I received an email from a 35 year old American couple who became aware that their financial service company, Friends Provident, was sucking from them like a 50 pound leech.
The company labels itself as an “investment” insurance company, promising 101% of what an investor deposits, upon their death.
Of course, that sounds good. But think about it for a moment.
The company promises 1% more than what you deposited or the market value of the investments upon death, whichever is highest. I’ve taken this directly from the Friends Provident website:
“In the event of the death of the Life Assured (or the last surviving Life Assured if the policy is written on more than one life) while the policy is in force, 101% of the cash-in value of your plan will be payable.” … read the product summary
The fees charged to the “investors” to have their money in the stock and bond markets are so lucrative (for the fund company) that they would even make Bernie Madoff smile. Check them out, below:
- 1.2% annual administration charge
- 1.6% annual establishment charge (for the first 5 years)
- 2.59% expense ratio (See Average Channel Island Fund fees on page 1287, in the article by Henri Servaes, Ajay Khorana and Peter Tufano, called “ Mutual Fund Fees Around the World”: … read the article.)
Assuming that they have already paid the bulk of their annual establishment fees (charging 1.6 percent annually for the first five years) they will pay combined investment fees of roughly 3.79 percent annually, when adding up the annual administrative charge with the annual expense ratio for the funds.
This couple, after reading one of my earlier posts on Friends Provident, wanted to take action, by selling their investments, and reinvesting with a company that won’t drag them over the coals. But Friends Provident is a smart company. They want to ensure that investors stay with them for a long time, so they can reap perpetual fees from their clients.
If a client figures out the con game, Friends Provident wants to ensure that it still gets nicely compensated, despite the fact that they won’t be able to continue gouging their client on an annual basis, after they leave.
My new online friends have a dilemma: Their investments have a market value of $150,000 U.S., but if they withdraw their money now, they’ll pay a penalty of $45,000 to Friends Provident, while receiving just $105,000.
Should they do it?
As Americans, with Vanguard’s indexes, they could pay as little as 0.15 percent for a diversified portfolio. With Friends Provident, they’re paying roughly 3.79 percent in annual fees.
Let’s have a look at what those fees could do to the 35 year old couple, over the next 30 years. Assuming a stock/bond market return of 9 percent annually, they would make 8.85 percent annually with Vanguard, and 5.31 percent annually with Friends Provident.
Let’s have a look at what would happen if they pulled their money out, taking that $45,000 hit, and then investing with Vanguard.
|
Investment Company |
Investment |
Annual return over 30 years |
End value in 2041 |
|
Vanguard |
$105,000 |
8.85% |
$1,336,725 |
|
Friends Provident |
$150,000 |
5.31% |
$708,238 |
You can see, above, that despite taking that $45,000 hit, the comparative results with a low cost company like Vanguard would easily outstrip the results of a high-cost company like Friends Provident.
But these new friends of mine have an option: they’ve told me that they can withdraw as much as $90,000 today, without a paying a fee. And later, they can withdraw more money, paying a lower penalty as more time elapses.
That sounds like a good option to me. They could invest that $90,000 with Vanguard or Assetbuilder, and concentrate on building those accounts, while limiting their losses with the money they leave behind, with Friends Provident.
Unfortunately, from what I understand, they will have to keep contributing money to Friends Provident, based on the contract they have signed (bizarre, I know!) but the pain of selling their money later is abated, as the penalty to sell “early” isn’t as severe later on.
Expatriates often fall victim to these scams, and they should spread the word:
- You should never pay a fee to either buy or sell your investments (with the exception of a small fee to buy exchange traded index funds.
- You should never have to pay a penalty to withdraw your money
- You should never have to pay an ongoing administrative charge (or an “establishment charge” as Friends Provident coins it)
You should teach your friends not to fall for costly scams that can cost them hundreds of thousands of dollars over their lifetimes.
These sorts of cons shouldn’t be legal. But they are. Do your best to educate others.
Loading tweets...
108 comments
DIY Investor says:
April 27, 2011 at 10:34 pm (UTC 8 )
Woodie Guthrie wrote it down in song years ago:
“Yes, as through this world I’ve wandered
I’ve seen lots of funny men;
Some will rob you with a six-gun,
And some with a fountain pen. “
Andrew Hallam says:
April 28, 2011 at 6:17 am (UTC 8 )
Well recited Robert.
Woodie Guthrie probably would have make a great advocate for individual investors!
CreditDonkey says:
April 29, 2011 at 4:05 am (UTC 8 )
So unfair. Poor fellows who have fallen to these scammers. Sometimes the desire to earn money can just end up in losing money – lesson learned the hard way
Paul Carey says:
October 5, 2011 at 12:18 am (UTC 8 )
Can you please tell me if this is Friends Provident in the Isle of Man?
Andrew Hallam says:
October 5, 2011 at 9:06 am (UTC 8 )
Yes Paul, that’s the same company.
David says:
November 12, 2011 at 4:28 pm (UTC 8 )
As a Canadian living overseas will I benefit from investing in an ‘off-shore’ program like Royal London 360 vs. Vanguard where I will have to pay US taxes on my money?
