Bank navigates wrong path with insurance bias

Citi offers expensive product and an insurance plan, but the adviser did point out high charges

PUBLISHED : Monday, 29 July, 2013, 12:00am
UPDATED : Monday, 29 July, 2013, 3:53am

The South China Morning Post continues its mystery shopper series, this week looking at Citi.

As with previous rounds, our reporter poses as a 37-year-old expat mother of two wanting to invest HK$10,000 a month.

Financial needs analysis/risk assessment: The mystery shopper explains that she wants to save for her retirement. The adviser asks if she is looking for an investment or an insurance plan. The shopper asks for a suggestion and the adviser shows an insurance plan with principal protection. He says a pure investment could involve losses.

"If you are saving for retirement, I suggest you use a secure method. If you use an investment, after 20 to 30 years the value may be smaller than your original principal," he says.

The adviser performs no risk analysis on the shopper as she does not have an account at the bank. However, he does ask at what age she intends to retire.

Investments offered: The adviser suggests the shopper take out the AXA FlexiWealth Protection Plan 12, a whole-of-life plan. These lock individuals into a long-term savings plan involving insurance.

He suggests that the shopper take it out for 12 years with the option to extend to 20 years. Premiums would be HK$10,000 a month.

The shopper says she does not want life insurance, but the adviser says the insurance element is a very small part of the plan. Even so, it will take until year 11 for the total value of the policy, including a non-guaranteed element, to be more than the premiums paid in.

If the shopper dies during this time, the life insurance payout will be only slightly higher than the premiums paid. The policy breaks even in year 11. The shopper says this is not what she is looking for, and asks about investments.

She is taken to a new room, but continues to see the same adviser. The adviser suggests the AXA Apex Select InvestLife Plan. He shows information on the plan to the shopper, but he will not talk her through the plan until she completes the risk questionnaire, which she cannot do until she opens an account. The product is an investment-linked assurance scheme that still contains a life insurance element, but enables the shopper to choose from more than 100 mutual funds in which to invest. If she surrenders the policy during the first year she will lose 90 per cent of her contributions, falling to 50 per cent in year four.

Fee disclosure: The adviser says there are no charges on the AXA FlexiWealth Protection Plan but premiums for the life insurance element will be deducted from contributions. He says he receives no commission from the sale.

The adviser warns the shopper, without prompting, that the AXA Apex Select InvestLife Plan has higher charges than the other product he suggested. The fees are indeed steep. They include a 12 per cent a year policy maintenance fee on the annualised basic premium paid for the first 10 years, a 1.2 per cent investment management fee, and an insurance charge if the capital protection life benefit option is chosen. Overall, he says charges are about 13 per cent a year, and for this reason he suggests that the shopper not take out this policy.

Verdict of mystery shopper: While it is hard to judge without doing Citibank's formal risk analysis, the shopper felt the conversation did not fit her attitude to risk. She might have been quite happy to weather some volatility in returns with a pure investment plan, in exchange for potentially higher returns, particularly as she was investing for a 30-year term.

The shopper was disappointed that, yet again, she was shown a whole-of-life insurance plan first. The second product was expensive and inflexible. It would be much cheaper to invest in mutual funds directly, rather than through an insurance wrapper.

However, the adviser was honest in pointing out how high the charges were on the second instrument.

IFA verdict: Glenn Turner, former chairman of the Independent Financial Advisers Association, says the adviser should have sought the shopper's views on education funds for the two children. If the children are aged six and eight, for example, and there is no education fund organised for them, he asks if retirement is the right priority for the mystery shopper. He says the adviser should have discussed basic issues such as these with the shopper before proposing any investment.

"Any process which is bereft of a good discussion about circumstances and family - that is, a decent fact find - will almost always see a product solution misfit. Since bank staff appear to be on a limited timeframe in dealing with one potential client, how can a banking distribution channel provide good product solutions?" asks Turner.

Citi's response: The bank said its advice was based on the limited information. On signing up a client, the bank does a comprehensive know-your-client assessment on their risk appetite, investment objectives and experience, existing financial situation and family status, a spokesman says. Only then will an adviser make final recommendations on a plan. He adds: "Insurance and investments are both integral parts of a well-balanced portfolio for long-term retirement planning."