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Some Things Financial Consultants Might Not Have Quite Gotten Yet

Updated: Feb 9, 2023

Part of the reason I continue to have a job is because not everyone is as competent in the same area.

Some people continue to dominate me in terms of Retirement Plans, even though I was good enough to do a cool write up on them.

Disability Income Insurance is another area that I'm not a specialist in. I couldn't tell you specifics without continually asking you to wait or referring to the product summary, and even then there would be questions that are quite tricky to answer.

But there's a couple of points which I tend to know a little more about than the average Financial Consultant, especially someone who just started this job or someone who hasn't had to cover some of these in a while.

And it's good for both consumers and consultants alike to get a recap on these pointers, especially if they've been missed out.

1) Sales Charge and Bid-Offer Spread

Definition-ally, if you took M9 or M8 (insurance qualifying papers on Collective Unit Trusts and basic investment concepts), you would know that the Bid-Offer Spread is a sales charge.

There have been a couple of occasions where I've had to explain to a client, often those whose agents have left, what this means. Below, I'll illustrate that the Bid-Offer Spread is exactly like the sales charge - using i) $10,000, ii) compounding at a 7% annualized rate across iii) a 10 year investment period.

5% SALES CHARGE: $9500 (compounded at 7% annualized yield for 10 years) = $18,687.90

5% BID-OFFER SPREAD: $10,000 (compounded at 7% annualized yield for 10 years) with a bid offer spread of 5% = $19671.514 x 0.95 = $18,687.90

If you have agreed to a bid-offer spread for a particular plan, usually an ILP or something offered by a Financial Broker or bank, it is unlikely you are also paying a sales charge on top of that. It's usually one or the other.

2) Distribution Costs

If you're the kind of client ever ask you to explain every single page of a Product Summary, you'll be very disappointed.

Financial Consultants who are inexperienced would find it hard to explain due to their lack of experience. (not used to explaining it)

Financial Consultants who are experienced would find it hard to explain due to their abundance of experience. (not used to have to explain it anymore)

In any case, the one page that can be a bit hard to explain is distribution cost. It's not an insurance cost, its not a fee, it's just... There.

For what a distribution cost is, there's very fine print that tells you to refer to the IMPORTANT NOTES page (yet another page that is often overlooked). And this is what it says.

Cost of Advice + all sorts of stuff.

I'm not sure what cost of benefits and services paid to the distribution channel is, but I'd remember if I were getting paid the total distribution cost because I could retire in 3 years instead of 20.

So do rest assured that it's just not the case.

3) Nice Try, Kidney Guy

The most fun question I get when I go through the conditions covered by Early Critical Illness Insurance Plans (ECI) is when we browse over Kidney.

The clients with a sense of humor will talk about Kidney donations and claiming on them.

I will tell them that's not how insurance works, unfortunately.

When doing my comparison table (not formally approved by MAS) for Early Critical Illness plans, I had to interact with other consultants to put it together. In return for their kindness, I would typically cover this particular point about addressing the definitions of their plans in order to gain a competitive edge over their competitors, in the event that they wanted to be so technical (and now enough time has passed that I can just reveal it here). Certain companies have more favorable definitions for claims than others. When I do a comparison, I do account for these things to the degree that I can afford to.

Your advisor should also be clear on the definitions in the event that it matters greatly to you based on family history, for example.

It helps to note which companies have certain restrictions on certain conditions, especially Early Critical Illness ones.

4) 3.25% and 4.75%

I've saved the worst for last because it's the one that's not only the most basic but it riles me up the most when I have to 'fix' it for a new client.

For any plan with cash value (with the exception of ILPs and some other fixed non-participating endowments), there is a projection of the performance of the fund that is between 3.25% and 4.75%.

Let's be very clear.

The fund does not pay anyone up to 4.75% [annualized return from inception]. There are no plans that presently exist which will pay you 4.75% for a 4.75% par fund return.

This misunderstanding was so prevalent amongst consumer and planner alike that they actually had to manually add this section in across all insurers last year.

Interestingly enough, some insurers will pay higher net values during low yields than others.

You can see from the above example that there is a distinct difference between the Illustrated Rate of Return of the Participating Fund (potential gross return), and the Illustrated Yield at Maturity (net return).

Do note that not every policy ends up with a value like the example. Some par plans, depending on your age - can have an illustrated net return higher or lower.

Most of the policies 2017 and older will not have the above picture, so it's important to adjust your expectations if you're reading this and have wrongly believed that you should be getting a much higher than projected return.

The illustrated numbers are very clear, but it's good to not be shocked by the discrepancy.

Par Fund Returns and smoothing history are usually an important consideration for high non-guaranteed values in their cash value plans.


In summary, its important to make sure that you've accounted for these things if you're doing your own planning.

If you have an adviser, you can hold them to a higher standard of service.

Money Maverick

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