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Hi RIP Friends,
This is the third and last post in a short three posts series about my experience with a Financial Advisor.
Your can read first post here, where I explained how I was cold contacted by her assistant on LinkedIn, and what happened during our first 1h-long video call.
You can also read the second post here, where I analyzed the two Structured Notes that she thought would have been the perfect investments for a risk averse person like “me”.
In this third post we’ll take a look at her final weapon: a Pillar 3A/B with a linked Insurance Policy.
Swiss Third Pension Pillar
For those who are not Swiss: the Pillar 3 (A or B) is one of the three pillars of the Swiss Pension System. While the Pillar 1 is tied to your residence in Switzerland, and the Pillar 2 to your employment, the Pillar 3 is fully funded by your voluntary contributions.
For this reason it’s unmatched by your employer, and it’s much more customizable (and potentially more exposable to risk) than the other Pillars.
…It’s also where the sharks thrive!
Not all Third Pillars are alike though. There are two categories: 3A and 3B.
The Pillar 3A is a tax-deferred (you save taxes at contribution time, and you pay lower taxes at withdraw time), yearly capped (~6.8k CHF per year if you’re already contributing into a Pillar 2, ~34k CHF if you’re self employed), locked (until statutory pension age, 65m/64w) Pension Plan.
Fun fact: you won’t get a “pension” at age 64/65. You can only cash the final balance as a lump sum, and pay taxes on it.
About Pillar 3B, I must admit that I struggle to find any reason for it to exist. Pillar 3B is called “flexible” third pillar. It’s “uncapped” but with no tax advantages. It’s “unlocked” in theory (you can access your capital before or after retirement age), but read 10 times your contract fine prints before unlocking it. If you’re buying into an insurance-linked Pillar 3B your surrender value is going to be way lower than your accrued principal!
As I said, I don’t see any reason why you should subscribe a Pillar 3B solution. The surrender value counts toward Wealth Tax! I don’t know… In absence of any valid reason, I consider Pillar 3B an inefficient way to “invest” only good for someone who doesn’t know how to open a brokerage account and invest on their own. Change my mind if you can!
As we’ll see, The Advisor’s selling point for their 3A/B solution is that “you can’t contribute into a Pillar 3A if you move out of Switzerland, but you can keep investing in a Pillar 3B“. More on this later.
About Pillar 3 (A and/or B) accounts: there’s a saving portion, an investing portion, and an insurance portion. I mean… the insurance portion is only present if you subscribe a Pillar 3 (A or B) Policy.
If you open you Pillar 3A account with a bank (or with one of the FinTech companies registered to operate in the Pillar 3A world), you usually have access to the saving and investing portions.
The investing options for a 3A are limited compared to the open market: you can only invest in the products offered by your Pillar 3A bank/company, which are usually products that meet a set of regulations imposed by Swiss Authorities. It’s a kind of US 401(k), except that it’s not company matched.
Maxing out your Pillar 3A contributions every year is usually considered the top no-brainer tax saving action you can take, which will result in 1.5-2.5k CHF per year in tax savings, depending on your marginal tax bracket.
For example, I used to have my Pillar 3A with PostFinance. I’ve contributed the maximum amount for both me and my wife every year, except in 2012 (I relocated in Switzerland in November), and I’ve invested part of it into Pension75 and Pension100 funds, and kept a part in cash. I recently moved all my and my wife accounts to FinPension (next post!).
If you open your Pillar 3A account with an insurance company they’ll sell you a 3A Policy, which means that a fraction of your contributions will be unrecoverable insurance premium payments (you get a Life Insurance), and only what’s left goes into your savings/investments.
I’ve never subscribed a 3A Insurance Policy, even though I’ve been pitched one 3-4 times during my 8 years in Switzerland so far. Every pitch came from someone who would have benefited by me investing in the policy, i.e. from a salesman.
Never ever a friend, a colleague, or a fin-savvy person recommended me to invest in a 3A Policy.
Mind that I’m not saying that Life Insurances are bad!
You might want or need a Life Insurance (which is not a bad idea), and you definitely need to save and invest money for retirement.
What I’m saying is: do not mix the two. Go shop for them separately.
So, again, don’t fall into the trap of a 3A (or, worse, 3B) Insurance Policy!
The tax saving feature of a 3A Policy is what sharks will use as “bait” to manipulate you into subscribing a crappy overpriced insurance. Remember that even a standard 3A saving/investing account has the same tax saving feature.
