A few weeks ago, I took a look at whether you should invest with Primerica, a company which gets a lot of criticism for being a multi-level marketing company masquerading as a financial services firm. According to critics, it’s filled with agents that have little experience and training, with the majority of the time spent with new agents dedicated to teaching them how to recruit their own new agents.
In short, it gets a lot of crap talked about it because it’s a pyramid scheme.
I’m not sure it’s quite that simple. Yes, there are Primerica reps who rip off their customers, putting them in products that aren’t suitable or who use expensive loans to get people into RRSPs. But there are also many folks who work for the company who legitimately want to help people invest.
Anyhoo, after that article got published, I received an email from a reader asking about a company very similar to Primerica, World Financial Group.
He saw the ads while watching curling, googled the company, and thought they seemed legit. He found an agent, met with him, and got presented with a financial plan which included borrowing $50,000 against his house to put into the stock market.
The agent had several arguments for borrowing against the house. He could get that money at a cheap interest rate. The dividend yield on the mutual fund alone would be enough to pay for the interest. And Canadian stocks are more depressed than a dumped 15-year old. According to the agent, he’d be silly not to borrow, especially since house prices are bound to drop.
So let’s take a closer look at whether he should invest with World Financial Group.
What’s World Financial Group?
World Financial Group was first founded by Hubert Humphrey in 1991, after he got pissed off and left Primerica. The original name was World Marketing Alliance, and it ripped off a lot of ideas from Primerica.
In 2002 the company was acquired by Aegon, a large insurance company from The Netherlands. These days, the company has grown to 1,700 licensed reps across Canada with a further 19,000 in the U.S. 180,000 Canadians have at least some of their savings invested with World Financial Group.
The company modeled itself in the same way Primerica does, encouraging agents to not only sell products but to recruit new agents under them. They would then get a portion of their earnings. These new agents would get a portion of their recruits’ income. And so on.
Related: That time World Financial Group tried to recruit me
The only real difference is Primerica only offers term life insurance. World Financial Group, through its insurance subsidiary Transamerica, offers stuff like disability insurance and universal life insurance.
Term life insurance is pretty straightforward. You pay a premium for a set amount of time and get paid the policy amount if you kick it during the life of the contract.
Universal life insurance is a little different. Each month some of the premium payment goes towards the insurance part of the contract, while any excess gets put towards the cash value. Basically, universal life insurance combines term insurance with an investment arm.
There are certain advantages to universal life products. You can borrow against the cash value of the policy. The insurance aspect protects the cash value from huge swings in the value of the underlying investment. You can decrease the premium in hard times, provided you still pay the minimum required to keep the insurance coverage.
But there’s one huge disadvantage, and that’s the fees. The investment part of a universal life product will be put in a segregated fund, which is a mutual fund with some sort of principal guarantee. You pay dearly for that principal protection though, with annual fees anywhere from 3-5%.
You can see why some people might have a problem with that. A nice basket of low-cost ETFs will have a fee of one tenth that of a segregated fund.
Agents have one big incentive to do this, and that’s CASH MONEY BABY. Commissions on universal life products are huge, often totaling a year’s worth of insurance premiums up front to the agent. Most WFG agents will get about 30-40% of that since so much of the compensation goes to people above them in the pyramid.
World Financial has a little more diverse product mix than Primerica. Through Transamerica and at least one other insurance provider, it offers everything from long-term care insurance to annuities. Word is Transamerica’s policies are pretty expensive compared to others, so I’d recommend at least getting a second opinion on price before committing to something WFG offers.
Investing with World Financial Group is pretty much equivalent to investing with any other mutual fund salesperson. WFG offers the same funds from the same fund families as everyone else. All of the usual suspects are there, including Franklin Templeton, AGF, Mackenzie Financial, CI, and so on.
The company can also refer clients to mortgage brokers, banks doing debt consolidation loans, and so on. I would assume the agents get a kickback each time this happens. Naturally, the agent who told my reader to borrow $50,000 had a mortgage broker who could get him a killer rate.
Should you invest with World Financial Group?
This is going to sound pretty familiar to those of you who already read the post on Primerica.
I still maintain the average World Financial Group agent is probably worse than the average Investors Group agent or the nice lady who works at your bank. If agents aren’t going to be supervised closely, bad stuff is going to happen.
Related: that time I interviewed with Investors Group
But at the same time, I think some of the bad reputation is unwarranted. Most WFG agents are regular folks who legitimately want to help people. They get distracted by the constant pressure from their superiors to recruit more people.
Many of these people only do investments on a part-time basis, which means they don’t know a whole lot. They might think they’re doing well when they get somebody in an expensive mutual fund or a segregated fund with principal protection without realizing the fees really kill returns.
The thing World Financial Group (and Primerica) haters downplay is just about every full-service financial services company is out to rip off their clients. The bigger ones just do it with a little more professionalism than the ones filled with part-time agents. Some people should be in segregated funds. Many other people are in them because an insurance salesman saw them coming.
The big risk in investing with World Financial Group isn’t the agent leaving town with all of your money. Sure, that happens, but not terribly often. The risk is being invested in high-fee funds and insurance products. When it comes to that, I’d rank WFG as only slightly worse than other financial services companies.
It’s funny. If a bank were to have told my reader to borrow $50,000 and put it into RRSPs, people wouldn’t really bat an eye. Banks lend money. It’s not a big deal. But when a WFG agent does the same thing, people don’t like it, even if there is a pretty legit case for borrowing to invest.
The bottom line is this. Overall, you probably shouldn’t invest with World Financial Group. Fees are too high on their products. But at the same time, they’re probably not a whole lot worse than some of their direct competitors. Each is out to collect as many fees as possible from you. Helping you with your finances is a secondary goal at best.