High Costs for Poor Returns


I recently received a plea from a lady living in Thailand to warn people against a well-known locally-based financial adviser to expats for “locking clients into long-term investment products promising high returns, but in actuality delivering low returns and high fees.”

Her own experience has included suspension of two of five funds in which her money was invested (including “a risky real estate scheme in Australia,” as well as “misleading and dishonest reporting,” by the adviser, followed by… silence.

Unfortunately this is typical of the experience of many expats living in Asia. They trust advisers who operate within the law, but generally channel clients’ savings into investment products that give them the largest and most immediate commissions.

The most widely-promoted of these are investment-linked assurance schemes (ILASs), where policies with reputable insurance companies are used as the vehicle to channel savings into various investment funds.

The insurance content is minimal. Investment returns are mediocre at best, and the funds recommended often much higher-risk than appropriate for the investor’s circumstances. Quality of reporting to the client is usually poor.

But substantial charges make these products highly profitable for the companies and for the financial advisers selling them. So they are promoted heavily. In Hong Kong, it was reported not long ago, about three-quarters of all investment products sold to individual investors are these ILASs.

“It is not unusual for a client to see his first full years of contributions to an ILAS paid out to cover commission costs – money that goes to the person who recommended the plan,” Nicky Burridge reported in the Morning Post. “The fact that an adviser gets paid his commission in one large upfront payment means the adviser has little incentive to stay with the client after the sale” and provide ongoing guidance.

To pay such commissions and run their own profitable businesses, insurance companies levy high charges. You can often see how high, if you plough through all the paperwork and understand the complexity and the jargon (of course – doing that before you sign up, not after).

One of the more reputable firms says of one of its savings plans: “Every time you pay a contribution, we deduct a single bid/offer spread charge. This can add up to 7 per cent of the amount invested.” It also levies a 1 per cent management fee, while the fund managers will also charge their fee, “usually between 1 per cent and 2.5 per cent a year.” And there are other charges.

A familiar trap is that investors sign up to pay premiums for long periods, often as much as 30 years. But because of changed circumstances or anger at the low level of investment returns, few ILAS clients stay with their plans to maturity. Only about 7 per cent of them, according to one expert.

Any client who insists on cashing in before his maturity date set years ahead faces heavy exit charges.

Although there are occasional exceptions, it’s generally a bad idea to sign up for any investment plan routed through an insurance company. It’s also a bad idea to use a financial adviser who does NOT charge you an annual fee for his/her services (therefore depending entirely on commission income).

It’s nearly always preferable to manage your own investments, putting your savings into directly-owned assets such as shares, exchange-traded funds, bonds, real estate, bank deposits and gold.

If you don’t have the expertise to choose which one and to time when to buy and sell, just follow a simple formula plan. It’s a concept first popularized in the US by Harry Browne.

You decide on a simple model such as 25 per cent into each of four categories – for example shares, bonds, cash and gold. You invest in the lowest-risk versions of each category. Then forget about watching your portfolio.

Just once a year you tot up what you’re worth. Where one of your holdings is substantially above its 25 per cent mark, you cash in enough to bring that holding down to the mark, immediately switching the cash into the asset category whose value is well below its mark.

Any new cash available for investment, you accumulate and invest when you do the annual rebalancing.

You’ll very rarely lose money in any year, and if that happens it will be small. Every other year, your portfolio will grow.

Over long periods, that’s a proven way to get slowly but steadily richer, with virtually no losses, very few investment judgments to make, minimal fees to pay, and no stress.

CopyRight – OnTarget 2013 by Martin Spring