Last week I was on a return flight to Toronto from Kelowna. Seated beside me was a young man dressed in a blue business suit and he smelled salesman. My suspicion was confirmed when after exchanging pleasantries he told me he was a financial advisor.
"Oh, What company do you work for"? I asked. "World Financial Group" he answered. Me - "Never heard of them".
We then proceeded to discuss all things relating to personal finance and our own individual thoughts on money and investing. He was very polite and pleasant. For the rest of this post I'll just refer to him as Sam.
I didn't have time to research and get a handle on the company he worked for but it didn't take me long to grasp that Sam was nothing more than a mutual fund and insurance product salesman. He was nowhere near a financial advisor and neither was he independent. He promoted company specific products and sold them on a commission only basis.
As he explained the harder you work on your business the more money you make and the more success you'll achieve with the company. He had been with WFG for 4 years and was in a senior management position. He was on his way to meet four associates who worked for him.
I have heard all these pitches before so my spidey senses had me cautious and attentive as I listened to him talk. After all it was a six hour flight and we weren't going anywhere for awhile so why not engage?
I bought mutual funds back in 1994 after attending a seminar put on at my workplace by The Financial Planning Group. The keynote speaker was a fiery personality named Brian Costello. I was hooked and invested immediately. It was just a small monthly sum to get me started buying into mutual funds. Brian was compensated for clients who signed up through these seminars.
The company then became Assante Financial. My wife was also with Investors Group when I met her in 1999. So, I have lots of experience and history when talking to these types of salespeople. They all call themselves advisors BUT they only sell insurance and mutual funds. They are mostly concerned with generating fees for themselves and NOT your financial well-being.
What is WFG?
I told Sam I never heard of them so once I got home I researched them. I didn't do anything special and only worked on the handout he gave me on the plane and what I could glean from the company website.
They are owned by Aegon a large insurance conglomerate based in the Netherlands. They have existed since 2002 and are aligned with another company called Transamerica.
From their factsheet - " WFG is able to offer a wide array of life insurance and income protection solutions with a common purpose: to protect families and their dreams."
What are income protection solutions? Just sales speak and gobbly gook to impress you that they have something different and special.
This is also a MLM Company
Another big part of WFG is recruiting new associates and selling the business to them. The more associates you have underneath you the more commissions you make off of family and friends.
The usual structure is to share the first years worth of an insurance product and 50% of the second year. That's a lot of money up front to you and your mentor.
In the third year all the money goes to the mother ship and you get nothing. That's why you need to keep selling. You work with your mentor off of a 'warm list' that you provide, listing possible targets that are mostly comprised of your family members and friends. Yes, they will hate you after awhile because you can't stop trying to sell them something to get ahead in your new business.
The Products For Sale
I can only tell you about some of the topics that Sam talked about on the plane and not what a one-on-one with a salesman would take you through.
I thought it real strange that he went right into the benefits of Critical Illness Insurance coverage for young families and for anybody working a job. Really? Why?
A childhood friend of his had just contracted kidney cancer and the news was devastating as he had a wife and young kids. He couldn't work during treatments and money was tight. "What about short term disability coverage with his employer" I asked. Nope he didn't have coverage.
"Luckily, I was able to get him some Critical Illness Insurance coverage to help with that, said Sam"
Whoa! - "You got him insurance coverage for a disease he already contracted after the fact?" "Yup, I was able to work it out for him, we got lucky", he said.
This is the point in the conversation I called bullshit on Sam. There is no way you would collect on an insurance policy when you already have the disease. Especially CI coverage. The rules are so strict and dates of diagnosis are highly scrutinized for fraud.
I don't own and never have owned Critical Illness or Long Term Care Insurance. I think young families can go insurance premium bankrupt, buying insurance products they don't need and don't fully understand.
Another big push form WFG salespeople is Universal Life Insurance. Why? Big fees. If you buy in it will cost you 3-5% in management fees per year because a portion of the policy is invested in a seg fund. You will never hear them talk about cost of products. You will only hear about protection and the products they provide for that.
Sam also bragged about the access he had to the mutual fund marketplace and how he could get people into the best of the best. Again, he never talked about cost or fees.
What I've learned throughout the years is that costs matter and they really affect your investment returns throughout the years. WFG is only concerned with selling you on the benefits of whatever the highest priced product they can find for you.
What Could I Spend Here?
If you decided to buy a Universal Life Policy with $500,000 for income protection and are a 40 year old male in Ontario. You are looking at spending $383.47 a month from BMO Assurance for an A+ policy. This was the cheapest I could find using a broker website.
