Alongside the 'Livret A' bank savings account assurance vie is the most popular savings and investment product in France. Around 38% of the population hold such a policy in a market worth €1,800 billion.
The product is a particular type of life insurance which benefits from tax breaks on capital gains, although it is an advantage which is frequently exaggerated. The low return on government securities, increased taxation in recent years, and the fees payable mean that gains are generally very modest.
The benefits of such policies for inheritance planning are, however, less in dispute. Under specific conditions the policy is exempt from French inheritance tax, and it also escapes the forced heirship laws in France. Timing is all important with such policies; taking one too early is needless and taking out too late losses the tax benefits.
The policies are marketed by insurers, brokers and agents, banks or their agents, and wealth management advisers, but all contracts are with an insurance company.
Historically, the funds in such a policy have been invested in risk free securities and bonds (fonds en euros), but with the collapse of interest rates in recent years and the introduction of tighter solvency rules required for such funds, a larger proportion (around 40%) are being invested in equities (unités de compte) on which there is no guaranteed return.
The banking and insurance regulator, the Autorité de Contrôle Prudentiel et de Résolution (ACPR), an agency of the Banque de France, has stated recently that insurers need to review their prices on such policies.
According to Jean-Paul Faugère, Vice-President of the ACPR, speaking particularly of unités de compte policies, he stated: "The accumulation of high fees can in some cases undermine any expectation of return, while the return on investment ultimately benefits only the financial intermediaries."
In short, the only winner with such policies is often the broker.
"All the signals seem to indicate that a movement of professionals would be appropriate or even necessary," he continued.
He concluded by stating that "In view of the findings, it seems to me that it is no longer possible to hesitate."
This is the second time this year that the ACPR has reminded life insurance professionals of their duty of care on the advice provided and on the fees charged, pointing out previously that "Entry and management fees are particularly penalising if customers are forced to quickly buy back their life insurance contract for lack of liquidity."
The institution also criticised the overuse of capital at risk funds (unités de compte) in policies, which they consider to be a "risky allocation" not necessarily "adapted to the needs of customers whose financial situation is fragile at the time of subscription".
The stand taken by the regulator echoes a statement made earlier this year by Bruno Le Maire, the Minister of the Economy, who called for a review of the fees to be carried out. "In this regard, the committee will usefully study the issue of transparency of distributors' remuneration vis-à-vis customers," stated the Minister.
The French parliament has also weighed in, stating in a report that "the French savings market is characterised by defects in its operation: limited competition between players, a high number of intermediaries and weak development of passive management. This structuring of the savings market is thus reflected in a high level of fees which weighs on the performance served to savers."
The fees associated with opening and running an assurance vie are multiple and often unclear.
There are sometimes administrative fees (frais de dossier), although they are not always charged, and they are only likely to be around €50 or less.
There are entry fees (frais de versement) for deposits, which can be anything from 1% to 3.5%, and which can also apply should you later deposit new funds into the policy.
There are then annual management fees (frais de gestion) which vary between 0,2 % and 1 % for sums invested in euro funds and between 0,5 % and 2 % for those invested in unités de compte.
Together with the entry fee, that would mean that over 10 years you could easily pay 10%+ in fees.
If you change the distribution of your savings on a policy, that is to say should you decide to change the portfolio of your investment, a brokerage fee (frais d’arbitrage) may be applied by your insurer. They are calculated on the amounts brokered (between 0.25% and 1% of their amount) or using a lump sum. Some policies allow a minimum number of changes without a fee.
Fees can sometimes also be payable on closure of an account prior to expiry of a minimum number of years, although such fees are prohibited for a policy that has been open for at least 10 years.
Although not a fee, some intermediaries also receive retro-commissions from the insurers for the policies they take out with them. The sums involved can be very substantial.
Since 2018 the practice of such commissions has been outlawed for independant financial advisors but remains in place for those who are agents of the insurer and those directly selling the product eg, banks and on-line companies. The problem is that intermediaries may not always as transparent as they should be about their status and continue to benefit from retro-commissions for new placements. Although agents are obliged to indicate the level of the commission to their client, there is far from complete compliance.
In addition to the fees of the broker, there are often also fees associated with investing in in funds (FCP, SICAV). Such fees are usually built into the remittance fee paid when you fund your policy. If this is not the case, they are added to the management fees claimed by the insurer.
Fees charged using on-line schemes are lower or even 'free', but as Robert Kent, a leading independant financial advisor in France points out, "It is essential to understand that this costing relates to set-up and ongoing annual charges for the assurance vie structure. One then has to consider fees within the structure itself, ie, the funds. From these companies we have seen internal fund charges of over 3% per year."
Even where professional advice is used, nothing is guaranteed, as was shown recently in a study of 500 funds carried out by Quantalys, a company specializing in financial analysis. They found an overall negative correlation between the performance after fees of the funds and the current management fees charged to investors.
The study also showed that investment fund management fees are a predictive indicator of future fund performance and that fees are negatively associated with performance predictability. In short, fees can cancel out the benefits of the stock performance and high fees are no guarantee of a good return.
Robert Kent cautions about throwing out the baby with the bathwater: "With due diligence, getting professional advice makes sense. However, investors need to be clear exactly what they are paying, to whom and in return for what."
Some changes towards greater transparency will soon be in place, with a requirement for all insurers to publish on their websites a standardised table of costs for their policies. From Jan 2023 they will also be obliged to publish the returns on their policies, before and after fees have been applied.
Nevertheless, the authorities want more and if the profession does not advance in its auto-regulation, they have brandished the threat of external control. "Unless the profession makes rapid progress, we will take a recommendation from the ACPR if necessary by mid-2023," said François Villeroy de Galhau, Governor of the Banque de France and President of the ACPR.
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