream keeping up with inflation is pretty slim.

    ReplyDelete
  4. Michael,

    You don't have to tell Don what to do, but you MUST point out the fees.
    It's obvious to anyone that this specific advisor is not interested in Don and you would be doing him a favor to point him in the direction of how to find a competent advisor (you, for example).

    Please make sure he reads your post with the comments. That's not butting in. That's being kind to an under-informed member of your extended family.

    ReplyDelete
  5. Mark: You're right. Although I'd hesitate to call Don underinformed. He's a sharp guy and funny too! Don't worry -- we plan to discuss things when he gets into town.

    ReplyDelete
  6. I skimmed this post in my RSS reader, only to find a GoogleAd at the bottom for - you guessed it - Manulife IncomePlus. Classic.

    ReplyDelete
  7. Dillon: That's funny. I suppose that is consistent with my view that people should have objective information and make their own choice. However, if I had more control of these things, I wouldn't have a Manulife ad at the bottom of that article.

    ReplyDelete
  8. This shows how important good adviser or broker is. I am dealing mainly insurance, but I have to admit of course not ALL products on the market are good, some of them are even bad. And then it's the responsibility of an adviser to provide his client with full information (the question is, if the adviser understands...)
    This one financial product really doesn't seem so excellently (on the other hand, if stocks are hitting bottom now, I can imagine 11% growth in next years :), unfortunately, there are advisers who are looking just for the profit and don't care about long term relation with the client and their own reputation...
    Regards,
    Lorne

    ReplyDelete
  9. Lorne: Thanks for the insight from someone in the industry. Like any other endeavour, I'm sure that some insurance brokers are competent, some aren't, some are honest, and some less so. In the case of this particular product, it's hard to see how any client could benefit.

    ReplyDelete
  10. I invested heavily in this last year before the crash. (I was given the hard sell too). I guess I'm angry about learning that it is not likely to keep up with inflation like I was categorically promised it would by my trusted financial advisor at Edward Jones. I'm going to show him this article.

    But on the other hand, if I had bought, say, some ETFs hoping thier captial apprciation would grow to protect me from inflation I'd probably be even less successful at fighting inflation, right now due to big losses in the ETF share prices.

    Has any one ever had any experience getting the firm to switch you from Income Plus to the inflation-protected annuity that Iwonder mentioned?

    ReplyDelete