Investment-linked assurance schemes (ILAS) are one of the most popular investments in Hong Kong. If you've ever taken out a pension or savings plan, there is a distinct possibility you own one without having heard the term. However, if you are a financial adviser or private banker, you are likely intimately familiar with the investment as they are big sellers and can carry high fees.
Once a client commits to an ILAS plan, it is difficult to exit. They can last 20 or 30 years and, in the initial years at least, investors may incur hefty penalties for leaving early.
The inflexibility, long commitment and potentially high fees would be fine, assuming that ILAS plans are well explained and completely transparent. So long as people know precisely what they are getting into, no problem.
To see if that is indeed the case, I recently conducted a mystery shopping exercise at three major consumer banks - HSBC, DBS and Bank of China - to see how well banks explain ILAS products, particularly the tricky matter of fees.
I presented myself at each of the three banks as someone looking to invest HK$10,000 to HK$15,000 each month. I have no specific goal for the money but I am looking for an investment of 10 or more years. I say I have no experience in investing.
Each of the three advisers recommended an ILAS plan to me. Only the HSBC adviser suggested an alternative (a unit trust).
The HSBC adviser proposes its WealthInvest Insurance Plan, an ILAS offered by its insurance arm.
The plan offers 58 funds for investment, each with diverse assets and strategies. Investors can switch in and out of these funds without incurring charges, the adviser says.
Speaking with admirable clarity, she says the fees of the plan are typically around 5 per cent a year.
But there is a lot of complexity behind that number. The product's official literature states that the product's main fees (for administration and 'asset maintenance') amount to an annual 2 per cent of the fund's value, calculated monthly.
There is an extra life insurance fee that varies according to the policyholder's gender and age.
These are just the direct fees. Beyond that, funds in the WealthInvest plan incur management, custody, trustee, and performance charges.
For example, the brochure notes that fund management fees on the underlying funds range from 1.5 to 1.75 per cent. (The brochure also reveals that 14 of the plan's 58 funds are managed by HSBC, suggesting the plan is a good source of investment money for the bank's asset management arm.)
Such fees are deducted from the plan's total returns, but are not directly charged to the client and, as such, are invisible.
Other charges may be indirectly levied on the investor, such as the bid-offer spread, which is the cost of trading in and out of funds. The product's brochure says 'the underlying funds ... may have separate charges including ... bid offer spread'.
So, while there is no direct 'switching charge' for changing funds during the lifetime of the investment, there are potentially indirect costs to switching funds.
The HSBC press office says there is currently no bid-offer spread applied to the underlying funds of the plan but that policy charges are reviewed periodically. It's another moving variable to the fund's overall fees.
Nevertheless, if the adviser is accurate, and the total fees - direct and indirect - add up to 5 per cent annually, the charges could easily take up most if not all the fund's returns. Assuming the plan generates a respectable return of 7 per cent, after fees I would be left with about 2 per cent.
Selling commissions on ILAS plans is a hot topic. Some financial advisers have spoken out about what they view as excessive income from selling the investments, which they think prompts advisers to recommend the product whether it suits a client's investment needs, or not.
When the HSBC adviser is asked if she gets any money for selling ILAS, she says no.
'We have sales targets and get paid commission for meeting them,' she says. HSBC communications clarified that, stating: 'Our staff earn incentives, including commissions, on total achievement of sales targets for a mix of products, including ILAS. We do not pay commission on individual products.'
Bank of China
The Bank of China adviser suggests an ILAS called the Tactics Investment Insurance Plan. I find the explanation of how the product works confusing.
The adviser does not mention the life insurance element, but instead says the first 24 months' premiums will be put into an A account, with premiums from the 25th month onwards going into a B account. I am told there are separate accounts because they have different charges.
I ask what happens to the money in account A and am given an explanation that I find confusing. I still have no idea what the purpose of account A is and whether I ever get the money back from it.
The plan can be taken out for five or 10 years.
