FIREinTh
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Post by FIREinTh on May 25, 2019 10:23:35 GMT 7
A friend of mine has been basically scammed by a well known financial advisor in Thailand. The fees in the plan he was sold are so high his cumulative return over the past 10 years is only 6%. This is sad because my friend is in the prime earning years of his life and we're 10 years into one of the best bull markets ever.
I've been to a few of their investment meetings over the years and thought everything was fine with that company until last week when my friend asked me to look into why his return was so low. There were lots of questions that needed to be answered so we met in person with his financial advisor.
At the meeting, I found out that ten years ago, my friend, who is a novice investor, was sold a highly complicated endowment/assurance plan that is front-loaded with very high fees, and got locked into it for 15 years! I don't know how this advisor can sleep at night knowing he sold such complicated plans to novice investors and locked them in for the prime of their working lives. My friend didn't even realize exactly what he's locked into until that meeting.
I had previously looked at the funds he was invested in and thought the funds and allocation were fine, but after more research, I was shocked to discover the layers upon layers of fees my friend was charged. First off, his statements list the names of funds he's invested in, and we all know their factsheets and fees are available online directly from the asset management company behind the fund. These fees are about 1.5-2% per year.
That seemed fine, but after the meeting last week it turns out he's actually invested in mirror or copy funds from Friends Provident that are exact replicas of the original funds, and all those mirror funds have lower returns. As far as I know, that's because Friends Provident takes fees off the return of about 1.5%. There's also a platform fee of 1% per year on top of that.
But here's the real scam. The endowment is heavily front-loaded to benefit the advisor at my friend's expense, with a 6% fee of the first 18 months of deposits! That fee is then taken out yearly for the rest of the endowment. So, if you deposit $1,000 per month for 18 months, your total deposit is $18,000 and your fee is $1080. That $1080 is then taken out yearly until your plan matures, which is a total of 15 years for my friend. As a result, my friend was paying roughly 6% fees per year for the first half of the plan, which is why his total return is so low. Now ten years into the plan, that fee is about 1% because his total amount invested is larger, but of course, you want to have as much invested as possible for as long as possible, and those early fees destroyed the amazing returns of the current bull market. Also, the financial advisor said he couldn't calculator the IRR because the fee structure is too complicated!
Here's a summary of the layers of fees he's being charged:
1. 1.5-2% from the asset management company that created the fund.
2. About 1.5% for the Friends Provident mirrors funds.
3. 1% platform fee.
4. Original endowment fee of 6% of the first 18 months of deposits.
If he withdraws the money he has to pay a penalty, so it's probably best to leave it in for the next five years until his plan matures. That gives him a lot of time to figure out what to do next.
All in all, it's sad a financial advisor my friend trusted sold him such a complicated plan with fees so high he almost can't make a return and locked him into it for 15 years.
On the bright side, it's better than losing everything and he can look at it as forced savings because if he didn't have this plan he probably would have spent the money.
Does anyone have similar experiences?
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AyG
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Post by AyG on May 25, 2019 11:44:38 GMT 7
It reminds me of the situation in the United States. There are basically two types of financial adviser: ones who have a duty of care to offer you the best advice, and ones who don't. Why the latter category even exists, I don't know.
Then in the UK there are still (I believe) tied financial advisers, who can only recommend from a limited range of products.
The mirror copy of funds is absolutely standard for products such as investment bonds and many retirement products.
What I would say is that the fees are a drag of around 4%/year on performance. Over the next 5 years that's going to be a hefty proportion of what he could be making. Do the calculations (not forgetting compounding), but I suspect that he would be better off biting the bullet and paying the escape charges.
I am also curious about the high fund charges (1.5-2%). That is extraordinarily high for developed financial markets. It would even be steep for most Thai funds. And a 1% platform fee is outrageous.