Andrew Hallam says:
November 13, 2011 at 1:43 am (UTC 8 )
Hi David,
I don’t know exactly where you are living, but as an non-American, you can’t invest directly with Vanguard. You can, however, open an account of exchange traded funds at a brokerage. If you open an account in a country that doesn’t charge capital gains, you’re free and clear of paying capital gain taxes. You don’t have to live in the country either. People in Vietnam (Canadians) are flying to Singapore to open accounts, then building their portfolio of exchange traded index funds from there. Wiring the money each quarter might cost a little, and it’s not convenient, but overall, you will pay far lower fees with this option, than with the service company you are using.
Also, even with your offshore investment company, you are paying U.S withholding taxes on the dividends, if any of their products have exposure to the U.S market. There’s no way around that. Where do you live/work? I may be able to offer a suggestion.
Cheers,
Andrew
David says:
November 13, 2011 at 3:42 pm (UTC 8 )
Andrew – I live/work in KL and we have some mutual friends through SAS. I am seriously considering closing my IPP account and cutting my losses. This is a big step and I want to make sure I am making the right choice before I do it. I need a place to start investing once I give up my Royal London 360 account. Any advice?
Andrew Hallam says:
December 3, 2011 at 2:28 pm (UTC 8 )
David,
You can open a DBS Vickers account in Singapore and use exchange traded index funds, just as I do. True, living in KL makes it less convenient, and you would have to open the account in person (then wire the money) but it’s the most efficient way for you to invest. If you check the “expat investing” tab at the top of the page, you should be able to find some useful information.
Lisa says:
May 14, 2012 at 3:36 pm (UTC 8 )
Andrew,
From this post you are suggesting that someone living in KL can go to singapore to open an account in DBS Vickers and use exchange traded index funds. I was wondering how this is possible as i have checked the DBS Vickers website and it looks like you would need to be working in Singapore (with a valid employment pass) to open an account with DBS Vickers. Can you confirm that a foreigner that does not reside in Singapore (i.e a visitor/tourist) can actually open a DBS Vickers account in Singapore.
Thanks
Lisa
Andrew Hallam says:
May 14, 2012 at 6:12 pm (UTC 8 )
Hi Lisa,
You don’t need to be working in Singapore to open such an account. You could visit here, bring all your particulars, and open the account–then wire monthly savings to Singapore from your country of residence. I know plenty of non Singapore residents, firsthand, who opened their DBS Vickers accounts. This reminds me that I asked one of them to write a story about it (he teaches in Thailand) and I have it in my inbox somewhere. Firsthand, I know of the following people who have done it: two people residing in Thailand, one residing in Vietnam and one residing in Amsterdam. All three of them are Canadians. If you’re American, you won’t be able to open such an account. As easier option might be assetbuilder, for Americans: http://www.assetbuilder.com Let me know if you have questions Lisa.
Cheers,
Andrew
Joe says:
May 15, 2012 at 10:24 am (UTC 8 )
Hi Andrew, If Lisa is an American, couldn’t she just open an account directly with Vanguard? That’s what I do, and I can buy or sell Vanguard ETF’s for free. That’s right, zero transaction costs! Cheers! Joe
Andrew Hallam says:
May 15, 2012 at 10:28 am (UTC 8 )
Hi Joe,
If Lisa lives overseas, she can try, but unless she tells a small white lie, they won’t let her open a Vanguard account. If Vanguard catches a sense that she lives overseas, game over. They brought that into effect about 3 years ago. If you are a current overseas American Vanguard customer, you can keep your account, but if you’re trying to open a new account, they won’t let you.
Lisa says:
May 15, 2012 at 12:34 pm (UTC 8 )
Dear Andrew,
Sorry, it’s me again….I was wondering….you mention that a portfolio should be 40% bond index fund and 60% stock index funds (i am 38 years old). You also mention that it is better to get a stock index or bond index from you home country or the country you plan to retire in.
Well, i live in Brunei, and we don’t have access to buying stock index funds or bond index funds and there is no broker in Brunei when i checked via the link you gave me http://www.selectabroker.com/Brunei-Darussalam/
So, what index funds would you advise me to buy?
I am trying to plan where to put my retirement savings once i get it out of Friends Provident!
If i already have an account with a Singapore Bank where i can buy ETF Tracker Funds should i just buy them from them? I think they would charge USD150 per transaction…..is that a high charge?
Regards
Lisa
Lisa says:
May 15, 2012 at 12:24 pm (UTC 8 )
Dear Andrew,
Thanks for all your help & advice. I am not an american, i am Bruneian.
I will look into the DBS Vickers account the next time i am in Singapore. Since reading your book (i am on chapter 5) and reading your posts i have realised that my retirement savings are with Friends Provident International and London 360….gulp!!!!
This has happened over the last few days so i am trying to get in touch with my financial adviser to find out how i can get as much money out as possible without paying huge surrender charges. i will use your advice to the other couple where they took out as much as they could without a penalty and left the rest there and reduced their monthly contribution to the absolute lowest possible.
Wish me luck.
Lisa
Andrew Hallam says:
May 15, 2012 at 1:00 pm (UTC 8 )
Hi Lisa,
Set up an account in Singapore with DBS Vickers. You’ll need to fly here to do it. Then you could buy the world stock market index (VT) and the international bond market index (ISHG). That’s all you’d need for full diversification. You’d pay $25 U.S. per purchase, so make sure you invest a decent sum at a time. You can then wire your money here. if you ask the bank for help, they will move you into what they want you to buy, and it won’t be low cost ETFs! Good luck with Friends Provident. I hope it’s not too painful.
