Secondary

The Great Switcheroo

I toyed with several titles when contemplating writing this article, but finally settled on this one, from a Roald Dahl short story. 

A typical Dahl tale contains unexpected developments in the story line, and a twist in the tale. The latest FAIS Ombud determination initially follows some of these trends, but then deteriorates into a horror tale when measured against today’s advice standards.

In the A and V Thompson determination, the Ombud deals with two complaints, from a husband and wife, simultaneously. In essence, the complaints concerned the advice given when the clients requested assistance with planning for their retirement, which was planned for five years hence.

The advice appeared to lead to the replacement of existing endowment policies and retirement annuities. The reduced proceeds of the terminated endowments were mainly funnelled to property syndications, the income of which would be applied to pay premiums on new retirement annuities and endowments.

The advisor involved elected to file no response to the complaints, which did nothing to help clarify her reasoning behind the advice. The Ombud also states, ominously, that the property syndication investments do not form part of this complaint.

There is no apparent structure to what happened between 2004 and 2011, when the clients finally had to terminate their remaining contracts due to the fact that they could no longer afford the premiums.

Appropriateness of Advice

Concerning the Sanlam endowment policies, the Ombud notes:

1.

“The policy schedules reflect that the underlying investment of the replaced and replacement policies remained unchanged…” and “…there appears no justification for replacing the endowments. In any event, if there was a need to change the underlying investments, it could have been done within the existing endowment policy structure at minimal cost to the 1st complainant.”

Hopefully, future regulation will also look at the role of the product provider in this kind of scenario. Treating customers fairly must force product houses to pay closer attention to policy replacement documentation.

2.

The Ombud then contends that the problem set out above was compounded when “…the respondent invested their funds for terms extending way beyond their retirement dates. The nett effect of the unsuitable advice was that when the complainants retired in 2011, they could no longer afford the premiums payable on their policies.”

Anyone involved in retirement planning knows that provision does not end on the date of retirement. Medical inflation, in particular, requires capital injections in the future. The problem in this case is twofold: No provision appears to have been made for funds to pay premiums after retirement, and, quite possibly, the funding from property syndication income had dried up.

3.

The Ombud further addresses the likelihood of the clients knowing what they let themselves in for, and comes to the conclusion that it is highly unlikely. This is confirmed by the respondent’s refusal to file a response, which must stem from the fact that she would be unable to defend her advice.

“Based on the total circumstances of this case, the likelihood that the complainants signed the quotations knowing what they were getting themselves into is slim. It is equally unlikely that they would have agreed to the incessant replacement of their investments had they been made aware of the financial consequences thereof.”

It is difficult to believe that a person will agree to all of this without a single question being asked. If, on the other hand, no disclosure of penalties or commissions were made, it possibly explains why no response was forthcoming from the advisor.

The respondent was ordered to refund the total penalties paid by the complainants in respect of causal events on all products. This came to about R190 000.

I wonder what the real loss was?

If a realistic projection could be made of what the clients lost in terms of accumulated future “bonusses on bonusses”, it could be substantially more.

Please click here to download the determination.

Comments are closed.