Regular Savings Plans for Expats
For many years, the default savings option for some expat financial advisors has been the 'offshore regular savings plan'. Produced some of the world's largest insurance companies, they project an image of quality and security but the reality is quite different. Most insurance-wrapped offshore savings plans are costly, restrictive and use expensive funds, ultimately 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 advice. Long-term contracts are often sold although the average term completed is only 7 years, so unless your advisor is committed for the whole contract, the risk of losses is high.
Contractual plans provide access to funds that can be purchased in very small amounts, but restrictions and fees erode the likelihood of satisfactory results. Motivation for advisors to manage policies throughout the term, often up to 25 years, also wavers owing to expat financial advisors being paid at the outset with little incentive to continue.
Commission - what did I pay?
To understand why you're unhappy with your policy, it helps to understand advisor remuneration which is based on the contributions due over the contracted term, not on funds invested. This means longer terms pay bigger advisor commissions which deducted from the first two years contributions. This 'front-end load' makes them very restrictive and even worthless if cancelled in the early stages.
The 'initial period' ranges from between 6 and 24 months, during which time closing a policy early means forfeiting payments until that point. Therefore, 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
I Have a savings plan - should I keep it?
Thousands of expats have contracted offshore regular savings plans with Quilter (Old Mutual) Generali (Utmost), Friends Provident, RL360 and Hansard to name a few. The enquiries we receive regarding these policies all reflect the same issues - high charges, exit fees and poor performance. The difficult question is whether to cut your losses or continue with the plan?
The answer to this question will depend on how far you are in to the policy and your desire for something better. In either case, it usually involves having to forfeit a significant amount to close your policy, which can be very tough to accept.
However, regardless of circumstances we can usually demonstrate that by taking the difficult decision to incur the exit fees, there is a very realistic chance of recovering the losses over time. The calculations shown above do not even include the higher underlying costs funds, but we know that using low-cost, flexible solutions without contractual obligations vastly improve the likelihood of positive results.
What are the alternatives?
Many investment platforms can receive regular payments without restrictions. Using either direct debits or ad-hoc cash transfers, monthly or quarterly payments are possible that can also coincide with investment reviews, promoting regular contact with your advisor, improving service and outcomes.
Platform charges are low with underlying fund and advisors fees clearly visible. Securities can be liquidated easily without penalty and monies returned quickly, giving you a flexible savings vehicle to invest in when it suits you.
If this your dilemma and you'd like to learn how lost performance from your offshore savings plan can be recovered, get in touch today and we'll show you options with the best possible results.