Lisa says:
May 15, 2012 at 11:29 pm (UTC 8 )
Dear Andrew,
I will continue to check my options with buying index funds(either low cost with DBS Vickers) or slightly higher cost index funds (at my existing bank). My question would now be…if I set up an account with DBS Vickers what would happen to the money invested if say something should happen to me before I take out the funds to use for my retirement?
Regards
Lisa
Andrew Hallam says:
May 16, 2012 at 6:40 am (UTC 8 )
The money would be in your name Lisa. Is as much “yours” and your family’s after you die as it would be if it were in any other bank.
Lisa says:
May 16, 2012 at 1:54 pm (UTC 8 )
Dear Andrew,
Thank you for all your helpful advice. I have just finished reading your book & I am so thankful that I did as it made me look seriously at my retirement savings & made me realize that I was being duped!!!!
You mentioned in your last reply to me that I should get VT and ISHG. I am assuming I should be getting approximately 40% in ISHG and 60% in VT…is that correct? Also in your book you make a case for buying short-term government bonds….is ISHG one of these?
Lastly, is 2 funds enough for retirement savings and where could I find data showing past performance of these funds? Should I be adding another fund?
Great book. Life changer for me
Thank you so much
Lisa
Andrew Hallam says:
May 16, 2012 at 6:32 pm (UTC 8 )
Hi Lisa,
The historical returns of VT are irrelevant—it’s a total world stock market index with a low expense ratio. ISHG is a medium term international bond index, but that should be fine. I don’t know of a short term international bond index—I don’t think there is one.
mahathir says:
May 15, 2012 at 12:58 pm (UTC 8 )
David,
I’ve been roped into Royal London 360 through IPP as well and have been making contributions for over 13 months.
What has given you cold feet? I will be placing a substantial amount of my savings through this plan as well and am concerned. Would appreciate your kind feedback.
MM
David says:
November 14, 2011 at 6:39 pm (UTC 8 )
I failed to mention that my wife is a US citizen and we have funds in the US with Fidelity.
bill says:
December 1, 2011 at 1:54 pm (UTC 8 )
David, please share your experiences with IPP and Royal London. I have also invested with them but over 8 months. What are your reservations?
Gary Crock says:
December 1, 2011 at 6:13 pm (UTC 8 )
I have an account with them with these fees.. However, they match 125% of the money we put in..
The program is called Premier Plus and the wording is:
“”if you invest $2k per month for 10 years, you will qualify for the current Premier Plus Special Offer – Your Initial Unit Bonus Allocation will be: 125%
This means that for the first 18 months, for every $2k you invest, there will be a $2500 USD working to buy units in your chosen investments..”"
I have to leave it in for 18 months, but then I can take out anytime.. How safe is this money ? I know they have AAA rating and Life Assurance Regulations of the ISle of Mann (1991)..
is this a good deal??
Gary says:
December 1, 2011 at 9:21 pm (UTC 8 )
I have an account with them with these fees – Premier PLUS.. However, they match 125% of the money we put in..
The program is called Premier Plus and the wording is:
“”if you invest 2k per month for 10 years, you will qualify for the current
Premier Plus Special Offer – Your Initial Unit Bonus Allocation will be:
125%
This means that for the first 18 months, for every 2k you invest, there
will be a 2500 USD working to buy units in your chosen investments..”"
I have to leave it in for 18 months, but then I can take out anytime.. How safe is this money ? I know they have AAA rating and Life Assurance
Regulations of the ISle of Mann (1991)..
But is this a safe and good deal??
Andrew Hallam says:
December 3, 2011 at 2:24 pm (UTC 8 )
Gary,
First of all, it’s a 25% bonus that they’re talking about. Giving you 100% of what you deposit means you are getting 0%. Getting 125% of what you deposit means you are getting 25%. But look very carefully at the contract. You must deposit money over 10 years, yes, but do you get this 25% bonus after ten years? Or after many other years?
If you get the bonus after depositing for 10 years and you’re keeping the account for 25 years, the “bonus” amounts to less than 1% annually.
You will pay triple that, annually, in fees. Dissect that contract very very carefully. It’s not as transparent as it appears, and it looks much better than it is.
Andrew Rowan says:
January 22, 2012 at 6:20 pm (UTC 8 )
With regards to the 18 month initial allocation period of the Friends Provident Premier; As I understand it you pay your monthly premium for 18months and it remains in the plan for the term i.e. 10 years. The bonus of say 25% is added to your premium thus buying 25% more units in the chosen investment and again this stays in the plan for the term.
So ok you pay the fees etc and doing the math you’re returning whatever % less the fees right?
My question is as a lazy investor; If I’m making say 8% p.a. in the product less the 3.69% above means i’m returning 4.31%p.a.? Where ‘should’ I be investing my money (as a lazy investor) to forget about it for the term that will return me this %?
As an expat I speak to numerous people, some opt to leave it in a bank account with little to no return others speak of Generali, Skandia etc but surely these are all much a muchness as fees go?
