HSBC​ Expat Investment Review

I have many expat readers, and from time to time, I am asked to review certain providers. HSBC expat is no exception.

I get asked the following questions on countless occasions;

    • Should I invest with a bank?
    • Isn’t it more convenient to invest and bank with the same firm?
    • Are banks expensive for investing compared to platforms and currency apps?
    • Do banks tend to only sell their own products and funds?
    • Aren’t bigger names safer?

I will answer these questions in this article.

Where does HSBC operate?

Globally. Most of their expat clients are in Hong Kong, Singapore, Shanghai, Dubai, Qatar and other places with large expat numbers.

What is HSBC Expat and what services do they offer?

HSBC Expat used to be called HSBC International. They offer multi-currency bank accounts, fixed deposits various investment opportunities.

What are the account minimums?

60,000GBP, which is about $80,000. If the accounts fall below 60k, additional fees are charged.

This is a very substantial account minimum, considering that money could be better invested elsewhere.

HSBC do offer fixed deposit interest rates, but due to the global situation with interest rates, the rates are paltry.

What are the benefits of HSBC Expat?

Theoretically, they allow customers to move from country to country and stay in the same banking family.

They also cooperate with the accountants EY, and their global tax guides, which can be useful for some with complex tax issues.

The mortgage service also isn’t bad, but it always pays to shop around for better rates and deals.

Their general service levels are still better than some local banks, even if they compare unfavourably to more boutique expat-focused banks.

What are the costs?

The cost of the banking service (current account) isn’t cheap, but not extortionate. FX fees are 2.5%-3%. This is more expensive than Transferwise, but normal compared to other offshore banks operating from Isle of Man, Guernsey, Cayman Islands and Jersey.

International bank transfers cost 30-35GBP each time, even when done online, which is higher than normal.

Investment costs on the platform are high, due to a combination of fund costs, direct costs and a range of hidden fees.

Do HSBC Expat offer mortgages?

Yes. HSBC offers UK mortgages to expat investors. They no longer offer international mortgages, however.

Why bank offshore?

For me, and most expats, the desire for expat banking isn’t about secrecy. Sometimes I feel like the media are in a time machine.

Offshore banking these days isn’t like the 1970s, 1980s or even 1990s. It isn’t linked to tax evasion for most people.

It certainly isn’t about stuffing money in your trousers, before going on a flight, like in this scene from the Wolf of Wall Street!

For most investors in the 21st century, offshore banking and indeed investing is about diversification, convenience and lowering political and social risk.

For me, I want a number of things;

    1. To avoid emerging market banking, especially in unstable countries.
    2. To avoid black swan events, I want diversification in terms of banking options. Even though I come from the UK, which is a fairly stable country, I want to have non-British banking options……just in case the UK goes into political turmoil and elects a radical government. Or for that matter, Brexit causes 1001 problems!
    3. I also want speed and convenience, and not to have to open and close bank accounts every 3-4 years.

I am not alone. Many expats, especially in unstable countries, feel the same way. Take oil and gas as an example.

Expats in this industry are often sent to unstable parts of the world. Angola, Egypt and countless other countries.

Why would an expat, moving from emerging market to emerging market, want to entertain a local banking solution?

So what are the negatives with HSBC Expat?

Based on the above reasons for offshore banking, how does HSBC rank? Firstly, for me, a bank which is so international means more risk in certain situations.

HSBC, we have to remember, has some links to our governments back home, if we are from the UK, US and countless other countries.

The very fact that HSBC is so international means that they can come under political pressure at any moment.

A few years ago, HSBC reviewed accounts held by UK residents in Guernsey. These people aren’t expats.

Nevertheless, it shows that it can be easier to pressure a bank that is registered in the UK but has an offshore arm, compared to a truly offshore platform or bank.

That doesn’t mean that platforms or banks operating in just one country are perfect or without risk.

They still have to operate under various accounting reporting standards, moreover, such as FATCA for Americans and CRS.

Despite this negative, surely HSBC is more convenient than some options, due to their international flavour?

Well not really. Even though HSBC UK is a different entity to HSBC Japan or HSBC USA, the local regulators can put up barriers, and these barriers can also work against you.

It often isn’t possible to deposit an HSBC cheque in country Y, if it has been produced in country X.

Very normal, you may be thinking, but this hardly makes HSBC the world’s local bank, which makes everything convenient!

Countless other banks, moreover, have international services, even if they don’t have physical banks in numerous countries.

How about HSBC Investment Options?

Like most private banks, HSBC offers some very expensive fund ranges. So even if you use HSBC for banking, most of their expat investing accounts are best avoided.

There is a strong correlation between lower investment fund fees and better long-term performance.

Countless of the funds offered on the HSBC platform cost 1.5%, 2% or even 2.5% a year in fees.

HSBC does have some excellent index fund options available for UK investors, such as the FTSE250 tracker fund, which has 0.1% yearly costs.

These options, however, are seldom used on the platform offered to expats. They tend to be used on third-party platforms, alongside BlackRock, iShares and other providers.

This situation isn’t surprising. The largest institutions, with the biggest brand names, often get away with charging more money.

How about customer service?

Large organizations can lead to slowness and impersonal service. With HSBC, you are one customer out of 37 million!

So many expats claim that service levels are poor, even though HSBC preach about the benefits of getting a specific relationship manager assigned to your account.

What are some of the biggest mistakes investors make with big banks?

Given all these negatives about the big banks, why do many people still use them? Even though more and more people are becoming sceptical about big business and big government, some people still pick big brands.

This is despite the extra cost, slowness, poor impersonal service and so on. This can be blamed partially on familiarity bias.

Various studies have shown people are more likely to:

    • Invest in Google stocks, if they use Google search more often.
    • Invest in a company they drive by on the way to work.
    • Invest in the company they work for, and therefore doubling their risk if the company goes bankrupt.
    • Assuming that big name company stocks are safer than the broader market.
    • Invest in stocks only in their home market
    • Invest in stocks in the sector they work in
    • Invest in certain assets due to cultural familiarity. For example, gold for Indian investors or property for Singaporeans, regardless of whether this is rational or not.

Applied to HSBC, many people assume that service levels and investment returns must be excellent, due to the familiar sounding name.

This is usually not the case.

So in conclusion, should you bank and invest with HSBC Expat?

On the banking side, HSBC is OK. Better options exist, however. The costs, service and convenience could all be improved.

On the investment side, the vast majority of HSBC products on the platform are expensive and focused on HSBC in-house products and funds.

Most of these funds are not the low-cost variety, that tends to outperform, long-term. For these reasons, banking and investments should be kept separate as a generalization.

Do you offer banking services?

I offer banking services for existing clients, but not as a standalone product. It is too time-consuming to offer as a standalone product or service.

My main focus is on investment-related services, although I do not charge for banking services for existing clients.

