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In The News |
Costly protection for the retiring type - March 29, 2008
Rob Carrick, Globe and Mail Update
You get a lot of insight into an investment product by looking at how lucrative it is for the company and advisers who sell it.
Let's borrow from the movie business and use the term blockbuster for Manulife IncomePlus, a guaranteed retirement income product from the insurance giant Manulife Financial. Assets are pouring into IncomePlus at a tremendous rate and the fees are significant.
Investors, take note. Anything this rewarding for the seller is not something you buy without careful consideration of the costs and benefits to you. That's what today's Portfolio Strategy column is all about.
Introduced in fall 2006, IncomePlus had by the end of last year generated almost $3.4-billion in assets for Manulife Financial, Canada's largest insurer. This is exceptional. The mutual fund industry has been around for decades and can only claim 30 or so funds out of more than 5,000 with that kind of muscle.
With IncomePlus, you get a retirement portfolio with guarantees that, first, you will never lose the money you invest and, second, that you will receive a minimum annual flow of income for life if you begin withdrawals at age 65. The stock markets are capricious these days, so this certainly sounds tempting. But any financial product that offers a guarantee inevitably comes with high fees that erode returns.
The question, of course, is whether these fees buy you, the client, any value. To help answer this question, let's consult Asher Tward and Ted Rechtshaffen of TriDelta Financial Partners, an independent financial planning firm. Mr. Tward is TriDelta's vice-president of estate planning, while Mr. Rechtshaffen is president.
It should be noted up front that these guys are IncomePlus skeptics who believe they can do a better job of providing secure retirement income through smart portfolio design focusing on dividend-paying stocks. “We have not sold the product at all, even though we're able to,” Mr. Rechtshaffen said.
IncomePlus is built on a foundation of Manulife segregated funds, which are mutual funds with various kinds of insurance guarantees attached. Seg funds charge higher fees than conventional mutual funds (Mr. Tward said Manulife's seg funds are among the most reasonably priced), but that's not the whole story with IncomePlus. Additional “guarantee” fees are also charged with this product and they bring the total fee load, or management expense ratio, to as much as 3 to 3.45 per cent for some funds. By comparison, the largest Canadian balanced funds these days have MERs that are at least a full percentage point lower.
Mr. Tward said the fees charged by IncomePlus seg funds have to be viewed against the guarantee that stock market declines won't decimate your retirement savings in a way that causes you to run out of money before you die. Remember, life spans are increasing and it's not out of the question that you'll need to draw on your retirement funds into your 90s. As for the markets, they've been shaky enough since last summer to cause investors a lot of stress, if not major losses.
Now for some specifics on IncomePlus. Invest as little as $50,000 in an IncomePlus account (registered or non-registered) and Manulife guarantees that you can make withdrawals of 5 per cent of your investment annually for life, providing you start at age 65. Every three years, Manulife can adjust the value of the pool of money you have available to withdraw from – called the guaranteed withdrawal balance, or GWB – to reflect increases in the market value of your seg funds.
As an incentive to get you to buy IncomePlus before retirement, Manulife offers a 5-per-cent bonus for every year you're in the product without making a withdrawal, to a maximum of 15 years. The bonus is based on the GWB, which as we've seen can rise every three years if your portfolio does well.
Mr. Rechtshaffen has two problems with what on the surface looks like an appealing package for investors who worry about stock market declines causing them to run out of money in retirement. First, he argues that guarantees against market losses are a waste of money for any investor who has a horizon longer than 10 years. Over that period, he's confident that total stock market returns – dividends plus capital gains – would beat the guaranteed returns of IncomePlus.
Second, he notes that the selection of 25 seg funds available for IncomePlus are predominantly conservative choices that include bond, balanced and asset allocation funds, but no pure equity funds. To Mr. Rechtshaffen, it only makes sense to have a capital guarantee when you're investing in areas with higher levels of risk and reward.
“Basically, what [Manulife] is saying is don't worry Mr. and Mrs. Canadian, you will never lose by investing in IncomePlus,” he said. “But you also are never going to get significant gains because our fees are high and you're never going to be able to have an aggressive portfolio.”
The high fees explain only part of how attractive IncomePlus is to Manulife and its agents, and why they are marketing it so aggressively. Investors are more likely to stay put in IncomePlus than they are traditional mutual funds, which means a reliable, long-term flow of fees. “If you enter this product at age 50, you could be in it for 40 years,” Mr. Tward said. “There's little turnover because if you do great with this product, you're happy. If not, you hang on for your guarantee to kick in. Either way they win because they get to hold those assets.”
Advisers have a similar incentive to sell IncomePlus in that they lock in a long-term stream of trailer fees, which are paid to sellers of fund products on a continuing basis as compensation for client service. The guarantees provided by IncomePlus are also attractive to advisers because they lessen the amount of client hand-holding they have to do during down periods for stocks.
“If I'm a typical mutual fund salesperson, I am quite anxious to sell this product,” Mr. Tward said. “Economically it's neutral in the short term. But it makes for an easier client and a stickier client, so it makes sense.”
Mr. Tward and Mr. Rechtshaffen think IncomePlus has some merit in the case of risk-averse investors who cling to low-paying guaranteed investment certificates. IncomePlus offers a similar level of safety, and the potential for greater growth than GICs.
But what about other investors? Can they do better with properly managed investments blended with tax and estate planning? “The answer,” Mr. Rechtshaffen said, “is emphatically yes.”
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