Andrew Hallam says:
January 24, 2012 at 5:46 pm (UTC 8 )
Hi Andrew,
I have some options mentioned under my “Expat Investing” icon at the top of my home page. My total investment expenses average roughly 0.15 percent per year. I use DBS Vickers’ online brokerage, and I purchase three exchange traded funds: Vanguard’s International stock market index (VEA); Vanguard’s total U.S. stock market index (VTI) and a short term Canadian stock market index (XSB.TO)
I don’t pay capital gains taxes on the profits. The dividend yield is low, and I do pay a 30% witholding tax on the dividends. But even in a tax sheltered account with Zurich or Friends Provident, you would pay this percentage on all U.S. stocks or U.S. stock funds (the witholding tax gets removed at the source, in this case, so you won’t see it on the account, but you can read about it–in fine print–on their websites)
Linda says:
April 8, 2012 at 10:00 pm (UTC 8 )
hi Andrew
I’m kinda in the same boat. I had subscribed to the FPI Premier plan for the last 5+ years, sold unfortunately while I was an expat in China. Now i’m back to Singapore (where I am from) and a financial planner friend here alerted me to the high hidden charges that I’ve been paying.
Like the American couple that you’ve befriended, I’ve also have over USD140K parked with them. Thanks for your advice above – I think I will take out as much money as I can without penalty and reduce my monthly premium to the minimum.
Thinking back to what had attracted me to FPI originally is the mix of the funds that they had to offer (opportunities to invest in markets like Brazil, Russia, hedge funds) and I had assumed that nil difference between bid and offer price of the funds means a good deal for me. I admit I had not checked on the expense ratio of each individual funds that I hold and I now know the admin fees for the plan fees are also very high!
My question is whether through a normal brokerage like DBS Vickers, will we still get to invest (at relatively low costs) in markets aside from the likes of US, Australia, Singapore, China and India? do you recommend only ETFs then?
Andrew Hallam says:
April 9, 2012 at 5:53 pm (UTC 8 )
Hi Linda,
Through DBS, you can buy indexes (ETFs) representing any country you want. I recommend against picking individual foreign markets though. Neither you, nor anyone else, is going to know which markets will do the best over the next year, five years or ten years. It could very likely be a sleeper, like Greece or Ireland. In fact, the odds of that are better than you might think, yet few people would pick them. That said, considering that nobody really knows, you might want to hedge your bets (like I do) by purchases an international index that owns the widest array of international markets, like VT (the entire world) or VEA (the developed first world) coupled with EEM (emerging markets). You might see the method as unsophisticated, but your odds of beating a diversified account of world stock indexes are incredibly low, over your lifetime.
Mel says:
April 10, 2012 at 11:13 am (UTC 8 )
Hi Andrew and readers,
Andrew, firstly great book! Congrats on pulling off writing a book in layman’s terms that everyone can read, learn and act on.
I entered the investing world about 2 years ago indebting all my savings with an advisor at a large financial advising company in Canada.
Over the last few months I have awakened to the fact that my broker’s interests are not in my best interests so I have started on the long and sometimes confusing trail of educating myself on investing and how to build and manage my own investments successfully.
I was hoping you or your readers could give me some guidance. Currently all my investments are spread over 9 mutal funds (surprise surprise, did I mention I worked with an advisor) with an average MER of 2.2%.
I am thinking of selling my funds to reduce the MER’s by purchasing ETF’s and Bonds. The problem is all of the funds have DSC’s until mid 2016. If I were to sell the funds now I would have to pay around $6,000 in DSC charges. I am not sure if I have gave you enough info here, but do you think it is worth taking the hit now paying the $6k to get me out of mutal funds so I can save the 2% on MER’s?
Or am I looking at this the completey wrong way?
Andrew Hallam says:
April 11, 2012 at 8:52 am (UTC 8 )
Hi Mel,
This can be a really tough call. I don’t know all of the details, but perhaps, it I paint a compounding picture/scenario, you may be able to use it to make a decision.
Let’s assume that you lose 5% to deferred sales load fees for exiting the funds (I’m not sure what your penalty would be, so you might want to have a look). Then, let’s assume that you buy low cost ETFs with the proceeds. The ETFs would save you roughly 2% per year.
Assume that from 2012 to 2016, your ETF investments generated a return of 8% per year.
By sticking with your actively managed portfolio, there’s a strong probability that you would make roughly 6% per year, based on the higher costs.
OK…let’s assume that your portfolio is worth $100,000.
$100,000 making 6% per year (assuming you stay) over 4 years would grow to just over $124K
If the sales load cost you 5%, you would have $95,000 to invest in ETFs, and let’s assume you’d make 8% per year. After 4 years, you would have slightly more than $129K.
Under these circumstances, it would be better to take the 5% hit. But again, I don’t know what your hit would actually be for sure.
I hope this helps you though. And thanks for the kind words about my book! If you have a few minutes to write a quick review on Amazon, I’d be thrilled! Here’s the link, if you have time: http://www.amazon.ca/Millionaire-Teacher-Wealth-Should-Learned/dp/0470830069/ref=sr_1_1?s=books&ie=UTF8&qid=1324994093&sr=1-1
Thanks Mel!
Andrew
Gading Karsika says:
June 6, 2012 at 10:44 pm (UTC 8 )
Hello Andrew
I live in Bali indonesia and have been reading you posts on Friends Providential currently I am in the 12 month of the 18month payment plan/portfolio. I have already Committed 20,000 USD and need 2 more payments of 10,000USD to complete the initial startup investment. If I default on the next payments I will loose my 20,000. So what should I do? default or continue the payments? Do you have more knowledge on Friends Providential that may calm my nerves on the subject …… or is it to late and I should consider my $$ swindled?