What are your contact details?

adamfayed@hotmail.co.uk. I also am available on a range of apps.

Further reading

For expats with existing policies offshore the following article is useful;

Are portfolio bonds good investments?

The following article will introduce the subject of portfolio bonds and the positive and negatives associated with them.  I will touch on whether they are good investments or not, and what you should do if you have one, and are unhappy.

What are portfolio bonds?
Portfolio bonds aren’t linked to `bonds` in the typical sense of the word – they are not government or corporate bonds. They are umbrella products, that can hold almost any investment asset, and proportion to be tax efficient investment wrappers.

Portfolio bonds are typically offered by insurance companies in the expat market.  Many of these life insurance firms are usually domiciled in the Isle of Man, Guernsey, Jersey, Luxembourg, Dublin, Bermuda, Cayman Island and other tax efficient locations for expats.

Portfolio bonds are available in a wide range of currencies.  USD, Euros, British Pounds, Swiss francs and Japanese Yen are just some of the currencies on offer.

Where are portfolio bonds typically sold?
Worldwide.  However, they are sold more extensively in cities with many expats. Dubai, Amsterdam, Qatar, Singapore, Shanghai, Bangkok, Switzerland and Hong Kong are just a few examples of cities where portfolio bonds are typically sold.

What investments can be held within portfolio bonds?
Each provider has their own investment rule.  Numerous providers can accept almost any asset class, including;

Individual shares
Index funds
Mutual funds
Corporate bonds
Unregulated investments
Structured notes
REITS and other property related investments

How are portfolio bonds set up?
Typically clients need to produce anti-money laundering documents such as proof of address (dated in the last 3 months – such as bank statement or utility bill) and ID, alongside an online or paper application form.

After getting accepted and funding the case, you are a client of the life insurance firm.  The broker is just advising you, for a fee, and isn’t holding your money.

What are the advantages of portfolio bonds? 
For expats from numerous countries, there are some tax advantages. This is especially the case for British expats.

Portfolio bonds are usually tax-deferred, meaning that you can time your withdrawals to be tax efficient.
Often times, investors can take out 5% of a portfolio bond every year, without incurring tax penalty with the UK tax authorities, HMRC, up to a maximum of 20 years.

Many expats also use trusts to pass on their nest eggs to the next generation, in a tax efficient manner.
So portfolio bonds can be used as a legal way to minimize, or completely avoid, UK inheritance tax.

Furthermore, if you move back to the UK, the income on your investments are taxed according to your income.  So if you have moved into a lower tax band by this stage (in retirement) you may minimize your tax bills.

Australians investing in portfolio bonds also have some tax advantages.

What are some of the problems with portfolio bonds?
Whilst portfolio bonds can be excellent cost and tax efficient investments, they can have the following issues;

Costs– Some of the older and more well-established life insurance firms, tend to sell expensive solutions.  If you add in the management fee from the broker and fund fees, this all adds to cost.

Risky investments – structured notes, and some other risky investments, can destroy a portfolio, if not managed correctly

Because costs vary fantastically between brokers, life insurance firms, and funds within the bond, expat client A can be paying more than expat client B.
Let’s look at two examples;

Glenn, living in Dubai, invests $100,000 with a newer, cheaper, life company using the tax efficient wrapper.  He pays 1.2% per year costs + 0.1% for index funds.

He could be paying 3x-4x less, than David in Singapore, who is being charged 2% by a more traditional and expensive life insurance firm, 1% management fee from the broker + `hidden fees` from the investment funds.

Can expats move with their investments?
Yes, they can.  Usually, expats can move their investment with them.  Exceptions exist, and independent tax advice is sometimes needed.  As a generalization, expats moving to America should be particularly careful about continuing to contribute to investments, due to tax laws bought in since 2014.

Should Americans invest in portfolios bonds?
As a generalization, the answer is no.  In the last 4-6 years, the laws have become more and more restrictive for American expats.

This also applies to joint passport holders, Green Card holders and American taxpayers.

Portfolio bonds and SIPPS/Qrops 
People that have worked in the UK, even if they aren’t British, have often been advised to transfer their pension overseas.  Often called QROPS and SIPPS, this allows the formerly UK-based expat to transfer their pension overseas.

Whilst this does have numerous benefits, especially for bigger pension pots that would be subject to UK inheritance tax, some of the same issues exist here.

In particular, adding pension trustees to the equation adds an extra layer of fees; the trustee fees.  So investors now have the life insurance fee, broker charge, fund charges and trustee fees.

This can amount to up to 4%-5% a year in some cases.  Therefore, to make this structure worthwhile, investors usually need to:

– Invest with cheaper funds and indeed life insurance firms to minimize costs
– Have an investment pot worth 150,000GBP or more to make the fees worthwhile.  As some of the fees are flat fixed fees, the charges are too expenses on smaller accounts.  Ultimately, a 1,000GBP trustee yearly fee is 2% of a 50,000GBP account, but 0.1% on a 1million account.

Are there usually charges for getting out of a portfolio bond?
Yes.  When a portfolio bond is set up, an establishment fee is typically applied.  This establishment fee is gradually applied against the policy.

So for example, if an establishment fee of 7%-8% is applied against the policy, you may be charged 1.2% over 10 years.

If you want to withdraw, you can usually take out 70% or more of your policy, free of charges, assuming that you keep the minimum balance in the account.

So on a $100,000 account, you may be able to withdraw $70,000 or more, on day 1.  A charge will apply on the remaining balance, of $30,000 in this case.

This charge will apply on a sliding scale.  In year 1, a 10% charge on the $30,000 may apply ($3,000), and the charge will gradually be reduced over the 10 years.  This is merely an example, as each provider has different rules and regulations.

Beyond that, some funds within the bonds have minimum investment periods and lock in, whilst other funds have no charges for getting out.

Is there a maximum amount I can withdraw from the policy?
Yes.  Some providers have a $20,000 minimum, whilst others have a higher minimum.

If I am unhappy with my offshore portfolio bond, what can I do?
There are a number of options.  You can either exit the bond entirely, change the investments and/or transfer to another broker, who will hopefully manage your portfolio in a better way.

Have you ever taken over people’s portfolio bond investments?
Yes frequently.  In fact, as per the article at the bottom of the page, many people approach me with underperforming existing investments.

Can I invest directly, without a broker?
Some portfolio bond providers allow you to self-invest. Others do not. It depends on the provider and its rules.

If I decide to top-up my existing policy, can the charging structure for the additional premium be different to the initial premium?
Most providers allow different charging structures for top-ups. So if a 7% establishment charge was implemented on day 1, as an example you can pick a lower charge for top-ups.

Will the policy become cheaper over time?
Yes.  After the establishment charges are all paid for (after year 5, 8, 10 or 14 typically – again depending on the provider and the charging structure chosen) you no longer have to pay the yearly fee associated with the establishment charge.