Having said that, let’s take a look at the actual Pillar 3AB offer from The Advisor.
“Wait RIP, why you keep calling it 3AB? Is there a thing called Pillar 3AB?”
Because it’s a product that combines a Pillar 3A and a Pillar 3B, which is called…
SwissLife Premium Vitality Duo
During my second call with The Advisor, the one where I told her the Structured Notes she shared with me sucked, she tried hard to sell me the idea that I needed a Third Pillar Policy contract.
This second call with was very short. I think we were done in less than 15 minutes. Five minutes to destroy the Structured Notes, and 10 minutes for the 3A Policy sales pitch we’re going to analyze today. I nodded during her pitch, then after 10 minutes I cut it short asking the usual shark-killer question: “can you send me the contract/proposal/something so that I can take a look? Please, send me the most detailed version of this offer that you have, not a flyer”
Right after our call she sent me a very long, 41 pages contract.
The Sales Pitch
Before talking about the product – and why I think it’s a crappy product – let me tell you what were the selling points that The Advisor used in her pitch so that you can recognize them when a shark swims nearby 😉
- You need a Life Insurance! Right, in most cases. Especially if you are the breadwinner of a single income family and/or if you don’t have enough money saved up. But guess what? My Second Pillar already has a life insurance and a survivor pension embedded. If I had to pass away, my wife will get 200k CHF lump sum and 90k CHF/year survivor pension from Pillar 2, a Pillar 1 pension starting at age 64, and ~1.4M CHF of our assets. Does she need your extra 132k CHF? What she would eventually need is an annuity, a “salary”, not another (relatively small) lump sum.
- You need a Pillar 3A to save on taxes! Mostly right, if your salary is above 100-120k CHF per year. But I’m already maxing it out, thanks 😉
- You need a Pillar 3B if you move abroad and you want to keep investing in Switzerland! Mmm… what? Yeah, you’re right that one can’t invest money into a Pillar 3A if they left the country… but why would they want to keep contributing to a pension plan that has no tax advantages in the new country? “To keep the money in Switzerland! Everyone wants to have their money in Switzerland! Switzerland is a safe country for your money!“. Well, I can keep the money in Switzerland in many ways, for example by not cashing my Pillar 3A immediately. Not the best strategy IMHO, but if you’re concerned about safety in your new country you can keep your Pillar 3A account in Switzerland as long as you want.
- This Policy has infinite customization possibilities for the investment part. We can create the perfect asset allocation for you! Yeah, but not impressed. I have already enough freedom with the many currently available Pillar 3A solutions. And Pillar 3A is just a fraction of my Net Worth (and you know it, dear Advisor), so I can compensate any eventual misalignment within my ideal asset allocation with my after-tax, brokerage account – assuming the assets in my Pillar 3A are not rubbish. I mean, if 20% of my Pillar 3A portfolio is in Swiss stocks, and I only have 5% Swiss stocks in my ideal Asset Allocation, then I could balance my portfolio buying less Swiss stocks in my brokerage account. Assuming, in this specific scenario, that my Pillar 3A total value is less than 25% of my investable NW.
Mind that these strategies are usually targeted toward expats who recently moved to Switzerland and who have no clue about the Swiss Pension System. They are the ideal preys, busy people who have always heard that “Swiss is the land of Insurances and Bankers and I want to take advantage of it!” Mind that this is the land “of the Bankers”, not “of the Bankers’ customers” 🙂
Take a look at a few threads on the MP Forum, and a few more threads on EnglishForum, and this detailed analysis by reader Dominik (he lost 24k while surrendering the policy). It’s a very common pattern: you move to Switzerland, you sign shitty insurances, shitty pension plans, open a bank account with an unnecessary expensive bank and then, after few years (if you’re lucky) you try to undo everything.
Problem is that quitting a Policy based Third Pillar is a pain in the ass, and it’s going to cost you a 4-5 digits amount!
Ok, enough preliminaries. Let’s go to the actual product!
The Actual Product
The actual product The Advisor wanted to sell me is called SwissLife Premium Vitality Duo.
The “Duo” in the product name means that they open for you both a Pillar 3A and a Pillar 3B account, so that “you can switch from a Pillar 3A to a Pillar 3B and vice-versa” in case you’re no longer able to contribute into a Pillar 3A (like moving abroad or taking a sabbatical).
This Pillar 3AB is a fund-linked insurance policy Third Pillar, meaning that part of my contributions would fund the “saving” portion and another part fund the “risk” portion, i.e. the Life Insurance.