Andrew Hallam says:
June 7, 2012 at 1:18 pm (UTC 8 )
I think you should do the specific math on when it’s best to pull your money. I’m sorry to hear about your circumstance, but you may find the best time to pull the plug. Keep in mind, however, that if you remain with them for a lifetime, you will receive very little of what will rightfully be yours. Too much will be eaten by the tyranny of their fees.
Carrie says:
May 14, 2013 at 11:25 pm (UTC 8 )
Hi Andrew,
I am in similar position as Gading, having paid Friends Provident $1500/month for 1 year of the 18 months, then upped my monthly premium to $2000/month, which renewed the 18 month cycle, and I have 6 months left. The total I have paid into it is $30,000. I hate to admit that I’m not sure I understand enough about the charges to do the math and figure out when/how I should pull my money – which is why I went with an advisor! I am a Canadian living in Jakarta – do you have any recommendations of who I could talk to who could advise me on how to proceed?
Andrew Hallam says:
May 16, 2013 at 9:42 am (UTC 8 )
Hi Carrie,
Reading my book would be a place to start to understand why you would want to invest in low cost ETFs (indexes). I did my best to make it easily understandable.
Then you could open a discount brokerage account in Singapore—without necessarily visiting Singapore. And you could manage it online…which would take just a few minutes a year, and is incredibly simple. Here’s the Amazon link below.
http://www.amazon.com/gp/product/0470830069/ref=as_li_tf_tl?ie=UTF8&tag=nextstep07-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0470830069
Tony says:
June 14, 2012 at 11:20 am (UTC 8 )
Upfront commissions for the IFA are typically your first 6 months of contributions for a 10 year plan, and your first 12 months of contributions for a 25 year plan. Friends Provident is the one you should be complaining to as they purposely encourage misbehavior by paying their sales force like this. Good luck.
Harum says:
July 20, 2012 at 5:22 am (UTC 8 )
1.” ISHG is a medium term international bond index, but that should be fine.”
You responded to another reader, Lisa, as above. May I know why ISHG is fine even though it is medium-term and not short term?
2. Also, you mentioned to her, ” Then you could buy the world stock market index (VT) and the international bond market index (ISHG). That’s all you’d need for full diversification.”
Normally you would recommend another index, a home country index, but did you not recommend it to Lisa because she is Bruneian and a Brunei index is not available through Vickers?
I am a Malaysian, about to study in France. I plan to work in France after my studies but I do plan to come back to Malaysia in the future. (Especially to retire as my money would stretch further)
Since French ETF and Malaysian ETF are not available through Vickers, should I proceed with a diversification like Lisa’s or should I buy UK ETFs (in lieu of French) and look for other options (besides Vickers) to buy Malaysian ETFs? Or should I just buy Singapore ETFs? Help!
Andrew Hallam says:
July 24, 2012 at 10:27 am (UTC 8 )
Hi Harum,
There is a Malaysian stock market ETF. You’re right about why I didn’t recommend a home country index for Lisa. At this point, I don’t know of one. But you should build with a home country equity bias. The ticker symbol you want is EWM. Here’s the link: http://finance.yahoo.com/q?s=ewm&ql=1
You can buy this via a DBS Vickers or Standard Chartered account…any account, actually, giving you access to the New York Stock market.
Afonso Vieira says:
September 27, 2012 at 10:31 am (UTC 8 )
Message to Gading Karsika,
As the article said, you need to pay fees until the end of the “term”. So if you open the account for say 20 years, you need to pay fees for the all 20 years regardless if you keep deposits going after the initial 18 months.
At my firm we have tried several times to close this type of accounts and get the money back to clients that come to see us a few months AFTER being sold an account with Friends Provident by Devere, in the same fashion as the article describes. We complain to the Isle of Man regulator but to no avail. The reply is always the same: the client signed a contract that clearly states fees, penalties, etc.
So the advise is to complete the 18 months and stop making deposits. Also, I recommend to share the story among your network but remember that it was not Friends Provident that advise you, it was most for sure an “IFA” working for some “regulated” company. He was the one that didn’t tell you how the account works.
Good luck.
IFA Abroad says:
September 27, 2012 at 4:59 pm (UTC 8 )
Alfonso – why keep paying for 18 months when the aggregate fees on those contributions are going to be close to 10% per year, for the entire length of the term?
Andrew Hallam says:
September 27, 2012 at 8:55 pm (UTC 8 )
I think investing in one of these variable annuity plans (based on the prospectuses I have seen) will cost something like 3.5-4 percent per year in annual fees, not 10 percent. But I have to agree: these are nasty little products, sold by salespeople keen to make big bucks off the naivity of others.
IFA Abroad says:
September 27, 2012 at 9:47 pm (UTC 8 )
Andrew – great work on the site in regards to spreading awareness, but I’m actually correct when I say close to 10%. Have another look at the FP terms and conditions – there is a 1.5% quarterly administration charge on initial units – which is 6.14% a year, on initial shares and all those ridiculous bonuses (the ones that were about to run out before you signed on). Then you still have the investment admin charge of 1.2% and then the external fund fees – which usually add up to around 2% (total expense ratios, AMCs are nonsense). This is also ignoring other fees like funding the account with your credit card (1%) or foreign exchange fees. So there you have it – 9.3% in fees per year – and that’s generous! That’s charged on the initial units (everything you contributed for the first 18 months), every year for the entire term. If you continue throwing money at them, maybe you can work the fees towards 3.5%-4%, but why would you throw good money after bad?
