When 5 years becomes 10
HSBC suggests investment-linked assurance scheme even after client says she does not want insurance
The South China Morning Post is conducting a mystery shopping series to test the quality of the financial advice offered by banks. This week we visit HSBC.
As in previous exercises, our reporter poses as a 37-year-old expatriate mother of two who wants to invest HK$10,000 a month in a pension.
And, as before, we summarise the shopper’s experience and get input from an independent financial adviser on how HSBC handles itself. We also include a response from the bank.
Financial needs analysis/risk assessment: An adviser starts with a chat about whether the mystery shopper wants a pure savings plan, or whether she wants a combined savings-and-protection scheme.
The shopper says she is open to both but that she does not want life insurance.
The adviser tells the shopper that investment returns are likely to be volatile, but acknowledges that they will be better than that seen on an insurance instrument.
A second adviser asks the shopper about her budget and for how long she wants to save. He then gives the shopper a risk-profile questionnaire. It is six questions long and covers investment experience, attitude to volatility and preferred asset allocation. It takes about five minutes.
Investments offered: The advisers say a unit trust best suits the mystery shopper, and they suggest one that focuses on Asia-Pacific.
They say a pure equity fund will be higher risk, while a bond fund will have lower returns. They then recommend a balanced fund, which they say is consistent with the shopper’s risk profile.
The advisers ask whether the shopper wants the fund to be in Hong Kong or US dollars. They advise that she should opt for US dollars, as this would give her access to the widest choice of funds.
They then recommend the Invesco Asia balanced fund. The advisers explain the fund well, stating that it is 67 per cent invested in equities, 23.5 per cent in bonds and the rest in cash.
About a third of the money is put into emerging markets. The advisers say the fund has climbed 36 per cent in value over the past five years.
The advisers also recommend that the shopper look at a five-year plan that includes an option to extend. Without skipping a beat, they then bring out HSBC’s WealthInvest Insurance Plan, which is an investment-linked assurance scheme, or an investment plan created by an insurance firm that includes insurance. The plan involves a minimum 10-year commitment.
Fee disclosure: The advisers say that the WealthInvest Insurance Plan comes with an annual management charge of 2 per cent, although that fee will drop by 0.8 per cent after 10 years. There is also a 2 per cent fee levied on the amount the shopper contributes each month.
The advisers warn that the shopper will face early redemption charges of up to half of the money invested if she drops out of the plan in the first decade.
The advisers say they will receive no commission from the sale of the plan.
Verdict of mystery shopper: The shopper felt that the advisers started well. They asked the right questions, such as how long the shopper would be saving for, how long she would be in Hong Kong, and in what currency she wanted to save.
They administered a risk profile questionnaire. On the basis of that information, they recommended a balanced fund that was well explained and in line with the shopper’s needs.
Then, seemingly against their own advice, they recommended the WealthInvest Insurance Plan. The shopper thought that this was inconsistent, because just prior to recommending the investment-linked assurance scheme, the advisers said the shopper should look for a five-year plan that gave her flexibility. But the WealthInvest scheme involved penalties if terminated within 10 years.
They also offered her a plan incorporating life insurance even though the shopper had specified that she did not want such insurance.
IFA verdict: Glenn Turner, the former chairman of the Independent Financial Advisors Association, asked why the HSBC advisers offered life insurance without first discussing the risks which the shopper wanted coverage for.
He also asked why the advisers did not inquire about the finances of the shopper’s husband, given that she identified herself as a housewife.
HSBC’s response: A HSBC spokesman said the WealthInvest Insurance Plan was suitable for people who want to save for retirement. The bank believed that was what the shopper wanted “based on the provided information”.
He said the plan’s advantages included a lock-in period, which encouraged investment discipline, and the flexibility to allocate money to different funds.
The fund included benefits such as capital protection. While the life insurance involved a cost, it promised a payout to a beneficiary in the event the client died.
He said that the bank advisers offered both a unit trust and an insurance plan to give the shopper choice. “For educational purposes, the staff in general need to elaborate the benefits of different products,” he said.