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FIREinTh
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Post by FIREinTh on May 25, 2019 12:13:05 GMT 7
Just a couple example of funds he's in: BlackRock US Flexible Equity has a fee of 1.5% and First State Asian Equity Plus has a fee of 1.59%. Friends Provident Invesco GS European Equity has a fee of 1.93%. www.blackrock.com/hk/en/literature/fact-sheet/bgf-us-flexible-equity-fund-class-a2-usd-factsheet-lu0154236417-hk-en-retail.pdfwww.firststateinvestments.com/uploadedFiles/Content/UploadedLiterature/Auto/EMEA/pdffundfactsheets/IE00B067MR52_First%20State%20Asian%20Equity%20Plus%20Fund%20I%20USD_en_gb.pdffactsheets.financialexpress.net/fpil/RE38.pdfI understand the purpose of mirror funds - to allow for small, regular investments - but my friend and I didn't realize he was in mirror funds with lower returns because his statements only has the original fund names. And you're right, there are only about 10 funds he can invest in, and his financial advisor's interests are definitely not aligned with his. Tony Robbins talked a lot about the different types of advisors in Unshakeable. Advisor's that don't put your interests first shouldn't be allowed for sure. As for what to do now, since my friend is a complete novice investor, he needs someone to manage it for him. In addition to the withdrawal penalties, he might need to pay an initial deposit fee with a new full-service advisor. But like you said, it's probably worth looking into more. Standard Chartered in Singapore is one option and maybe Fletch can give some information as to how much guidance they can give my friend. There's also a few robo-advisors in Singapore that I think would be ok for him since everything is done on autopilot. We're still waiting for a reply from the advisor as to exactly how much the penalty is if he withdraws. It depends on if he withdraws the original 18 months as well. Once we have that and an idea where he can move the money to we'll be able to make a more informed decision. Thanks for your help.
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AyG
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Post by AyG on May 25, 2019 12:35:32 GMT 7
No, your friend doesn't need someone to manage it for him. There are simply, one stop funds, that will do perfectly well. You don't mention his nationality, but Vanguard has simple funds such as their "target retirement" funds or "lifestrategy" range. The performance isn't going to be earth shattering, but the fees are very low and performance has been better than many actively managed funds.
(You won't often find me advocating passive investment, but this does seem like one case where it's called for.)
In my opinion (and admittedly based upon limited information), he should open a straightforward brokerage account with low fees, and invest in a small number of the type of funds I've mentioned above. (More specifically, if he's a US citizen, he should invest not only in a US fund of this type, but also a complementary international fund.)
If you'd care to state your friend's nationality and in which country he intends to retire, that would be helpful. I could then be more specific with my suggestions.
FWIW, a few years ago I helped an elderly lady who'd invested her life savings through a UK IFA. The asset allocation totally failed to take into account her risk appetite (extremely risk averse), or the fact that she was living in Thailand. They were also charging a steep annual fee for their totally inept asset allocation. I have very little faith in advisers of any shape or form. One either has to do one's own, detailed research, or (as suggested above) go down the simple, but not stellar, approach.
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FIREinTh
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Post by FIREinTh on May 25, 2019 13:01:10 GMT 7
Good idea to get him into a simple, low-cost brokerage and buy one or two funds himself. I totally agree with that approach in this case. He's Russian and is planning to retire in Thailand. What would you recommend?