People are blown away when they learn it’s actually 6.1%. It’s so underhanded to quote the fee on a quarterly basis (who else in the world of finance does that??) AND who would have thought an initial charge is applied every year for the entire term? These insurance companies are horrible.
Afonso Vieira says:
September 27, 2012 at 6:52 pm (UTC 8 )
Hi IFA Abroad,
Gading said “I am in the 12 month of the 18 month payment plan/portfolio” and I assume he was sold Premier from Friends Provident:
http://www.friendslife.co.uk/doclib/xim16e.tg.pdf
On page 4 it says the account will be “surrendered”, which means closed in life insurance jargon. We encounter this issue recently with a Deveres sold/advised Friends Provident Premier. The client stopped deposits after 14 months because he find out that the information he received was incorrect, but didn’t do anything else. He came to see us when Friends told him via letter to deposit the remaining 4 months or else. After we explained how the account really works and what he had been sold –he had been told that there were no fees AT ALL after 18 months– he decided to let Friends close the account.
The client end up losing the equivalent of 5 months deposits (he had made some investment profits in 2011 and 2012; and luckily he is almost 65 years old, so the “term” was for ten years “only” because of age limit.
Letting the account close is also an option to Gading, but he needs to calculate how much he will lose, both financially and mentally. If he has signed a contract for 25 years (called “term”), the loss after 12 months deposits may well be… 12 months!
By the way, to my knowledge Friends doesn’t sell directly to the public. So far, all similar cases I have had the opportunity to work with, were sold by an intermediary, broker, IFA. Never directly by Friends.
IFA Abroad says:
September 27, 2012 at 10:01 pm (UTC 8 )
Singapore regulators are actually debating whether they should ban commissions – and this is exactly the type of story the press and regulators in Singapore need to hear!
Organize all the details related to your complaint and submit it to authorities. They can’t ignore it if people keep coming out of the woodwork.
Darren says:
October 1, 2012 at 1:07 am (UTC 8 )
Having read through several of these comments, as well as many others on other sites that describe the Friends Provident “Scam”, I am convinced that taking out one of their policies was one of the worst financial decisions my wife and I could have made. Like others, we trusted that our money was going to make money over the long run and we wanted to set up a retirement fund for our new family. As we are both international teachers this seemed like a wise decision and was reinforced by our DeVeere agent who ever so kindly did not go into much of the details of the charges of our plan. We’ re 3 years into a 25 year plan now and have recently asked for a surrender value. Here is what I received from Friends Provident via the agency (Total Premium Paid $55,562):
Plan Value: USD 57,115
Surrender Charges: USD 26,841
Surrender Value: USD 30,273
That’s an awful lot of money to lose for us. It makes me sick. The problem though, is that I’m likely to lose even more over time as the”1.4% quarterly charge” depletes all of my initial units. Not to mention the other charges.
I feel as though we are stuck in a “Damned if we do, damned if we don’t” situation.
Andrew (or anyone else who has been in a similar situation), if you have any suggestions, alternatives or otherwise that might help out our situation I would greatly appreciate it. I just want to make sure that I do more research and analysis this time before I cancel our policy and make potentially the second worst financial mistake of my life.
Andrew Hallam says:
October 1, 2012 at 6:47 am (UTC 8 )
The world stock index, including dividends, has increased by 12% in the past three years Darren. Bond returns have been similar. Rebalanced, you should have made roughly 12% in a low cost global portfolio over the past three years. Your account, unfortunately, is already showing signs of fee hemorraging. If you had gained 12% overall, your plan value would be $62,234, so you are already about $5000 behind. I can’t make the decision for you. It’s a personal one to make. But I sympathize wholeheartedly with you and only wish there was more I could do to help.
Afonso Vieira says:
October 1, 2012 at 10:56 am (UTC 8 )
Hi Andrew,
Usually the signs of “fee hemorraging” are seen at years 5 or 6 and after because the product pays bonus during the first 18 months. This is why Devere advisers use this product, 5 years gives the adviser a long time to move to another city, country, cheat a few more, move again…
I think Darren invested the $55,562 by on a monthly basis and over 3 years; not a lump-sum one time only at the start of 55k. Anyway, if the plan value is now $57k, there are been mistakes on the investment strategy. Who is managing the money?
IFA Abroad says:
October 1, 2012 at 8:21 am (UTC 8 )
I feel for you – no one should ever be in this situation. For a 25 year policy, devere was paid a bit over 12 months of your contributions as commissions – upfront. That should give you a better idea of why the surrender value is what it is (and why he forgot to mention fees).
A brokerage account lets you avoid the 1.2% investment charge and ETFs drop your fund fees from 2%+ total expense ratios with FP to between 0.1%-0.7%. Sending more money to FP does not make sense compared to the brokerage account alternative (i.e. 3.2-4% charges on new money, or less than 1%?). When it comes to personal finances, you need to start confirming/verifying information – and to start – for all these fees I’m talking about here and in the post adding up fees on initial units – look it up yourself to confirm it applies to you. Look at the portfolio you have and add up all the total expense ratios (you need to make a weighted average), and verify all the other fees I mentioned. And if you see ANY error in what I’ve said, let us all know in a response (that goes for all the people selling these plans that stumble upon this site as well).
