SWITCHING OF INVESTMENT PRODUCTS (LIFE INSURANCE POLICIES AND UNIT TRUSTS) - UNDERSTANDING YOUR RIGHTS AND RESPONSIBILITIES

MoneySENSE brings you a case story of how a consumer became a victim of undesirable switching. At the end of the story, we explain what switching means and what consumers can do to protect their interests.   

Case story

Mr Tay bought a $50,000 investment-linked insurance policy (ILP) from an insurance agent. Two months later, the agent told Mr Tay that the value of his policy had risen to $51,000 and advised him to surrender the policy to buy a new ILP that could give him higher returns.

Mr Tay assumed that he did not have to pay additional fees, and that he had made a gain of $1,000 from the switch. He left it to his agent to fill the application form and simply signed on the dotted line without reading the terms and conditions stated in the form.

Mr Tay later learnt that he was entitled to two free switches from his insurance company which was not disclosed to him by his agent. By buying the new policy, he instead incurred sales charges of $2,500. On top of that, the new ILP invests in more risky assets, which is not consistent with his appetite for low risk. By recommending the switch, the agent made a sales commission of $1,500.   

    
What is switching?

*  Switching is when your financial adviser (FA) advises you to sell one investment product (i.e. life insurance policy or unit trust), either fully or partially, to buy another investment product. When you sell one type of investment product (e.g. life insurance policy) to buy a different type of investment product (e.g. unit trust), it is also considered a switch. Similarly, selling an investment product through a particular FA, and buying a new investment product through another FA, is considered a switch.

*  Not all instances of switching are harmful. There may be good reasons for your FA to advise you to switch from one investment product to another, such as a change in your risk profile, financial situation or investment objectives. Switching is inappropriate when you do not benefit from the switch, or are worse off from the transaction.

*  Undesirable switching may occur when sales representatives are purely motivated by the commissions they can get from the sale of new investment products. 

What you should know about switching

*  Switching may involve monetary costs. For example, if you switch between unit trusts, you may incur transaction costs such as switching fees, redemption charges and/or sales charges. These transaction costs may outweigh the benefits from the switch. 

*  There may be other potential disadvantages associated with switching. For instance, in the case of a whole-life policy, the cash value is typically paid only if the policy has been kept in force for at least three years. You are likely to suffer a loss if you make a switch before the policy builds up cash value. 

*  Most insurance companies and fund managers offer free switches or charge a nominal fee when you switch to another investment product offered by the same company.  

What are your rights and responsibilities?

*  When your FA advises you to switch, it must take all reasonable steps to disclose to you in writing the following:

(i) the reason for recommending the switch;
(ii) whether you are entitled to any free switching options;
(iii) any monetary costs you have to incur if you are not entitled to free switches; and
(iv) whether there are any potential disadvantages associated with the switch

so that you are fully informed of the implications of the switch.

*  Your FA will also obtain a written declaration from you whether you have been advised by a sales representative of the FA to switch. This information would enable the FA to monitor and deter undesirable switching activities by its sales representatives. 

* You should be very cautious when you make the above declarations to your FA. To protect your interest, you should make the appropriate declaration when you have been advised by the sales representative to switch. You should understand what you are getting yourself into and be fully informed before you make any declaration on whether you have been advised by a sales representative of the FA to switch.

*  Before switching from one investment product to another, check whether you are entitled to free switches and if not, how much you would need to pay for the switch.

*  You should ensure that the new investment product you switch to does not give you a lower level of benefit at a higher cost or same cost, or the same level of benefit at a higher cost. The new investment product should also suit you, taking into account factors such as your risk profile, financial situation, and investment objectives. 

Other MoneySENSE Tips

*  Do not buy any investment product until you have fully understood what you are buying.  Read all the materials and documents provided to you carefully. Never sign on blank forms without understanding what you are signing.

*  Investment products like life insurance policies and unit trusts are meant to be medium to long-term investments. Consider carefully before you terminate or surrender your investment product as you may suffer a loss in doing so.