For as long as people have been investing, there have been unscrupulous salespeople looking to profit from an individual’s inexperience in investment structures. They will try to take advantage of their inexperience by selling them unsuitable and overly expensive financial products.
It’s important to note up front that we’re not talking about the kind of investment scams carried out by the likes of Bernie Madoff or Jordan Belfort – the ‘Wolf of Wall Street.’ The types of schemes you’ll read about in this article are legal and can be suitable for certain types of investor if they are traded properly. The problem is that they are often sold in a way designed to benefit the salesperson at the expense of the client.
Unless you are experienced in the financial sector, it’s easy to get taken in and sold one of these products without realising exactly what you’re signing up for. Details of the charges are often hidden, buried in jargon, or simply not disclosed at all.
Sometimes, unsuspecting investors won’t realise they’re being fleeced until they look at a statement showing the deductions that have been made, or until it’s pointed out by an honest financial professional.
UK expats living abroad in places like Hong Kong are often targeted. Financial regulation is much laxer in Hong Kong, to the extent that we have been told by some clients that it’s almost seen as a rite of passage to have been the target or victim of some kind of rip-off investment scheme.
To help you avoid being a victim, and to help you work out if you have been in the past, here are two examples that we are aware of.
1. Full Commission Insurance Linked Assurance Schemes
Salespeople have historically persuaded a Hong Kong based client to make regular monthly payments into an insurance-based investment plan. These types of plan are generically known as Insurance Linked Assurance Schemes (ILAS).
The conversation would usually have gone something like this:
“The more you pay up front the quicker you’ll start building up a decent sized fund and the lower the charges will be. So, start off paying in $5,000 per month.”
”I’m not sure I can afford that much.”
“Okay. Well, just start off at that amount initially from your capital so you give your fund an early boost and spread the risk of investing your capital all in one go. You can always reduce the amount you pay in later.”
Unless the client asserted otherwise, the salesperson would have written the policy on the longest term – usually 25 years. This being most advantageous to them as it would maximise the charges payable and therefore the commission they would receive.
A typical example of the various charges we have seen on these plans are:
- 1.5% per annum set-up charge for the first five years (7.5% in total)
- 1.2% administration fee for the duration of the plan
- 1% per annum investment management charge
- 2% per annum typical underlying fund charges (such funds have a built-in commission)
That all adds up to a charge of 5.7% each year for the first five years on the value of the investment and means that the client would need an annual investment return of that amount to simply break even at the end of that period.
After year five, even with the set-up charge finished, there will still be charges of over 4% deducted from the total fund value each year.
You’ll incur other charges If you stop paying into the plan, or if you reduce the amount you’re contributing.
Up until 2013, the charges on this type of plan did not have to be disclosed at all. So, if you’d taken a plan out before then, you wouldn’t have known you were being ripped off until you looked at a valuation of your plan and seen the difference between the amount you’d paid in and the overall value.
In Hong Kong, the introduction of various regulatory measures over recent years has diminished the sale of such products. Unfortunately, these high charge products have not been banned and they are still prevalent and regularly feature in many people’s investment portfolios.
ILAS products go by many names, most commonly ‘Offshore Investment/Insurance Bonds’ and ‘Portfolio Bonds’. It is worth noting that these products do offer extremely attractive tax planning opportunities, particularly for those individuals planning a move to the UK. And they can be accessed without incurring the high charge/commission arrangements described above, so they should definitely be considered as an investment vehicle.
2. Unregulated Collective Investment Schemes (UCIS)
The second example often concerns those individuals who previously had UK pension funds that they have since transferred overseas to a Qualifying Recognised Overseas Pension Scheme (QROPS) or to a UK SIPP.
Again, many people who have moved overseas from the UK will relate to being targets, shortly after their arrival. The protagonist, a salesperson purporting to be an ‘independent financial adviser’, will try to persuade them to consolidate and transfer their pensions into a single arrangement. Victims often end up with their pension assets being subsequently invested into an offshore Unregulated Collective Investment Scheme (UCIS).
A UCIS is a pooled investment that will invest client money in various assets. Many of them will promise high investment returns. Typically, they will involve overseas investment opportunities including property development, agricultural opportunities, or renewable energy.
However, these schemes are not subject to the same regulatory controls as standard investments and, as such, are riskier. They are also often difficult to cash in because the underlying investments are in illiquid assets that are not easy to sell at short notice. On a worst-case basis, the investment could be fraudulent.
UCIS structures are often opaque and can result in clients paying extremely high initial charges (we have seen some with an introducer commission of over 20% – no prizes for guessing who pays that!) together with additional charges similar to the ones we outlined above for ILAS products.
The Financial Conduct Authority (FCA) who regulate all UK based pension schemes, have expressed concern about such schemes in the past, and have warned that they only see them as being appropriate for highly sophisticated investors.
The underlying point to note here is that if an investment opportunity looks too good to be true, it probably is.
Do you think you have been ripped off?
It is well worth taking the time to review all your investment and pension holdings, paying particular attention to the details of the charging structures in place.
If you think you might have any plans with charging structures like the ones we have described here, please get in touch. We have been able to help many of our clients extricate themselves from investments of this kind and put together a much more low-cost investment portfolio.
Also, please let us know if you get to hear about this kind of scheme, even if you do not invest yourself. We may be able to warn other clients, less financial savvy than yourself, to steer clear and save themselves a lot of problems.