That doesn’t mean it has become a free policy, of course.  It has merely become cheaper.  Fund and broker fees still apply, which can cost from 1%, all the way up to 5% a year, if you include hidden fees.

When are the charges taken out? 
Some fees are taken monthly, and others quarterly and yearly. Most are quarterly or yearly.

Are portfolio bonds good investments?
It depends on many factors, including your tax situation and how you are invested. As per the article below, some of the old-school providers offer products which are expensive.

This tends to eat into the benefits, including tax benefits, of the product.  In comparison, a small percentage of portfolio bonds are good value, especially if you are invested in low-cost funds, such as index trackers.

As a generalization, some of the newer providers are cheaper, as they can’t rely on brand names to sell expensive products.

What are your contact details?
adamfayed@hotmail.co.uk.

Further reading 

For those with existing portfolio bonds, and SIPPS/QROPS, you can read the review article below. The article is especially useful for those that aren’t happy with existing returns.

Expat savings plans and portfolio bonds reviews: Zurich Vista + RL360 Quantum/PIMS + Friends Provident + Old Mutual executive/redemption bonds

Prudential International Investment Portfolio Bond Review

(Quick note; for a more in-depth review of Prudential and similar plans, alongside customer reviews and questions at the bottom of the page, please visit here – https://adamfayed.com/zurich-vista-review-rl360-quantum-friends-provident-hansard/). 

Who is Prudential?

Prudential is a financial services, and life insurance company, with product offerings in areas such as life cover, savings plans and lump sum. The International Portfolio Bond is a lump sum premium.

Where is Prudential sold?

They are sold worldwide in Dubai, Qatar, Hong Kong, Singapore, Malaysia, China and other expat destinations.

Compared to RL360, Hansard and a few others, Prudential isn’t as widely sold in the expat market.

In fact, they cannot be sold in numerous markets.

What are the minimums?

Prudential have very low minimums of $25,000, 20,000 Euros or 15,000GBP.  Top ups come with the same minimums – for example, 15,000GBP is the minimum top-ups for the British Pound Accounts.

What are the fees and general terms and conditions?

The charges are taken out for as long as 10 years and aren’t very transparent. The reason is that the charging structure that is chosen (commission-free or with commission) can mean that client X is paying more than client Y for the same product.

In general, the charges are:

  • Establishment charge of up to 5%. This charge lasts for 5-10 years, often working out at 1%+ per year. This charge goes down to 0% after this time.
  • Fund charges, which can be anything from 0.1% to 3%, but typically 1.5% on most actively managed funds
  • Admin charges.
  • Broker management fee charge – typically 1%.

This plan isn’t the most expensive in the market, therefore, but it also isn’t cheap.

What’re the positives about the plan?

1. You can earn more than in the bank even with high costs

2. It isn’t as high cost as some options but is still expensive

What are the negatives about the plan?

1. It is expensive, especially if the most expensive upfront costs are taken on day 1.

2. The investment choice is limited. PruFund Range of Funds and the Dynamic Portfolios and Dynamic Focused Portfolios are both available.  However, the number of low-cost funds available is limited.

3.  Many high-risk and high-fee funds are used in tandem with this product. This often leads to losses.

Are there charges for getting out of this product?

Yes, there are, but it depends on how much you want to withdraw.  On day 1, most clients can withdraw 70%+ or more of their money, without penalty, assuming the funds are liquid funds, which can be sold relatively quickly and without penalty.

Just because the provider allows penalty-free withdrawals, doesn’t mean there aren’t charges for getting out of the investments chosen within the platform.

If there are charges for getting out of the product, what can I do?

It depends on each case. In some cases, reducing the management fee and fund charges can make a difference.

For instance, if somebody has already been invested for 10 years, the establishment charge doesn’t apply any longer.

In such cases, simply reducing the other fees, could increase performance.  For many other clients, however, it is possible to get the same funds, for a cheaper price, with cheaper platforms and providers.

This will make a big difference over time. If you have $100,000 in your account and markets go up 8% per year, for the next 5 years, you are only likely to get 4% per year returns in this product, due to the numerous charges.

What can you do if you have a Prudential policy offshore?

If you have a policy and would like a conversation please contact me via adamfayed@hotmail.co.uk, I can’t promise anything – only to try my best.

Momentum Pensions Review

(Quick note – this is just a brief review.  For a more in-depth review of Momentum Pensions and some of the bonds they are sold with, together with customer comments, please visit here – https://adamfayed.com/zurich-vista-review-rl360-quantum-friends-provident-hansard/).

Who are Momentum Pensions?

Momentum Pensions offer a variety of solutions to UK residents and expats.  They are perhaps most famous, however, for their UK pension offerings through SIPPS and QROPS.

Most commonly, this is where a bond is offered (from the likes of RL360, Old Mutual and others) and Momentum is the Trustees.

Where is Momentum Pensions sold?

They are sold worldwide. However, as a lot of clients are British expats, they are especially widely sold in Australia, New Zealand, Canada, Hong Kong, Singapore, Dubai, Qatar,  Malaysia, China, France, Italy, Spain and other expat destinations in Europe.

What are the fees and general terms and conditions?

The charges are taken out for as long as 10 years and aren’t very transparent. The reason is that the charging structure that is chosen (commission-free or with commission) can mean that client X is paying more than client Y for the same product.

The fees also compound because now you have the trustee fees (Momentum), the bond fees (Old Mutual, RL360 and the like), the fund fees and the broker fees.

In general, the charges are:

  • SIPPS fee of at least £250 a year.
  • In terms of the bond, establishment charge of 8%-8.5% upfront charge, taken out over many years, on a gradual basis. This charge lasts for 5-10 years, often working out at 1%+ per year. This charge goes down to 0% after this time.
  • Fund charges, which can be anything from 0.1% to 2%, but typically 1.5% on most actively managed funds
  • $137.50 every 3 months for admin charges.
  • Broker management fee charge – typically 1%.

What’re the positives about the plan?

  1. You do avoid the risks of UK inheritance tax in certain situations with SIPPS and QROPS, so that is the main benefit of the plan, rather than investment returns.
  2. You can earn more than in the bank even with high costs
  3. Low-cost options, such as index funds, are available, but seldom used, within this product.

What are the negatives about the plan?

1. It can be expensive if the wrong options are chosen.

2. Used alongside expensive funds, and trustee fees in QROPS/SIPPS for British expats, the fees compound.

3.  Many high-risk products like structured notes are used in tandem with this product. This often leads to losses.

Are there charges for getting out of this product?

Yes, a termination fee of £1,500 from year 1 until year 5, and then £1,000 for transferring to a non-Momentum product.

As QROPS and SIPPS are UK pensions, it isn’t as easy to withdraw money before retirement, although 25%-30% can often be taken out as a lump sum at any point.