I am told there is a promotion on at the moment, which means I will receive a bonus, and redemption charges are lower than normal. The bonus is equivalent to up to 10 per cent of the regular premium I pay on the policy, while a 'surrender charge' is waived during the first three months of the policy.
The adviser is initially reluctant to talk about charges and says he will talk about these later. When I push, he says charges will be 4.56 per cent a year, plus a US$60 annual 'policy fee'.
The Bank of China press office says sales staff are required to explain the product and the related fees and charges. The bank explains that the 4.56 per cent annual charge is, in fact, the sum of administration fee and maintenance fee of the plan.
The press office clarified that the admin fee, which makes up most (3.96 per cent) of that charge, is levied only during the first two years of the plan.
I say the fee sounds very high, but the adviser assures me that if I pick a fund 'with a stable rate of return', the charge is 'covered already'.
Bank of China's Tactics Investment Insurance Plan promotes 'free switching', allowing investors to switch in and out of 20 funds in the scheme without charge.
However, as with the HSBC fund, the product's brochure says that bid-offer spreads and 'switching fees' may be charged for the trading of the underlying funds.
The bank's press team declined to say specifically whether an adviser earns a commission on the sale of the ILAS plan. However, it did say that advisers' 'remuneration is based on a balanced approach, taking into account both sales performance, quality of service, and regulatory compliance'.
The final words of the adviser: 'You will need to think about it, but this promotion will finish at the end of March 28, so you need to make a decision quickly.'
The DBS adviser suggests an ILAS called the Global Investment-Linked Plan, which comes from Aviva, a British insurer.
The adviser's explanation of the plan, particularly the fees, is so complicated, it makes my head spin.
The brochure says there is a 4.48 per cent administration fee charged annually on the contributions made during the first 18 months, which are held in a separate account.
There is also a 1.52 per cent a year investment management fee charged on the whole investment, and a HK$50 per month policy fee. Beyond that, there are annual management charges and annual fund charges, which vary according to the investment funds I choose. When I say I think the charges are high, the adviser tells me I need to look at the features of the account, such as the access to 72 funds that it gives me, and the fact that I can switch between funds free of charge.
The plan advertises unlimited free fund switching. but, like the above plans, bid-offer spreads may be applied to the underlying funds.
The DBS press teams says 'that unlimited free fund switch with no bid/offer spread remains a product feature for the Aviva Global Investment Linked Plan'.
The product brochure clarifies that, 'We will not charge you a bid/offer spread under the plan. However, an underlying fund manager may impose such a charge on the underlying fund.'
So, is a bid-offer spread charged or not? It's unclear and part of the adventure of buying an ILAS.
The adviser tells me she will not earn commission if I take out the product.
DBS' press office says: 'As with similar policies in town, the bank as a group will earn upon completion of ILAS policy issues. For individual staff, we reward our staff based on their overall performance, not on sales of individual products.'
This mystery shopper found the ILAS plans presented at the three banks to be complicated, and the advisers' discussion of fees confusing.
The plans make heavy use of bonuses, staggered fees, deferred fees and hidden fees to make the key issue of 'what is the total fee?' extremely hard to pin down.
Different fees can apply to different stages of the plan, and there are other moving targets, such as insurance charges, or the penalties for early withdrawal from the plan.
There are, simply, a lot of fees to track and a lot of different scenarios in which different costs and/or bonuses might kick in.
The product providers do not do themselves any favours with their liberal use of jargon in the marketing information.
HSBC's WealthInvest plan, for example, makes reference to 'monthiversary', 'premium reduction factor', 'early encashment charge', 'account value', and so on.
It's a lot to try to understand, particularly as the plans can lock in investors for up to 30 years, requiring potentially large, regular contributions. The product could easily be the most important and permanent investment a person makes in their lifetime.
Given what's at stake, are banks sufficiently clear about the fees attached to ILAS, and their impact on returns? Given my recent experiences, this mystery shopper says no.