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Post by Fletchsmile on May 25, 2019 17:34:19 GMT 7
Smilar experiences: yes
Endowments, whole of life plans, and their offshore equivalents offsore portfolio bond (OPBs) are very often poor value for money because of the fees. Thankfully in the UK enowments have really fallen out of favour. At one point it was something ridiculous like 75% of mortgages were linked to an endowment. Every personal experience I've had with them has found them poor value for money. A couple of examples: I remember my first UK mortgage was linked to an endowment. I wanted a PEP mortgage, but most places wouldn't do, and often to get the best promotional rates you had to take them out. That's why I took mine out. Knew the endowment was crap, but the mortgage rate was more important. I've also had an offshore portfolio bond (OPB). First experience was required by my employer to have such an approved scheme to be able to get an "allowance" that would provide some form of long term financial contribution to my future in place of a pension. As an expat the local schemes in the countries I was in weren't a option knowing I would move around. So it was either find a scheme to have the "allowance" money paid into or not get the money. Take it or leave it. I knew the policy was crap, but better to get the money than not. Both these I ended up cancelling before the term. Both were poor value for money I also helped my mum's sister getout of one of these products her financial advisor put her in after her husband died. Basically she would always wait weeks to get any money out of the policy. When larger than usual expenses came up she had to request withrawals, like a holiday, new sofa etc. She had no real cash reserves (though quite good pensions for day to day needs). She should never have been in it in the first place. Fees were horrendous and net returns poor. I looked into it, and basically any returns she got/withdrawals made were effectively coming from capital, as the fees were terribe. I looked at the policy, evaluated it, then helped write her stern letters to get it cancelled, along the lines of it was totally unsuitable and I would need to take legal action if not expedited. When she tried herself she got fobbed off, as not being well versed in this stuff. We got the money back. Basically what she put in over many years less her withdrawals as fees ate any "profits". I considered investing it for her like I do my mum. But her financial situation was different, she had no real other investments or savings or cash reserves, but did have reasonably good spouse pension income from her late husband. We basically identified a high interest bank account with her bank, and parked it there. She was so happy just be able to get at it when needed, rather than have to wait weeks on end. Providers of such policies generally fall into two main categories: 1) just don't care about the customer only their fees. 2) Those that justify to themselves that they are supposed to be long term, and that if held for long term they are OK. i.e in OPs friends example, if he holds for 15 years it's OK. Plus their customers aren't qualified to understand all the things that could go wrong, etc etc Poor justifications really. So yes these products suck big time. Question is where to go from here?
In all the above cases it made more sense to cut the policies, bite the bullet and get out rather than wait until maturity. Needs evaluating though.
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FIREinTh
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Post by FIREinTh on May 25, 2019 17:58:24 GMT 7
Thanks. I'll report back once I find out more about the penalty to withdraw.
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Post by Fletchsmile on May 25, 2019 18:00:58 GMT 7
..... If he withdraws the money he has to pay a penalty, so it's probably best to leave it in for the next five years until his plan matures. That gives him a lot of time to figure out what to do next. All in all, it's sad a financial advisor my friend trusted sold him such a complicated plan with fees so high he almost can't make a return and locked him into it for 15 years. On the bright side, it's better than losing everything and he can look at it as forced savings because if he didn't have this plan he probably would have spent the money. Does anyone have similar experiences? Leaving it there to maturity to avoid the penalty is an assumption many people make. Often seems easier too. But very often the assumption is wrong. The penalties are there to deter withdrawals at any stage before maturity.
Another reason people don't cash them in when they should is often people also don't want to "crystallise a paper loss", so also put it off for that reason. Again likely to be another mistake. The money has been lost.
The first step is to get a surrender value for the policy. Ask for one. From there you can start to evaluate if it makes sense or leave. Basically compare what you think you could get from that lump sum in a much lower fee structure, to what you will get at the end.
To compare to what you get at the end: Worth also asking the company for a projection of the value at the policy maturity date. If they don't provide or aren't obliged to. Then you need to do some calcs yourself looking at fee structure, past investment returns etc
As part of the process you could also express your disastisfaction and ask them who is their regulatory body you could complain to. If an OPB in reality they will run you round in circles, neither advisor or policy provider will accept as their fault. So likely you just need to bite the bullet.
On an emotional level I can say that dragging the policy on till the end isn't pleasant either. You've made a mistake taking it out in the first place and as long as you still hold it you are reminded of that. Bit like picking a wound that never heals properly. There will be a feeling of being p****d off when you cash it in and finalyy accept the loss. But after that the healing starts, and over time it is no longer in your thoughts so often, so you start to forget it. Do you really want to drag on feeling unhappy about it for another 5 years. Like a bad marriage, you're otherwise married to that policy for 5 more years of suffering. Instead, get that sense of relief you're out of it.
Yes there's few positives like: something to learn from, at least he has put something away instead of just spending. Looking forward if he does it right, he will also start to see nice returns.