What can I do if my investment is underperforming?

Get advice. Often funds and fee structures can be amended. In such cases, simply reducing the other fees, regularly increase performance.

This will make a big difference over time. If you have $100,000 in your account and markets go up 8% per year, for the next 5 years, you are only likely to get 4% per year returns in this product, due to the numerous charges.

Mistakes to avoid in investing

Various bias cloud investors minds, such as recency bias (preferring assets that have gone up most in recent years) and familiarity bias (preferring assets and people we are more familiar with).

Moreover, one of the biggest mistakes investors makes is called loss aversion in cognitive psychology. This means that if investors are down, or not doing well, they wait until the accounts are breaking even before selling.

A simple example would be if you have $100,000 in your account. The value is $95,000. After more reading, you know that deep down the fees are eating into returns. However, as the account briefly hit $101,000 before, you wait until the account recovers to $100,000+ before selling as you don’t want a loss.

I have even seen investors wait 2-10 years to avoid this loss. The rational thing to do is accept the $5000 loss in this situation, as that money can be made up quickly in a cheaper structure.

In addition to that, many investors think size is always good. Having 24/7 account access and log in, flash IT systems and an office in Mayfair doesn’t help client returns; lower fees and better funds would help that.

What can you do if you have a Momentum policy and you aren’t happy?

If you have a policy and would like a conversation please contact me via adamfayed@hotmail.co.uk, I can’t promise anything – only to try my best.

Daman Insurance UAE Review

This article will review Daman Insurance, which was created in 2006, in Dubai.  It is a joint initiative between the government and a private insurer.

Who does Daman Cover?

They cover individuals and families within the UAE.  Who they cover depends on the visa status and a few other things, including salary.

For example, for lower-income workers, who hold Dubai resident visa, and who are earning less than AED4,000, they offer very limited coverage.  Typically the coverage is only for $40,000 (or AED 150,000) of coverage.

What about the chrome and premium plans?

Daman insurance has different plans including; Care Essential Plan, Care Chrome Plan,Care Bronze Plan, Care Silver Plan, Care Gold Plan, Care Platinum Plan and the most extensive coverage (Premier Plan).

How much coverage you will get will depend on each plan. For example, on the Care Essential Plan, you only get local coverage, AED 160,000 total coverage expenses, 80% coverage for inpatient services and subsidized medicines.

In comparison, the premium plan (Premier Plan) offers worldwide coverage, has an AED 20,000,000 limit, pays medicines that are prescribed in full and covers inpatient, outpatient, infertility, dental and many other procedures.

How about corporate medical insurance plans?

Daman insurance does offer corporate plans, and again, that depends on many factors.

What are the positives and negatives with the plan?

The plan is well-regulated by the government and covers both high and low-income households.

However, the plan is mainly focusing on companies, so doesn’t focus on individuals so much and is expensive relative to the benefits.

As insurance is a dead-money product, meaning you get nothing back if you don’t get sick, it is best to pay the least possible, for the most benefit.

What if I am looking for new insurance and want to contact you?

My contact details are adamfayed@hotmail.co.uk

Further reading 

If you are living in the UAE, or beyond, and have an insurance-investment scheme offered by the likes of Zurich, RL360, OMI and so on, you may find this article useful.

 

 

RL360 Oracle Bond Review

(Quick note; this is a short and basic review.  For a more in-depth review of RL360 Oracle Bond plan, alongside customer reviews and questions at the bottom of the page, please visit here – https://adamfayed.com/zurich-vista-review-rl360-quantum-friends-provident-hansard/). 

Who are RL360?

RL360 is a life insurance company, with product offerings in areas such as life cover, savings plans and lump sum. The Oracle Bond is a lump sum account, with minimum investments of $32,000.

Even though RL360 Oracle is a lump sum product, it isn’t open architecture, which means that only about 160-170 fund choices are available.

Where is RL360 sold?

They are sold worldwide in Dubai, Qatar, Hong Kong, Singapore, Malaysia, China and other expat destinations.  RL360 has become more widely sold in recent years, after many bigger life insurance companies which were more widely sold 5-10 years ago have restricted sales.

What are the fees and general terms and conditions?

There are numerous charges associated with this product:

  • Establishment charge of up to 7.5%. This is charged gradually. For example, 1%-2% per year for 5-10 years. This charge goes down to 0% after this time.
  • 1.2% for investing in mirror funds, even though non-mirror funds exist in the plan.
  • Admin charges of 1.2% per year, or 0.3% per quarter
  • Fund charges, which can be anything from 0.1% to 3%, but typically 1.5% on most actively managed funds
  • Broker management fee charge – typically 1%.

What’re the positives about the plan?

  1. You can earn more than in the bank even with high costs
  2. If a cheaper charging structure is chosen within this plan, the plan isn’t as super expensive as it might seem.  For example, the establishment, broker management fee and mirror fund charges can be reduced, unlike the admin charge.
  3. In general, as the number of funds within this plan are limited, some of the truly toxic funds that have gone down to 0 in some cases, are not allowed within the platform.

What are the negatives about the plan?

1. It is an expensive product, especially if all the fees are applied as above.

2. There are few index trackers available and investment options are limited. Whilst this may limit the possibility of clients being in dangerous funds, it also limits the cheaper fund options, which tend to perform better over time.

Are there charges for getting out of this product?

Yes, there are, but it depends on how much you want to withdraw.  On day 1, most clients can withdraw 70%+ or more of their money, without penalty, assuming the funds are liquid funds, which can be sold relatively quickly and without penalty.

If there are charges for getting out of the product, what can I do?

It depends on each case. In some cases, reducing the management fee and fund charges can make a difference.

For instance, if somebody has already been invested for 10 years, the establishment charge doesn’t apply any longer.

In such cases, simply reducing the other fees, could increase performance.  For many other clients, however, it is possible to get the same funds, for a cheaper price, with cheaper platforms and providers.

This will make a big difference over time. If you have $100,000 in your account and markets go up 8% per year, for the next 5 years, you are only likely to get 4% per year returns in this product, due to the numerous charges.

Mistakes to avoid 

In investing one of the biggest mistakes investors makes is called loss aversion in cognitive psychology. This means that if investors are down, or not doing well, they wait until the accounts are breaking even before selling.

A simple example would be if you have $100,000 in your account. The value is $95,000. After more reading, you know that deep down the fees are eating into returns. However, as the account briefly hit $101,000 before, you wait until the account recovers to $100,000+ before selling as you don’t want a loss.

I have even seen investors wait 2-10 years to avoid this loss. The rational thing to do is accept the $5000 loss in this situation, as that money can be made up quickly in a cheaper structure.

In addition to that, many investors think size is always good. Having 24/7 account access and log in, flash IT systems and an office in Mayfair doesn’t help client returns; lower fees and better funds would help that.

