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WARNING !!!
I believe that anyone who has had the misfortune to invest via a guaranteed fund
in the past 5 years should take the trouble to haul out the documentation and peruse
the fine print VERY carefully.
There are many guaranteed funds in the market which do live up to their claims,
and probably have a place in the current markets (if you can handle the higher
costs associated with these products), however, every so often one sneaks through
which does not. Unfortunately, we (Brantam) have now been exposed to two such funds
from a large institution, and feel that some form of "warning" is required.
In this particular case that has come to light, although the company involved did
cover themselves in the fine print, once again the impression was given to the
unsuspecting investor that all was kosher, and that they would receive 100% of
their investment back at the end of the term (5 years). However, the quotations
used in the original illustrations assumed a 15% return on investment in an equity
portfolio, and we all know what has happened to equities over the past 5 years !
This, to my mind, is a serious case of misrepresentation. The really unfortunate
part of the whole issue is that their defence on being approached was (and I quote):
"…the product was approved by the FSB (Financial Services Board) at the time of
issue" and "…the process is well documented". I have two comments to this:
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The FSB is also liable here ! For anyone to approve a product that projects forward at a compound return of
15% needs to be castigated. It is a known fact that the insurance industry were
forced to revise their projections from 12% - 15% down to 6% - 9% (and some as
low as 4% - 6%). How could the regulatory authorities allow a unit trust based
investment, in an equity portfolio, to use a 15% projection? It is iniquitous
to say the very least, and for the company involved to use that as a defense stinks !
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The institution in question is linked to a
major banking group, and as such, are well aware that their
products are marketed by bank brokers and other independent
insurance brokers. These good folk sell a “product”, and often do
not have the expertise to assess the viability of the said
products, and thus sell in good faith. When a document is produced
by the offending company that categorically states: "Guaranteed
Value at maturity = ‘X’" one expects that to be honored. When the
fund matures at significantly less 5 years later, it is simply too
late to now request that they go back and read the fine print
which qualifies why this could happen. They have, in my humble
opinion, a fiduciary duty to their investors to highlight the
pitfalls in large red letters so that there can be NO excuses
after the fact.
The case I am referring to in this diatribe was offered as follows:-
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Investment of R 1.0 million (a lot of money) on behalf of a trust, which investment
would pay the beneficiary an income of R 10 000.00 pm for 5 years;
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The initial investment is made into a Pure Endowment policy, with the original
capital of R 1.0 mil guaranteed, while the income is funded by the institution as
a "loan".
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After 5 years, the endowment matures at an
estimated 15% pa growth (supposedly R 1.9 mil), the loan, which
now stands at R 900 000, is deducted, and the client theoretically
gets his investment of R 1.0 mil returned to him.
Sounds great huh ?
But herein lies the rub – firstly, to assume that any equity investment, even in
good times, can compound consistently at 15% is naïve in the extreme. In truth,
the investment went nowhere over the 5 years, and merely returned the capital of
R 1.0 mil, less the loan of R 900 000, leaving the trust with a grand R 100 000
after 5 years – they would have done better placing the money in the bank ! Of
course, the institution successfully managed to earn over R 300 000 in interest
on the loan + the annual management fee for not delivering a return + various other
admin fees. They are very happy with the investment process!
So, although in the eyes of the law they are covered, the question one
must ask is: "were they morally covered ?"
Emphatically not.
I re-iterate my warning – if you are the holder of any guaranteed investments,
please read the fine print very carefully – you could be in a similar situation !
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