Offshore Savings Plan/Portfolio Bond vs. Low Cost Platform and the difference between 'Commission-Based', 'Fee-Based', and 'Fee-Only' Financial Advisors.
Many contractual savings plans/portfolio bonds are sold by financial advisors (commission only salespeople?) in the offshore financial services industry.
Many people are looking for a disciplined approach to savings on a monthly basis, either to supplement retirement income or to fund school fees, house purchase etc. There are many popular plans, but is this because of the benefits to the client or the commissions to the advisor?
Cancellation in the first 18 months will result in a total loss and hefty losses occur on early termination. The first 18 months contributions are always lost if the plan does not reach maturity.
Let's look at the fees of one of these plans.
This is 4% pa that is deducted monthly during the initial period. The initial period is 18 months. This 4% fee continues to be deducted at the start of each month until the policy matures or the 25th anniversary- whichever is earlier.
Monthly Fee - There is a $8.50 monthly policy fee
Policy Management Charge- This is 0.75% pa, applied monthly on the value of the fund
Underlying fund fees - Can be between 0.35% to 3% pa
Let's consider the establishment charge on such a plan:
Assume someone takes out a 20 year plan at 1,000 USD per month. That equates to 18,000 USD in the first 18 months and 4% of this is $720.
In the early years, this is a hefty drag on performance. By year 5 if we assume fund fees of about 1.75% and policy management fees of 0.75% and policy fee of 0.85% ($8.5 a month) as well as the 4% fee paid based on the first 18 months we can try and make some assumptions of the cost. If ongoing advice at 1% pa is required, this must also be taken into account.
Assume a 6%pa investment return at $1,000 contribution per month over 5 years-
1. Low cost platform with no initial fees and lock-in penalties.
$71,430 (based on 1% total fees- incl advice, platform and low cost funds)
1. Offshore Savings Plan/Portfolio Bond
$56,700 (estimated using fees above, return less than the contributions paid)
But, the client in the first example can access the $71,430 without charge- in full, there are no lock-in periods.
The client in the second example will lose a large chunk of the $56,700 in surrender fees.
Offshore Savings Plan/Portfolio Bond- long term
Due to the complex charging structures applied, it is difficult to predict the effects on returns but the fees are going to be broadly 4.5% pa
If we look at the examples above, over 20 years, then the estimated fund at 6% pa growth ( assuming the same investment funds*)
1. Low cost platform with no initial fees and lock in penalties.
$412,000 (based on 1% total fees- incl advice, platform and low cost funds)
1. Offshore Savings Plan/Portfolio Bond
$280,000 (estimated on fees above)
The difference is substantial and, remember, there will always be a surrender fee up to the date of maturity of the offshore savings plans/portfolio bonds.
* Low cost platforms use clean funds and the fund fees are much less expensive than the same funds in an insurance product.
The Difference Between 'Commission-Based', 'Fee-Based', and 'Fee-Only' Financial Advisors.
Commission-based is as it sounds, an advisor or agent is compensated mainly by earning commissions on products they sell. They may also earn bonuses and incentive vacations by meeting quotas on certain products. Commissions create conflicts of interest. It makes you wonder whether these advisors are recommending a product because it's right for you, or it's right for them.
Fee-Only is on the other side of the spectrum. Fee-Only means no commissions. A Fee-Only advisor like expatwealthatwork is compensated 100% from clients in the form of financial planning and investment management fees. They do not accept kickbacks or other incentives for recommending certain investments or products. Their incentive is to provide you good service and advice so you continue working with them. Fee-Only is considered to be better aligned with the client and their goals. It also has the least conflicts of interest.
So what is Fee-Based? Fee-Based is an advisor who is compensated in the form of fees for financial planning and investment management, AND commissions for investments and insurance they sell. Most advisors are fee-based. While they may emphasize that they work on fees, they can also recommend products that they earn a commission on. There are more conflicts of interest because of the ambiguous nature of the business model. "How am I paying for advice? Are they working for me, or are they trying to sell me something?"
Remember, Fee-Based is not Fee-Only.
Consider Your Options
The next time you receive a cold call or email from someone pitching an offshore product or financial service, consider us: email@example.com