What can you do if you have a RL360 Oracle policy offshore?

If you have a policy and would like a conversation please contact me via adamfayed@hotmail.co.uk, I can’t promise anything – only to try my best.

Buying index funds in Singapore, Hong Kong or anywhere outside America; index accounts

Want to gain access to low-cost and diversified funds from some of the world’s leading financial institutions, but still want the personal touch of speaking to your advisor regularly by phone or WhatsApp?

Or perhaps you are just fed up with some of the expensive products offered by your bank, or other traditional companies?

In any case, I have helped countless investors gain access to such portfolios, and achieve better returns, all around the world.

If you want more information about the accounts please contact me in the comments section below or here. The FAQs below will cover many of the questions I get asked;

FAQs

What kind of returns can I expect?

Historically markets like the US S&P give 10% per year, but that is merely an average. Some years, and decades, are much better than others, and nobody can predict or time marekts

As you need some bonds in your portfolio, 7%-8% long-term returns are realistic. Overall returns will also depend on how much you invest, and for how long.

If you invest $50,000 for 5 years and get 8% per year, you will only have $73,466 after the 5 years are up. If, on the other hand, you invest for 30 years, and add a $1,000 per month contribution, you will have $1.5M, even if you only get the 7% per annum returns.

How do the accounts work?

You are set up with investments that are in line with your age. As a simple example, a 25 or 30 year old, should be invested less in bonds and more in markets. A 55 year old, or anybody 5 years away from retirement, should have more bonds in their portfolio, compared to the younger person.

What currency can I invest in?

USD, British Pounds, Euros, Australian Dollars, Norwegian Krone, Swedish Krona and various other options. Money can be taken from almost any bank account in the world, and deposited into a USD account.

What are the account minimums?

Analysis paralysis, and not taking action, are the biggest mistakes I see. Ultimately, if you spend 100% of what you make, you will make $0 in investment returns. If you inv$500 for monthly accounts and $40,000 for lump sums, or currency equivalent. My lump sum minimums will be increasing to $50,000 from next month (May 2019).

What are the biggest mistakes I see investors make?

Analysis paralysis, and not taking action, are the biggest mistakes I see. Ultimately, if you spend 100% of what you make, you will make $0 in investment returns.

If you invest $2,000 a month and get 5%, you will be richer than if you invest $500 a month and make 8%.

Various studies have shown that how much you contribute, is the biggest indicator of how much your wealth will be in retirement, alongside spending habits. Your income and investment returns are secondary factors.

Despite this, most people are overly cautious and want to start small. The opposite end of the spectrum – taking too many risks and speculation – is another key mistake I see. Market timing and speculating are huge risks, that seldom pay off, compared to buying and holding for 40 years.

So a realistic understanding of risk and return is one of the keys to investment success, alongside a disciplned approach.

Can’t I just invest myself?

Yes you can, but how many people, including doctors, do you know who have six packs and are ultra-healthy? The point being, often people need some structured help, for example a personal trainer, to see sustainable goals, and to stop them doing silly things.

Likewise, in finance, somebody who invested $10,000 in the S&P in 1941, would have $52 million today.  How many of our parents and grandparents did that? Most people panic when markets are going down, and get too excited when markets are going up – buy high and sell low.

What are the minimum investment terms?

I would highly recommend that anybody who invests should consider a medium-lump term investment. Markets perform well, but in the short-term, nobody can predict what will happen.

Therfore, anybody investing should consider this a 5 year + commitment, and understand that the longer you invest, the more you will gain.

What do you charge?

1% on smaller portfolios, reducing to 0.5% for portfolios above $500,000.

How do I pay?

Bank transfer or credit/debit card. For lump sums, usually bank transfer are used. Card payments are used by most monthly investors.

Do I gain online access?

Yes you gain 24/7 online access.

Do you have any client recommendations?

Yes countless. Below are a small selection taken from my LinkedIn :

Many more can be found on my profile.  One of my clients, Nikolaos, has also produced a recommendation on Youtube.

How do you stay in touch with clients?

By email, WhatsApp and various apps. I communicate with some clients weekly, others monthly and some quarterly, depending on a range of factors, such as how busy we both are.

However, I do respond to emails and WhatsApp messages within 24 hours.

What kind of fund managers do you use within the platform?

Various fund companies. Again, many people over analyze this question. The difference between an index fund used by Vanguard, and one used by BlackRock or iShares, is tiny. The costs are the same.

How do you keep costs low?

By focusing on technology. The traditional financial services industry has $30,000 a month offices and does everything face-to-face. This increases the cost for clients, and lowers returns.

It is also a very poor use of my time, and yours, and doesn’t help increase returns.

What is my money invested into?

Low-cost ETF and index funds, focusing on markets in the US, Europe and emerging markets, with some in bonds.

How much should I be saving and investing?

That depends on your age. If you are very young, 5%-10% of your salary may be fine. Most people leave it too late, however, and need to be very aggressive with their saving targets.

In general, it is better to save and invest aggressively when you are young, and when you have the chance to invest.

You never know when you will need the money.

What is the process like for opening up accounts?

The first stage is an initial talk to understand your objectives better. If we are on the same page, the next step is documentation; proof of identity (passport) and address for anti-money laundering requirements.

Finally, once that is done, the accounts will be reviewed for 24-72 hours. Assuming they are approved by admin/legal, the premium needs to be paid.

What investment options do you have for American expats?

The regular contributions aren’t available for Americans, but the lump sums are.

Can you accept anybody who meets the account minimums?

Everybody apart from people living in America. American expats are fine. Most locals are fine as well. In fact, I do have a significant number of local ‘returnees’ as clients, who have returned home after living in the UK, US, Canada or Australia.

Where are the assets held?

It depends on the platform, but typically in well-regulated UK, US and offshore territory, with various guarantees if there is a financial crisis.

Will I need to pay tax?

Tax is usually on capital gains tax, and that is paid once you sell and make a gain. That is another reason to be long-term; it is more tax advantageous. Generally speaking, the offshore destinations are best for tax, especially for expats, but all the solutions are tax advantageous.

I may be moving, does that affect things?

This is a question that many expats ask me, as they regularly move every 3-4 years. The simple answer is no, it doesn’t affect things.

Provided you update your payments information like credit or debit card, your investments won’t be affected if you move.

Can expats invest in Vanguard and other index funds? 

Often not directly, but the platforms I have access to, allow for such options to be held.

Where do your clients live?

All around the world, from the UK, Shanghai, Brussels, Qatar, Holland, Japan, South Africa, Singapore, Hong Kong, Australia, Canada, to Dubai.  More than 100 countries in total.

Is this the right time to buy index funds?  I am worried about a recession and/or a financial crisis.

