The default savings option for expats has been the 'offshore regular savings plan'. Produced by some of the world's largest insurance companies, as familiar brands they project an image of quality and security but the reality is quite different. Most insurance-wrapped offshore savings plans have the similar expensive fee structure, producing disappointing results for thousands of investors.
How advisors are paid is a cause of debate as large commissions are earned for making a sale, not giving trusted advice. Although long-term contracts are often sold, the average term completed is only 7 years, so unless your advisor is committed for the whole contract the risk of losses is higher.
Contractual plans provide access to a range of funds that can be purchased in small amounts, but high charges erode the likelihood of satisfactory results. Motivation to manage policies throughout the term, often up to 25 years, also wavers owing to the upfront commission on offer.
Advisor remuneration is based on the total of payments due over the contracted term, not on the funds invested so larger contributions for a longer term mean advisor payments are higher. The plans are 'front loaded', meaning the charges are deducted at the outset to pay the commission, making them more restrictive andperilous for the investor.
The 'initial period' ranges from between 6 and 24 months. Closing a policy early means contributions made during the initial period are forfeited, so terminating a 25 year plan with a 24 month initial period after just 4 years (48 months) could result in a 50% loss of contributions.
To calculate the amount of commission an advisor is paid the following formula is used, with this example of $2,000 a month for a 25 year term:
Term of contracted term: 25 years
Contracted contributions: $2,000 per month ($24,000 a year)
Total amount payable over contracted term: $24,000 X 25 years = $600,000
Commission payable: $600,000 X 4.4% = $26,400
What are the alternatives?
Investment platforms can receive regular payments without the restrictions. Using either direct debits or ad-hoc cash transfers, monthly or quarterly payments are possible and by coinciding with investment reviews, can promote regular contact with your advisor and improves service.
Platform charges are usually modest with custody, underlying fund and advisors fees all clearly visible. Securities can be liquidated easily and without penalties, providing a flexible, liquid savings vehicle to invest in when it suits you.
Finding an advisor with a long-term outlook is where we can help. We believe that all investors have the right to save in a safe, secure and fair environment, so get in touch today and one of our team will talk you through the options.