Technically, your advisor was paid 25 years of commissions upfront to give you advice for 25 years – but do you expect this person to deliver on that? and would you want to continue seeing someone that did this to you? Most people I know just get out of the plan completely to recoup what they can, as the 10% annual charge on initial units is obscene, and sending new money does not make sense either. You could ask the guy how sending new money would help your situation in regards to fees, but make sure to get their answer in writing. If you’re American, these are an even bigger mess (PFIC rules).
Going forward, explain to local regulators what happened with your experience. Warn all your expat friends and colleagues – especially new teachers coming to town. And if you want to talk to the media – the South China Morning Post in Hong Kong is running a series on investment scams – contact them. You could also talk to local media outlets.
Afonso Vieira says:
October 1, 2012 at 10:49 am (UTC 8 )
Darren,
My two cents:
1) Complain to Friends Provident Isle of Man with the Isle of Man regulator on copy on all communications; you need to attach all written exchange you had with your Devere adviser. It’s fundamental that you prove you were not made aware of the product fees by Devere.
2) Devere claims they have licenses in every country they have an office but that it’s not true. You can also use the same complain and send it to the local regulator. For instance, if the advise was given in Singapore, the MAS will take action. You have an arbitrage court available, for free, to help you.
3) Go –if you can– to Friends Provident office in Singapore and complain in person. Be aware that they do not know that Devere misrepresents their products and doesn’t inform clients of the fees involved.
4) As “IFA Abroad” said above, share your story with everybody.
5) Good luck! And PLEASE, if you can get all your money back, do let us know how you did it. I have been trying to close these accounts for several of my clients without success until now.
Afonso Vieira says:
October 1, 2012 at 10:58 am (UTC 8 )
Hi Andrew,
Usually the signs of “fee hemorraging” are seen at years 5 or 6 and after because the product pays bonus during the first 18 months. This is why advisers use this product, 5 years gives the adviser a long time to move to another city, country, cheat a few more, move again…
I think Darren invested the $55,562 by on a monthly basis and over 3 years; not a lump-sum one time only at the start of 55k. Anyway, if the plan value is now $57k, there are been mistakes on the investment strategy. Who is managing the money?
Andrew Hallam says:
October 1, 2012 at 11:23 am (UTC 8 )
I was considering the expense ratio fees on the funds themselves. My guess is that they were running about 1.5% to 1.75% each year, for 3 years. Such a drag on performance will also affect Darren over the long haul…and they likely ensured that he underperformed a global basket of low cost stocks and bonds over the past 3 years.
Cheers!
Andrew
Darren says:
October 1, 2012 at 3:59 pm (UTC 8 )
Thanks for the replies to everyone. I can give you some more information that might help you to give me some advise on my next move. We opened our plan with Professional Investment Consultants (https://www.pic-uae.com) while living in Abu Dhabi. Our payments were monthly and set at $1600 USD for the first two years. We moved to Oman last year after having a child and lowered our payments to $900 USD monthly as we moved to only one income. Unfortunately, this means that most of our money went into the initial units and are therefore subject to larger fees and penalties upon cancellation. Easy to see with hindsight (and now that I know how Friends Provident fees work) that we would have been better off with minimal payments at the beginning. We were directed to speak with an advisor at International Alliance Muscat (http://www.ia-muscat.com) when we first moved to Oman but on my recent review meeting last month I met with a different advisor. I get the feeling Devere is a large turnover company. Our portfolio for our plan is as such:
J30 J.F. India (20%)
P58 Templeton Bric (10%)
P60 Martin Currie GF Global Resourc (10%)
S112 Jupiter Global Financials (10%)
S258 Strategic Growth Fund (USD) (50%)
I must admit that although I have been watching these funds over the last 3 years I have no idea whether or not they are “good” or “bad” funds to be investing in. My lack of financial experience and vocabulary in this area, coupled with my naivity, led me to believe that was what my financial advisor was to be determining for me.
I will put together the written information that I have from Devere and FP and let you know what I have. I was mostly just shown projections and estimates for how much money I could expect to have in 25 years at the end of the plan. Obviously, I was unaware at the time at how incredibly well my funds would need to perform in order to offset the cost of the fees. As a teacher who knows the excuses “I didn’t know it was like that” and “It’s not my fault” simply don’t fly, I should have done more independent research.
Darren
Honest Adviser says:
November 28, 2012 at 6:32 am (UTC 8 )
Hi Darren,
The comment about the adviser receiving 25 years of pay for 25 years advice is a great call.
I tend to use plans with a 5 year period that you can continue paying into ad infinitum if you wish.
The difference in cost for essentially the same vehicle is remarkable.
You can then use the accumulated wealth to enter a more flexible vehicle where you can invest in ETFs, direct stocks and bonds, various currencies, alternative investment funds, structured notes etc etc at low cost.
Trying to surrender the plan now is very bad advice. You should rather make it “paid up” and start afresh. This way you have a chance of preserving the value if you can gain exceptional returns while not adding further funds.