Nobody can predict when a financial crisis will strike.  Barely nobody thought 2008-2009 would happen, and those few that did predict it, were surprised at how quickly GDP and sock markets recovered.  There is a lot of academic evidence that market timing doesn’t work, so we do know that it is counterproductive to worry about these things.

As for recessions, there is little or no correlation between GDP growth and stock market performance.  Just look at the last 10-20 years.  Chinese Markets have performed awfully since 2006, despite very strong GDP growth.

US Stock Markets have performed excellently since 2009 lows, with the exception of last year, when markets fell despite strong GDP growth!  This year markets have performed strongly again, despite weaker GDP numbers.

Beyond that, there is little or no correlation between GDP growth and geopolitical risks in general. Markets have risen during nuclear stand offs (North Korea, Cuba), trade dispute and hot wars. They have fallen during periods of geopolitical calm.

Even in recent times in the last 12 months, the best months for the markets have been during periods of uncertainty, such as the recent big rises during the US Government Shutdown a few months ago and the North Korea situation last year.

That doesn’t mean that markets always rise during such periods, only that no correlation exists between investment returns and political problems.  The only `strongish` correlation is between various price-to-earnings (PE) ratios and market falls.

For example, in 1999, the US Dow Jones looked overvalued, relative to bonds and international markets, on a PE basis.  The investor who has a well diversified portfolio doesn’t need to worry abut such considerations.  Rebalancing away from the winners to the losers, has always worked historically.

Why is it so hard to beat the market? 

The costs of trying to beat the market is one of the biggest reasons.  If you are buying and selling frequently,  you are increasing costs.  This means your net returns need to be huge, even to break even with the market.

For example, if the markets produce 6% for the next 2 years, and your costs for buying and selling and market timing are 3%, you will need to beat the market by 50%, an extremely tall order

Beyond that nobody can know, for sure, when markets will fall and rise.  People who beat the market over 5-10 years often get cocky and complacent.

People also allow their emotions to guide their investing decisions.  Various studies have shown that doctors may be more likely to buy healthcares stocks, and teachers education companies and ‘everybody’ has a bias towards their home country.

This is called ‘familiarity bias’ in investing.  Investors are less likely to be objective, and more likely to be emotional, about things close to their heart.

Besides, all of the information about listed firms is publicly available. I don’t need to be a doctor to check the balance sheets of pharmaceutical stocks!

There are thousands of investors, and indeed robots, in the market these days.  If there is such a great undervalued opportunity in the market then why isn’t everybody buying that stock?  You don’t have special information…..if you do, that is insider trading and illegal.

They are just some of the reasons why only 20% of people beat the market over 5 years, and 2% over 50 years.

Is it true that even Warren Buffett isn’t beating the S&P500 anymore?

Yes it is true. In the 1960s and 1970s, he beat the market handsomely. In the 1980s, he did it comfortably. The gap closed in the 1990s, and 2000s.  The last 10 years, he hasn’t beaten the market.

The biggest reason for this, is the rise of institutional investors like banks and hedge funds. In the 1960s and 1970s, most of the market was dominated by small investors. Regular people.

These days, most of the money is controlled by banks, financial advisors and hedge funds……..PHDs, robots and other people who have done their research.

So it is becoming harder and harder to use research to beat the market, because these institutions are also researching undervalued companies.

Is it easier to beat the market in emerging markets and small caps? 

Slightly easier, because there are less institutional investors in such markets, but it is still hard to beat the US S&P.  A good example would be the Chinese Stock Market.  I have seen more investors beat the index with stock picking, than any other market.

And yet the market has been one of the worst performing in the world,  falling from 6,000 in 2008 to 3,000+ now.  In comparison, the US Market has doubled.  So even if you beat the benchmark (in this case the Chinese Stock Market), that doesn’t mean that you have succeeded as an investor.

If somebody really can’t help themselves, stock picking with just 5%-10% of your portfolio makes sense.  After 20 years, you may just realize it was too much hassle, compared to indexing and using an advisor!

Is there no place for active management? 

Bonds are one of the few areas where active can beat passive.  Bonds don’t pay 6% anymore – often they only pay 1%-2%.  Besides, a good bond fund should include some high quality corporate bonds, as they pay more.

However, most of the index bond funds used are purely government bonds, which barely pay anything.  So some good quality actively managed bond funds can easily pay 3%-4% per year net, by including some corporate bonds.

Why even have bonds in your portfolio, if they pay so little?

Bonds usually rise when markets fall. This buffer allows you to rebalance in the bad times.  Let’s take a simple example of somebody who had $200,000 before the financial crisis.

$40,000 is invested in bonds and $160,000 in index equity funds. The bonds rise to $44,000 during the panic and the stock index fall to $100,000.

You now have a $144,000 portfolio, and 30% in bonds, as opposed to 20%.  Now you can sell 10% of your bonds, and buy the equities at a cheaper price, to maintain the 80%-20% balance.  After markets recovered, the rebalancing would have helped returns.

Having said that, a 10%-20% allocation to bonds is fine for most younger people, and even those who are 40, 45 or 50.  Above 50, and in retirement, it makes sense to rise the bond component of your portfolio.
Are FANG stocks overvalued?

Quite possibly.  They certainly look so on a P/E basis.  Today’s winners are usually today’s losers, and technology is one area of the market that looks overvalued now.

Who could have predicted the rise and falls of previous tech giants, such as Yahoo? I am not saying Amazon and Google will go bankrupt, or even fall by 50%, but it is a fact that it would be unprecedented if they continued to beat the market, year in, year out.

None of the original 30 firms on the Dow Jones, are still on it.  This survival of the fittest is one of the reasons why markets beat other investments – they are the cream of the crop.

FANG stocks may be the cream today, but don’t count on it continuing!

How about real estate investment trusts (REITS)?

REITS can be a great additional to a portfolio.  Various academic studies have shown that REITS lower volatility, and (slightly) increase returns over the long-term.

The reason is that REITS perform well, during periods when stocks markets perform badly, and vice versa.  REITS also have several advantages over direct real estate, including;

  • They can be sold more easily. With direct real estate, it isn’t always easy to sell, especially in markets where people don’t like ‘second handhomes’ like in China and many Asian markets.
  • Long-term performance is better.
  • It can be held in the same portfolio as bonds and stock indexes. This means you can buy and rebalance.
  • They are globally diversified so not focused on just one real estate market.
  • Geopolitical risk is less when you can buy and sell online, quickly.  If you buy a physical plot of land, or property, in an emerging markets, there is significant political risk.  Indeed most countries in the last 50-100 years have had extreme governments that have confiscated  land and private property.
  • They can be bought in seconds whereas direct real estate is time consuming.

Just like stock market indexes, however, some of the lower-cost REITSfunds are better.

Do index fund products exist which lower the downside?