Don't look at it as "forced savings for 5 years", or "best to just continue to avoid a penalty". Get a surrender value. Then take a step back and evaluate the 2 options: leave or stay and which will do best in the next 5 years, as though this was Day 1. Which it is. Day 1 of the rest of his life. He made a mistake. Own it. Learn from it. Look forward.
If he needs any help with evaluating the numbers, just shout and let us know what they are. Pretty much know the answer before he gets the surrender value to be honest. But go thru objectively just in case
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FIREinTh
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Post by FIREinTh on May 25, 2019 18:08:47 GMT 7
Really good points, thanks. You're always good at remembering the emotional side of investing.
I'll let you know as soon as I get the info.
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Post by Fletchsmile on May 25, 2019 18:10:21 GMT 7
Good idea to get him into a simple, low-cost brokerage and buy one or two funds himself. I totally agree with that approach in this case. He's Russian and is planning to retire in Thailand. What would you recommend? Is he working here, so LTFs an option? Tax breaks very useful. Getting the tax breaks would also help restore some faith in the financial system and let him see immediate results in valuations vs cost (though he still has to wait the holding period). Likely he should do other things as well, but this would be one of the nice choices.
One difficulty is that he's "once bitten". Even though we know that long term equity based products make sense and should make money, there's also the risk markets tank just after he takes them out. No-one knows when crashes will hit, but if unfortunately they do just after he exits, that's then "twice shy" and may impact his views for life. So he no longer wants to touch anything again and misses out. This needs careful handling, including a combination of being very clear and makng him understand expectations; plus suggestions may need to be less risky than they would be for someone that hasn't had bad experiences. LTFs again offer a nice cushion
Anyway, keep us posted.
How old is he? and is he working here?
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FIREinTh
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Post by FIREinTh on May 26, 2019 9:30:58 GMT 7
How old is he? and is he working here?
He's about 50 and we work together. I got him into LTF's a couple years ago He's going to follow-up with the FA about the surrender value so we should know in a few days.
He mentioned he might want to use the money to pay off the mortgage on his condo (he bought one about the same time as me last year). He was able to get a local Thai mortgage because he has residency (it wasn't easy though since the bank had never given one to foreigner before; the computer kept rejecting him). He got a reduced interest rate for the first few years but then it will jump to about 7-8%.
I know usually it makes sense to keep the mortgage and stay invested since the mortgage is a leveraged investment, but in the case it might make sense to pay it off because of the high interest rate. Thoughts?
But even if he pays the mortgage, he'll still need an account somewhere else for future investments, so it's still worth figuring that out.
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AyG
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Post by AyG on May 26, 2019 9:54:17 GMT 7
I know usually it makes sense to keep the mortgage and stay invested since the mortgage is a leveraged investment, but in the case it might make sense to pay it off because of the high interest rate. Thoughts? Thai people I know simply switch mortgage provider when the higher rate kicks in.
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FIREinTh
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Post by FIREinTh on May 26, 2019 10:53:51 GMT 7
Thai people I know simply switch mortgage provider when the higher rate kicks in. Good idea, thanks.
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AyG
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Post by AyG on May 26, 2019 11:34:51 GMT 7
With the friend being Russian, that rather limits the options as to what he can invest in.
Let's assume, for the sake of argument, that he can open a brokerage account with Internaxx in Luxembourg, he will then be able to invest in (amongst other things):
- ETFs - Funds (a limited range) - Investment Trusts (listed on the London Stock Exchange)
(I'm using Internaxx here as the example since it offers a range of funds. Most brokers for expats don't.)
Now let's assume he wants to invest 80% in globally diversified equities and 20% in globally diversified bonds.
First, let's look at the equity portion:
ETFs Key things to look for include:
- Low TER (total expense ratio). - Physical stock holding i.e. not using financial derivatives. The later is more risky, since the company providing the derivatives may go bankrupt leaving you with nothing. - Non-distributing fund so you don't have to worry about reinvesting dividends. - Good liquidity, which should reduces big/offer spreads.