I must admit that I’m still not sure if my policy had any disability benefits apart from the “Premium waiver” (I wouldn’t have had to pay policy premiums in case of disability), and even in case of “premium waiver” it is still not clear to me if it’s my entire monthly contribution that would be waived or only the “risk” component – which is nowhere stated. Confusing.
I don’t know how “freely” you can chose, I was offered a specific three funds portfolio by The Advisor based on my risk aversion.
Let’s take a look at my offer!
Few obvious things: I told the Advisor that I’ve already deposited the maximum amount for 2020 (6826 CHF) into my current Pillar 3A, and that I would eventually be interested in a new Pillar 3A(B) starting from January 2021. She obviously “forgot” about it, and sent me a policy contract starting on November 1st 2020.
Second: I don’t see any “guaranteed” survival amount, just projections based on investments performances forecasts..
Like our friend The Poor Swiss said:
Well, according to Page 1 of the contract, my policy has no guaranteed survival benefit! What a huge red flag!
Ok, after having dug into the contract fine prints I’ve seen that the Death Lump Sum value is also the guaranteed survival capital: 132’875 CHF. Note that in 22 years my total contributions would be more than 150k CHF.
“The funds! I want to see the funds!!”
Calm down my friend, we’ll come to that. I don’t want to reduce this analysis in “the underlying investments are suboptimal“. I want to show you (with data) that the entire category of policy based third pillars is inferior, when not openly a scam.
We have a long way to go 😉
I see that my total contribution is fixed: 6825.60 CHF/Year, paid monthly (568.80 CHF/Month). I wonder what happens when the tax deductible Pillar 3A limit is raised, like it happened every two years on average since I moved in 2012. For example, in 2021 the new maximum amount will be 6883 CHF (instead of 6826 CHF in 2020).
In our third and final meeting I asked The Advisor if I can contribute more to the policy, up to the future limits (which could be significantly higher in 15-20 years). She said “No, this is a fixed policy“.
Just to discover few days later, somewhere in the contract, that she has no idea about the products she’s selling:
Plus… WTF!? What do you want to do with my asset allocation during the last three years? And where is the “exit management” in this contract, I don’t see it! Which “low-risk investments” will you put my money on?
Ok, let’s move on.
Insurance vs Investing split
if I signed this contract I’d be “investing” in a product that ties together a Life Insurance and a saving/investing scheme. The saving/investing scheme would be a “Dollar Cost Average” investment plan over the three funds in the contract for the next 22 years.
But… what’s the split? How much goes into “insurance” and how much goes into “investing”?
The Advisor couldn’t tell. The contract doesn’t answer this question either. How come is it so hard to get such a simple answer? I want to be able to judge the two products independently.
I know how to get a quote for a Life Insurance, it takes 5 minutes and a search engine:
Note: I’m not claiming this is a good Life Insurance, it’s just the first one I’ve found Googling for it.
Anyway, I can’t see how much am I paying for the insurance component of this policy, and it sucks.
But I’m a software engineer, and I have enough data points to reverse engineer it 🙂
According to the forecasts on page 1, I know what the final redeem value will be if the portfolio performed +2%, +4%, +5.75% on average over the entire duration.
I tried few hypotheses (constant percentage of monthly payment goes toward insurance, first N payments go toward insurance, and a couple more), and the one that seems to match the final outcome closer is the “monthly constant percentage split” (here the full spreadsheet):
Playing with the insurance% variable I’ve found the percentage of my yearly contributions that goes “wasted” in insurance premiums is somewhere between 12.10% and 12.40%. Every year, less than 6k CHF goes into saving/investing, while the insurance premiums eat up 830-850 CHF.
And that sucks! I’m paying 800+ CHF per year on a ~20 years Life Insurance that pays out 133k CHF in case of death, while the Generali offer above (again, not the best one just the first one I’ve found) would cost me roughly half of that to insure the same amount for the same duration!
Not good. But there’s more.
If you buy a Life insurance AND you drop money into a separate Pillar 3A (not a policy one, just a saving/investing account), guess what happens if you die? Your survivor spouse (or the next beneficiary in line) is getting the insured amount AND your Pillar 3A balance.
What happens if I buy this policy and I die?
Wait, what does it mean?
Death: if the fund assets are above the guaranteed benefit, the fund assets are paid out.
In any case the guaranteed lump-sum death benefit is paid out as a minimum
Are you joking?