Yes they do. Many companies offer limited guarantees, linked too structured notes. A typical example would be a 3%-4% per year ‘guarantee’ provided markets don’t fall by 40% or more over the duration of the product – say 15 years as an example.

However, these guarantees add costs and complexity to the products. The chances of you being down over a 15-20 year period are very low, in any case.

It has never happened that somebody invested for 20-25 years or longer, in a diversified stock and bond index portfolio, has been down.

What’s the bottom line?

I can’t control markets or always pick winners, but I can control risk through the asset mix and help with the behavioural/emotional aspects of investing – stopping my clients from doing silly things that affect most investment portfolios.

Investments for American Expats

Since the Foreign Account Tax Compliance Act (FATCA) was approved in 2010, and enacted in 2013, investing for American expats has become more difficult. This article will explain more.

What is FATCA?

The FATCA law requires all non-US financial institutions, to search their databases for US clients, and to self-report. This includes insurance companies if there is a savings and investment element to the policy.

FATCA imposes a 30% withholding tax on any financial institution, that doesn’t reveal the identities of US account holders, within a specific period of time.

The costs of complying with FATCA are estimated to be about $200M for each foreign institution.

The cost of the regulation means that many non-US financial institutions no longer accept Americans as clients, including insurance companies if those insurance companies offer insurance with a saving and investing component.

In addition to that, many US individuals have had their American brokerage accounts closed, since they moved overseas.

For American expats, therefore, investment options have become more limited. Countless Americans living overseas, who aren’t lucky enough to have an HR department help them with the tax implications of investing overseas, end up confused by the paperwork and other requirements that go along with investing.

Who does this effect?

This affects Americans living and working overseas, in any country, and US-specified persons. The majority of American expats live in Mexico, Canada, New Zealand, The UK, Germany, Sweden, Australia, UAE, Singapore, Israel, Costa Rica, France, Brazil, Colombia, Philippines, Mainland China, India, Hong Kong, Japan and South Korea.

There are, of course, American expats all around the world, including numerous places in Central and South America.

American Expat Investment Options – what are the realistic choices?

US expats have many options, including;

1. Putting the money in your partner’s name – although it may not be the most sophisticated option, having the money in your spouse’s name (assuming they are non-Americans) is one simple option to overcome FATCA. This comes with various risks, of course, if you break up. This is especially risky in countries without a developed legal system, if divorce ensues.

2. Another option is to continue contributing to your existing accounts in America, assuming they are open to American expats, which often isn’t the case. This does come with risks though, such as currency exchange fluctuations, and various banking fees.

This also isn’t an option for Americans who have lived overseas for 25-30 years, who no longer have US bank and brokerage accounts in many cases. Another risk is that your US brokerage will eventually follow in the footsteps of many others, and close your account.

3. Tax-compliant investment services overseas. There are a limited number of platforms that can accept American expats overseas, which are FATCA-compliant, which I, and some other firms, can utilize.

The benefits of this approach are the capital gains tax are slim (0%-20% depending on many short and long-term factors), whereas non-compliant US investments can be taxed up to 37%. This approach also makes tax filing and compliance as easy and as convenient as possible.

4. Giving up your American Green Card or Citizenship. This might seem like a big step, but more and more are doing it, with over 5,000 yearly cases reported, including Facebook founder Eduardo Saverin.

FATCA and double taxation on higher incomes have contributed to this situation. However, there is an exit tax for giving up your Green Card. Whether you pay the taxes depends on your immigration status and financial assets.

As a generalization, if you have lived lawfully in the US as a permanent resident, regardless of whether on a green card or as a US citizen, for eight out of the fifteen years ending with the expatriation year, could mean that you are subject to exit taxes.

If your income is above $160,000 per year, and/or your net wealth is above $2M, you are also more likely to be charged an exit-tax. If you don’t meet these two criteria, and you have correctly filed for the last 5 years, then you are less likely to be hit by the exit tax.

If you haven’t filled out your tax forms correctly, the penalties can be severe. For instance, the penalty for not having filed the FBAR (Report of Foreign Bank and Financial Accounts) or the form 8938 (the statement of Specified Foreign Financial Assets) can be up to $10,000 per-form per year.

In such situations, a taxpayer should consider entering into an IRS tax amnesty program to clean up the past and minimise penalties.

Giving up US Citizenship is a big step, with tax and personal implications, so shouldn’t be taken without huge amounts of research and professional advice sought.

In general, option 3 is the best option for most Americans living overseas.

Frequently Asked Questions

This sections will cover some FAQs.

Can a US citizen living overseas invest in Vanguard or other mutual funds?

Vanguard used to be able to accept American expats, but this is no longer the case. However, some of the US tax-compliant platforms can accept various low-cost funds and other investment options.

Most passive funds work in a similar way these days in any case, so many ‘Vanguard-like’ funds exist in the market.

What does a client need to do?

FATCA requires all US taxpayers with financial assets exceeding $50,000 to report these on IRS form 8938, attached to the taxpayer’s annual tax reports. Many institutions will help US expats with tax filing, or make it as easy as possible to do it themselves.

Who is considered US Status or US specified persons?

The following people are considered US specified persons;

  • Green Card holders
  • US birthplace
  • Has US residential address
  • Sending instructions to transfer funds from the US
  • A power of attorney granted to a person with a US address

What about joint accounts – if one person is American and one is non-American?

In this case, FATCA still applies, unlike if you put 100% of the money in your partner’s name. It is subject to the same reporting as a US person.

What about people who took out accounts before FATCA was enacted?

Americans who took out insurance or financial accounts overseas before 2013, should still receive tax advice, as they will still need to report any financial activity.

What if my family or friends in the US send me money?

Money sent out of the US will not trigger FACTA withholding. In comparison, money sent into the US, and income earned in a US account, may be subject to FATCA.

Could FATCA be rolled back?

There has been speculation that The Trump Administration may roll-back or repeal FATCA reporting. This is just speculation at this stage, and cannot be relied upon. Laws can always become less, or more, strict with time. A rational investor can only make decisions based on the information he or she has available to them.

Does FATCA affect health, life and other insurance products?

Many health and life insurance providers, such as AXA, also provide investment products. Many of these providers can no longer accept Americans.

Providers that only provide non-investment-linked insurance products, in comparison, can usually still accept American expatriate clients.

Are foreign mutual funds more heavily taxed?

Yes. The IRS considers foreign mutual funds as Passive Foreign Investment Companies (PFIC), and these are subject to high taxes.

Should I contribute to my employer’s scheme?

Many employers offer excellent schemes, where they contribute $1 for every $1 you contribute. However, this is only a good idea if the scheme is US tax efficient, otherwise, you will still have tax issues.

Do American expats pay taxes on income?

All Americans living overseas need to file a tax return. However, most Americans do not pay income tax in the US, unless they are earning over $101,000 per year.

How about US legacy estate planning?