One ETF that ticks all the boxes is iShares Core MSCI World UCITS ETF [SWDA]. TER (total expense ratio) 0.20%. Denominated in GBP/EUR/USD depending upon which exchange you buy it. The USD class of this ETF has a 5 year annualised return of 12.6%.
Funds Vanguard Global Stock Index Fund Investor EUR Accumulation is a low cost index tracker. However, its TER is higher than the ETFs at 0.3%. With the fund there is no bid/offer spread, and liquidity is not an issue. However, I think the iShares ETF is a better proposition for a long term investor. 5 year annualised return 10.4%.
For active management, there's Morgan Stanley Investment Funds - Global Opportunity Fund I. Its 5 year annualised return is 17.1%. I can't find a definitive version of the TER on this fund, but of course it's going to be more than the Vanguard fund. The key question is whether one believes that active management can outperform passive management over the longer term. If one believes (as I do) it can, then this might be a good buy. However, its performance would need to be monitored, just to make sure it doesn't “go off the boil”. This might be a drawback for your friend.
Investment Trusts There are quite a few global investment trusts out there. However, many of them invest quite heavily in technology firms. This has led to good short term performance. However, I doubt whether this is sustainable: the share prices of these firms are trading at crazy P/E ratios, and I think that they will come crashing down at some point.
One cautious global trust that I can happily suggest is F&C Investment Trust [FCIT] (formerly known as Foreign & Colonial). TER 0.56%. 5 year annualised return 15.4%. However, it's only available in GBP. It pays a dividend. And there are various issues of discount to NAV and liquidity that would need to be considered (as with all investment trusts).
Now turning to bonds:
ETFs Something like Xtrackers II Global Government Bond UCITS ETF 5C could fill this role. TER 0.2%. Physical replication (which is new - it used to be synthetic). 5 year annualised return 6.5%.
If you prefer iShares, then iShares Global AAA-AA Govt Bond UCITS ETF USD (Acc) [GAAA] would be suitable. TER 0.2%. Physical. This is a new fund, so no long term performance data. Note this is weighted more heavily towards Europe then the Xtrackers ETF which is heavily USA.
Don't go for a hedged ETF version. It adds to the costs, and since future expenditure will probably be in THB, it adds no value.
Funds The ongoing charges usually make bond funds uncompetitive. However, worth a look might be:
Templeton Global Total Return Z (acc) USD. TER 1.1%. 5 year annualised 0.8%.
Investment Trusts There's not a lot of choice here. I like and hold Henderson Diversified Income [HDIV]. TER 0.62%. 5 year annualised 5.1%. Unfortunately, it has a hefty dividend yield which would need to be reinvested. Others might prefer Invesco Enhanced Income [IPE] TER a bit steep at 1.38%, but the 5 year annualised return is 6.1%. The dividend yield is even heftier than HDIV. Both these options are riskier than the ETFs.
Anyway, I hope this is enough to give you an idea of the approach I would use to a problem like this.
Just a couple of additional notes:
(1) It would be possible to implement something similar using mutual funds in Thailand. However, the costs would be substantially higher. Also, there's the challenge of researching funds in Thai. That's not something I'm particularly comfortable with.
(2) Once the friend has got a core, global portfolio in place, he should probably start building up investments in the Thai stockmarket until they represent perhaps 10-20% of his portfolio, making use of the tax breaks available with LFTs and RMFs if possible.
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FIREinTh
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Post by FIREinTh on May 26, 2019 18:30:44 GMT 7
Great advice, thanks!
I'll talk to him about a 2 ETF portfolio on Interactive Brokers since I use them and I can help him with the learning curve. They do have a good mobile app and a decent web interface. If he's only in 2 ETFs I think he'll be able to handle it with a bit of help.
I like SWDA as a single global equity ETF, but SPDR ACWI might be a better choice since it has a small allocation to emerging markets. It's similar to Vanguards All-world VWRL but it's accumulating.
I also like your idea of a global government bond ETF, either GAAA or IGLA with iShares.
I'll report back as soon as I know the surrender fees.
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