You’re not paying BOTH the lump sum death benefit AND the fund assets?
Seriously, are you joking?
What am I paying the Life Insurance for 20 years for?
After 10 years, even assuming a 2% return my fund assets should have reached 80k CHF… After 15 years I should have crossed the lump-sum death benefits, what am I paying the insurance for?
This is outrageous!
I demand to receive BOTH the lump-sum death benefit AND the fund assets at the time of death!
I expressed my perplexities to The Advisor on our third and last meeting, but she hadn’t any answer for me: “Mmmh, I think there are products that are good for some people and products that are good for some other people…”
…And there are products that are only good for you, shark!
Ok, let’s say I get incredibly drunk that I start doing crazy/subversive things according to Swiss standard, like: putting the wrong zip code in an official communication, mixing green and brown glasses in the recycling bin, accompanying fondue with beer, and signing this crappy policy.
The day after, once I’m done dealing with the hangover, while re-triaging the recycling I suddenly realize that the policy I signed is crap, and I want to stop contributing to it.
Nope, you can’t. The policy will be transformed in a “paid-up” (i.e. all the future premiums are subtracted from current fund assets and you get the reminder paid out). We can only accept a delay up to 14 days.
Ok, I want to contribute less.
Nope. Same as above. Well, you could ask for a “premium interruption”, which means you stop paying your monthly contributions for one year, but we’ll take the insurance premiums from your fund assets, and reduce death and survival benefits as well 😉
Ok, I want to quit!
Sorry, it’s a Pension fund… you can’t quit and cash the money out, unless you’re moving your assets to another Pillar 3A, buying a house, or leaving Switzerland… btw, in the latter you can keep the policy because your contributions will go into the Pillar 3B. that’s why it’s called Duo 😉
Ok, I want to move the money somewhere else, you thieves!
I take that as a compliment 🙂 Yes, sure, you can quit. It’s called “Surrendering“. We take a huge cut of your fund assets and you take the rest. Please, consult the table below:
Ouch, its’s a lot less than my total contributions! At least during the first 15 years, assuming a 2% return on the portfolio… I don’t want to see the surrender values if the portfolio performance is zero or negative!
You’re welcome 🙂
So if I want to buy a primary residence and I need my Third Pillar…
You’re welcome, my surrendering friend 🙂
This is unfair! I want to fight!
You’re… welcome 😀
I Declare War!
I took time to read the 21 pages long General Policy Conditions. We’ve covered most of the weird aspects of this policy so far, it’s time to take a look at the actual funds…
“Wait RIP, you forgot a page in the printer”
Yeah, it always happens when you print 20+ pages out. Anyway, what is it about?
Yeah, the Swiss government can take money from your policy in case of War!
Say you left Switzerland more than a quarter of a century ago, finally sipping Mojitos in Guatemala, waiting for the crappy policy you subscribed 30 years ago (because an advisor told you it’s better to keep your money in Switzerland, invested in this policy) to reach Expiration Date… and Switzerland suddenly decides to invade the Canton Marittimo!
You’re going to fund the war, even though you’re a Belgian citizen that only set a foot in Switzerland for a few years, and relocated to Guatemala years before before your old Half-Canton of residence was even considered a Full-Canton!
Ok, it’s a bit unlikely to happen, but even just reading it triggered a nervous laugh 😀
Finally, let’s take a look at the investments. We can easily forgive these “minor” inefficiencies if the available funds are the Medallion Fund, the Legg Mason IF Japan Equity Fund, and the Baillie Gifford American Fund!
I’m sorry to disappoint you.
The list of available funds for my product is available on the policy website.
Here’s a screenshot:
First, note the 1% “commission on purchase”… why? Seriously, why? Which year is this, 1990?
Btw, I just noticed it while screenshotting. I missed it at first sight. Accounting for 1% subscription fees the math for insurance/investing split changes a bit, and the new reverse engineered insurance percent is 11.20-11.60% (link to my spreadsheet).
Second, I see few funds quoted in EUR and USD. I don’t want to know what is the currency conversion spread. “Luckily”, the portfolio that The Advisor prepared for me only holds assets quoted in CHF.
Third, let’s talk about the proposed portfolio 🙂
- 40% – CH0007294918 – SwissLife “Global Balanced”.
- 40% – CH0299461969 – SwissLife “Equity Global Protect Enhanced (CHF hedged)”
- 20% – LU1813279012 – Swisscanto “Bond Fund Sustainable Global Credit AA”
Let’s quickly analyze them one by one.