Your US estate plan, including wills and trusts, may not be viewed the same way in your country of residence, as in the US. If you have these plans in place, therefore, it makes sense to contact an expert in this space.

What’s the best brokerage accounts for American expats?

There is no best option per see, just that some are tax-compliant and reasonably priced, and some aren’t. Brokerage accounts for US citizens living abroad, that are tax and price efficient, are few and far between, but exist.

Should Americans expats have a specific US financial advisor, who specializes in US non-resident matters?

This isn’t always needed, as most expat financial advisors are aware of the issues many US expats face. Financial advice for US expats is specific, however, so the financial advisor should know about the specific issues non-residents face.

What are some of the key mistakes I have seen when it comes to expat retirement planning?

An even more common mistake than making bad investments is deciding to not save and invest at all because the process seems too complicated. Most expats and non-Americans alike don’t have access to local social security and pension programs, which means that poverty can await in retirement.

This is especially the case if expats move from country-to-country. Expats who stay in numerous European countries for 30 years plus, are often entitled to reasonable local pensions.

Over-reliance on your country of residence is another key mistake for American, and non-American expats, alike.

It can be difficult to say no to local stocks and real estate when you regularly go to dinner parties or bars, where everybody is talking about it.

However, most emerging markets are very high-risk. I have seen many expats get caught up in the mania.

Furthermore, tax laws are always changing, so it is important to ask your accountant and investment advisor to be up-to-speed.

As a final note, it is always prudent to get independent tax advice.

Are non-US investment accounts always expensive?

Not always. Some options in the overseas market are cost-efficient and are available with low account minimums.

In the US, it is normal for financial advisors to only accept larger accounts. Many advisors have account minimus of $250,000 a year, or even higher.

In the overseas market, getting advice through an advisor, at a reasonable cost, is often more accessible.

What should I do if I want to contact you?

I have set up many tax-efficient accounts for Americans living overseas. My email is adamfayed@hotmail.co.uk and various other contact options, including WhatsApp and Line, are available here.

Please note, however, that I am not a tax advisor. I can just help with tax-efficient investment structures that make filing more convenient.

What are your account minimums?

$50,000 as of May 2019. I started with $30,000, but have gradually been pushing up my minimums.

What documents are needed to open up an expat investment account?

Typically proof of identity (passport or ID card), and address dated in the last 3 months (utility bill or bank statement), plus an online or paper application form.

I have seen applications approved in hours, and some take months. A week is normal.

What are the minimum contribution periods overseas?

Just like back home, that depends on the product provider. In general, lump sum accounts are quite liquid, if you need the money.

However, with market-investments, it is always best to be long-term. Time in the market reduces risks of losses dramatically.

Can you invest in US Markets like the S&P500 from outside the US?

Absolutely. You can invest in the US Markets, without the money being held in the US.

What average returns could I expect?

Just like back home, nobody can predict what will happen to markets short-term. I have seen clients and associates make 30% 1 year, and 0% the next year.

In general, however, the long-term market average return is 8%-10% per year. That average merely gets distorted by the good and bad times.

1985-1999 and 2009-2017, for example, regularly gave 15%+ yearly returns, whereas the US markets produced 0% from 2000-2009.

 

Friends Provident Reserve (FPI) Bond Review

(Quick note; for a more in-depth review of Friends Provident and similar savings plans, alongside customer reviews and questions at the bottom of the page, please visit here – https://adamfayed.com/zurich-vista-review-rl360-quantum-friends-provident-hansard/). 

Who are Friends Provident?

Friends Provident are a life insurance company, with product offerings in areas such as life cover, savings plans and lump sum. The Reserve is a lump sum account. Friends Provident have been bought by Aviva recently, so have rebranded.

Where is Friends Provident sold?

They are sold worldwide in Dubai, Qatar, Hong Kong, Singapore, Malaysia, China and other expat destinations.  Friends Provident was more widely sold 5-10 years ago, compared to today.  So most people in the plan, have already contributed for a number of years.

What are the fees and general terms and conditions?

The charges are taken out for as long as 10 years and aren’t very transparent. The reason is that the charging structure that is chosen (commission-free or with commission) can mean that client X is paying more than client Y for the same product.

In general, the charges are:

  • Establishment charge of 8%-8.5% upfront charge, taken out over many years, on a gradual basis. This charge lasts for 5-10 years, often working out at 1%+ per year. This charge goes down to 0% after this time.
  • Fund charges, which can be anything from 0.1% to 3%, but typically 1.5% on most actively managed funds
  • $137.50 every 3 months for admin charges.
  • Broker management fee charge – typically 1%.

What’re the positives about the plan?

  1. You can earn more than in the bank even with high costs
  2. Low-cost options, such as index funds, are available, but seldom used, within this product.

What are the negatives about the plan?

1. It is expensive

2. Used alongside expensive funds, and trustee fees in QROPS/SIPPS for British expats, the fees compound.

3.  Many high-risk products like structured notes are used in tandem with this product. This often leads to losses.

Are there charges for getting out of this product?

Yes, there are, but it depends on how much you want to withdraw.  On day 1, most clients can withdraw 70%+ or more of their money, without penalty, assuming the funds are liquid funds, which can be sold relatively quickly and without penalty.

Just because the provider allows penalty-free withdrawals, doesn’t mean there aren’t charges for getting out of the investments chosen within the platform.

If there are charges for getting out of the product, what can I do?

It depends on each case. In some cases, reducing the management fee and fund charges can make a difference.

For instance, if somebody has already been invested for 10 years, the establishment charge doesn’t apply any longer.

In such cases, simply reducing the other fees, could increase performance.  For many other clients, however, it is possible to get the same funds, for a cheaper price, with cheaper platforms and providers.

This will make a big difference over time. If you have $100,000 in your account and markets go up 8% per year, for the next 5 years, you are only likely to get 4% per year returns in this product, due to the numerous charges.

Mistakes to avoid 

In investing one of the biggest mistakes investors makes is called loss aversion in cognitive psychology. This means that if investors are down, or not doing well, they wait until the accounts are breaking even before selling.

A simple example would be if you have $100,000 in your account. The value is $95,000. After more reading, you know that deep down the fees are eating into returns. However, as the account briefly hit $101,000 before, you wait until the account recovers to $100,000+ before selling as you don’t want a loss.

I have even seen investors wait 2-10 years to avoid this loss. The rational thing to do is accept the $5000 loss in this situation, as that money can be made up quickly in a cheaper structure.

In addition to that, many investors think size is always good. Having 24/7 account access and log in, flash IT systems and an office in Mayfair doesn’t help client returns; lower fees and better funds would help that.

What can you do if you have a Friends Provident policy offshore?

If you have a policy and would like a conversation please contact me via adamfayed@hotmail.co.uk, I can’t promise anything – only to try my best.