Critical Illness Insurance is very complex, that's why it's perfect for WFG salespeople. People don't understand it. Here is some information I cribbed from the Globe and Mail from an article dated March 2017.
"A monthly premium for a 10 year, $100,00 policy for a 40 year old non-smoking male, for example, is $70 on average, which adds up to $840 a year. It rises to about $100 a month for a 50 year old male non-smoker, totalling $1,200 a year."
$70 + $383.47 = $453.47
That is using broker prices on the open market searching for the cheapest rates. I can guarantee that you will be paying a heck of a lot more from the WFG salesforce. Can a young family even afford another $453.47 per month in insurance premiums on top of their car and house insurance? I highly doubt it and besides you don't need it.
What you do need is an emergency account with 3-6 months of your gross income saved up. This is my opinion and experience.
The biggest problem with CI insurance is collecting the money and the different diseases covered. The terms are too complex and the nuances so many that the average person will have a hard time knowing what's going on here.
Mutual Funds
Selling high fee mutual funds is another big pillar in the WFG house. Having said that, they are no different than any other company or your local bank out there selling these types of funds. My wife owns a mutual fund that I wrote about here.
The high fees can really eat into returns so you should really shop around for better rates. The problem is if you are sitting across the table from a salesperson, you will more than likely commit to buying something you don't understand and will pay too much for.
The mutual funds WFG sells will all cost 3-4% a year. My wife's fund costs 0.92% a year. That's just a sliver of the comparable cost. You would end up spending $3000 a year on a $100,000 portfolio just in management fees paid directly to the mutual fund company. WFG salespeople are compensated with an ongoing trailer fee while you are a customer.
Now add that extra $250 a month in mutual fund fees to your life insurance component. It now looks like this;
$250 (MER of funds) + $453.47 ( UL and CI insurance) = $703.47 per month
The ongoing cost of mutual fund ownership is something the average person never stops and calculates. It's not free. You have to pay for the ownership in the funds you own. The costs vary dramatically, that's why you should shop around. Just like you would shopping for any product you want to buy. It is slowly extracted on a monthly basis from your total portfolio so you don't notice big withdrawals from your account.
Make no mistake it DOES get taken out every month.
Your Total Cost On Investment
You have purchased your insurance and investments and are comfortable with everything. Let's look at the long term costs and investment losses of your decisions to buy and hold these products until you retire at 65.
Let's just assume you bought everything at 40 years old and will hold until retirement which is a 25 year time frame. Then we will look at what that 3% MER will have returned at a rate of 7% over 25 years.
The insurance component and mutual fees paid will cost you;
$703.47 X 12 = $$8441.64 X 25 = $211,041
That's a BIG NUT!
Only you can decide if that cost for protection and investments is worth it.
Let's now look at that 3% MER and what that money would return invested at 7%. I'm using 7% because that's what the average balanced portfolio can expect to return to investors per year.
That's $3,000 a year X 24/7% compounded annually = $196,296
I started with an initial year's premium of $3000 and then contributed the $250 monthly MER and received 7% a year on that investment to come up with just over 196K. That is how much you are giving up on fees over the course of 25 years.
Compare this with my wife's mutual fund with a cost of 0.92% invested over the same time frame using the same 100K portfolio.
Monthly cost $76.66 X 12 X 24 @ 7% per year = $60,438.97
That is a difference of $196,296 - $60, 438.97 = $135,857.03
You can see why costs matter and why it's vital to ignore the sales pitches and shop around. Your family's future depends on it. That 136K can greatly improve the retirement your going to have and be able to fund any problems you encounter along the way. You will just have more money in the bank.
My Final Take
I have no axe to grind with WFG. Sam is just trying to scratch out a living selling insurance and mutual funds. Nothing wrong with that and there are hundreds of companies out there doing the same thing. Matter of fact your bank does the same thing if you ever sat down with them and talked investments. They will put you in high priced bank sponsored mutual funds, talk insurance and credit cards.
People are always in sales and trying to sell you on something. WFG is no different.
My problem is what they don't tell you. Handing out glossy brochures and books touting the benefits of insurance and investments is just NOT enough.
Costs to you over the long term should be discussed but in fairness I've never met a mutual fund salesperson who does this.
WFG is a MLM marketing company selling investment and insurance products under the disguise of so called financial advisors. The are not advisors. These people are salesman and women. Recruiting new associates is also a big part of their business.
Get educated and become a buyer and NOT be sold something you don't need by anyone anywhere.