First one is an actively managed mixed fund (27% stocks, 16% bonds, 10% currencies and 47% other), with a 1.44% TER, that’s underperforming its index by a lot.
There’s not much more to say about it. +15% during 5 years of bull market… next!
Second one is an actively managed global stocks fund (57% US, 35% stocks ex-US, 1% bonds, 7% other), with a ridiculous 1.51% TER and these performances since march 2016:
“Well, it seems not too bad!”
Really? It up by 18.9% since inception… while the market has gone up like crazy.
Morningstar doesn’t show a benchmark, so I have to make one up. The closest benchmark I can think of is Vanguard VT, the best global stocks fund. Let’s see how it performed during the same time frame:
It’s up by 60.64% before dividends. But this is in USD, and USD sadly lost quite a bit compared to CHF during last 5 years. VT performance measured in CHF since March 2016 is only +48.8% plus dividends.
Oh, I forgot to mention that the crappy active fund is supposed to be “distributing” but I can’t find documentation about distributions anywhere. And all the websites (swisslife itself, swissfunddata) show the same performances that I’ve shown. I suspect these are the performances including the distributions…
Plus, I think currency hedging for a global stocks fund is inefficient. The global market in a globalized world is already self hedging against every currency simply because companies earn profits in all the major currencies. If your reference currency skyrockets, the profits that the global companies make in your currency boost their stock price. Ok, Switzerland is small enough that the CHF strengthening won’t visibly boost global companies revenues. On the other hand a dropping USD or EUR will have a more visible counteracting effect on stock prices – like we’re experiencing in Q3 and Q4 2020. Currency hedging is inefficient and expensive for stocks.
Third fund is an actively managed global bonds fund, with 1.11% TER which is incredibly performing not as bad as the other two.
Anyway, the gold era of long maturity bonds performing amazingly while interest rate dropped is over now, good luck performing better than its own cost from now on!
One of the Advisor’s selling points that I forgot to mention was that “with solution like VIAC, or FinPension, or even PostFinance Pension75/100 you’re too much exposed to market risk, i.e. you might lose money… with this Policy 3A solution we can customize the offer to match your risk tolerance and protect your principal!”
Yeah, I see. And I’m of course better off with your crappy funds, high fees, high TERs, and an inefficient Life Insurance!
But she’s right. Volatility will be lower if I invested in this crappy Policy instead of a global stocks portfolio within a normal Pension fund like those mentioned above: I’d be losing my money on a predictable trajectory 😀
To sum everything up, this offer is particularly crappy, but in general you should never sign a Policy Based Pillar 3A (or worse, a Pillar 3B).
A Pillar 3A with a Bank or a Pension Fund (VIAC, FinPension, Frankly,…) is the way to go.
You have the freedom to fund your pension when and how much (with a capped tax advantage) you want. You can stop contributing if you want. And nobody is going to slash your asset after “14 days of delay”.
You have the freedom to move your savings out at anytime, with no extra fees (except usually for home purchase). You can catch a better opportunity offered by a different Pillar 3A provider and put your original contributions on hold, or reduce them, or split the total amount by the several providers you have an account with.
You have the freedom to pick an investing strategy with transparent fees, and no subscription fees.
You have the freedom to open up to 5 different Pillar 3A accounts to save lump sum tax on withdraw.
You won’t have to give your private and sensitive medical data to these guys, and their marketing partners.
You won’t have to fill a Health form naming every single doctor you visited during the last 5 years, and have your insurance claim rejected had you mistakenly filled the form in an imperfect way.
Instead, by opening a Pillar 3A account with a Bank or a Pension Fund you’ll have all your contributions working toward your investing and retirement goals, with nobody taking a cut for a crappy life insurance. Every Rappen you put in is a Rappen you see in your account balance.
And you can always pick a Life Insurance on the market, at a cheaper and more transparent price.
I’ve of course declined this offer as well.
On our third and final meeting, after having asked a few clarifying questions I told The Advisor that this solution was inferior to my current one for the following N reasons: blah blah blah (see above).
She listened to me, and probably acknowledged that I wasn’t a catchable prey. Why wasting time with me when the world outside is full of lower hanging fruits?
I don’t know how she found the courage to ask me for a recommendation to my circle of friends and acquaintance (which I didn’t forward), but that was the end of it.
I didn’t hear from them again (yet).
That’s all for this series, I hope you enjoyed it.
Have a great day and a merry 2020 Christmas! 🙂