That said, once you have paid the initial period (this will be roughly the amount you pay in wrapper fees to generate commission for the adviser), the premier plan is quite cheap.
You are only paying the 1.2% mirror fund costs.
There are a number of loyalty bonuses that kick in down the line (depending on the style of premier plan you have)
Best,
HA
IFA Abroad says:
November 28, 2012 at 4:50 pm (UTC 8 )
HA
1.2% is the mirror fund admin fee, and then you have fund fees on top (say 1.5-2%), so anything after the initial units are going to be annual fees of 2.7-3.2%, and that’s ignoring other charges like foreign exchange, mirror fund drag, and 1% credit card fees.
Is it really possible to save your initial units by agreeing to keep it locked in with 10% annual fees?
Honest Adviser says:
November 28, 2012 at 6:57 pm (UTC 8 )
Hi IFA abroad,
You are correct, the underlying funds all have their own management fees which vary from nearly zero up to around 2% depending on the fund. Etfs will also have an annual fee from nearly zero up to around 1% depending on the ETF.
The etf fee is rightly lower as there is no management to speak of in most cases which can be good in tight markets or for generic exposure. This guarantees average performance against a chosen index which for many people is fine.
The benefit of using platforms such as FP et al is the institutional terms on purchase of funds from the worlds leading managers. You are also able to dollar cost average your access to such funds for very low amounts and switch without cost as you choose.
Mirror fund drag is hard to measure and can be negative or positive depending on the market. Personally I would look more at Generali or Royal London if this were a concern as they invest directly without mirrors. Also, neither company charges a credit card fee.
Exchange rate risk is oft overlooked but monthly cost averaging to your reference currency is right for the majority of people.
Another overlooked point is the investor protection offered by the (in Friends Provs case) the Isle of Man which is exceptional at 90% with no upper limit. These companies will also provide basic trusts for free.
I have just run a cost analysis for a 2000 a month contribution to a premier plan over 25 years, the RIY is 1.42% when you look at all the charges and bonuses. (FP add 4.8% of the fund value as a loyalty bonus every year after year 10 for example) The funds then have their own costs.
So, 1.42% for Friends Provident and their advantages aswell as a full time IFA is fair value in my opinion. The issue is that most people are not given the right plan or explanation.
In the above case, if you do not stick with the plan for its duration it gets very expensive. If flexibility was more important than discipline for savings a 25 year plan is the wrong advice.
Once again, everyone is different and it’s a good advisers job to give the right solution to everyone.
Cheers,
HA
IFA Abroad says:
November 29, 2012 at 11:49 am (UTC 8 )
Mirror fund drag is caused by money held out of the market. Over the long run, this is a bad thing – particularly because of how opaque the practice is.
I didn’t refer to exchange rate risk – I referred to exchange rate fees from when investors are contributing one currency and the advisor is recommending funds denominated in another.
With these plans, investors don’t actually own the funds – the insurance company owns the funds – and investors only own a promise from the insurance company. This is unlike a brokerage account, where the broker holds your funds in custody and investors actually own the funds and not just a promise. Even with investor protection for the insurance company’s promise to repay, I would prefer actually owning the funds.
1.42%? You have excluded fund fees without saying so, and your summary still excludes a number of other fees. The truth is that if the cost was remotely reasonable, the fee structure would be simple. Instead, it’s incredibly complicated, because it’s the only way to hide and recover the upfront commissions.
Honest Adviser says:
November 29, 2012 at 9:11 pm (UTC 8 )
Dear IFA Abroad,
I am starting to think that you are not an IFA at all. A key skill for an IFA is reading things and absorbing the detail.
I start my post by saying that underlying funds have their own costs and end the paragraph about the 1.42% RIY by saying it again.
The 1.42% includes all plan fees, negative and positive, what do you think has been left out?
Exchange costs often irrelevant as my clients mainly earn, contribute and invest in USD. Where this is not the case it would be a bank that makes that exchange and I fail to see how that is avoided anywhere?
A mirror fund (not a huge fan myself) is essentially that, a mirror of the underlying fund. It will have a small cash holding as it receives a whole stack of money each day from potentially millions of investors which they collate. That means returns will never be identical.
I agree that the complexity is a negative. It also means that some so called “advisers” can mislead clients either intentionally or through stupidity.
How are you remunerated for your time and advice and which savings and investment vehicles do you use? I am always keen to have options.
Best,
HA
IFA Abroad says:
November 30, 2012 at 8:34 am (UTC 8 )
HA
I’m an advisor, but the point of this discussion is the product, not how I work or you work.
Look at one of FP’s illustrations, for example where it says the growth rate is 9% – use a calculator to confirm the end amount’s actual growth rate. It’s not 9%, it is about 1.1% lower – because the projection includes fixed fees and the best case scenario assumption of never missing a payment in order to get every possible bonus.
Footnotes clarify that the illustration excludes the 1.2% fund admin charge as well as mirror fund fees. So say a total around 3.8-4.3% a year, best case scenario of NEVER missing a payment. This ignores mirror fund drag, foreign exchange fees and the 1% credit card charge.
This was hard for me to figure out (I actually had some help from another advisor), and I’m guessing this is big news to you. You made a valiant effort coming up with 1.42%, and I know you’re trying to be honest – as very few IFAs would ever try to do what you did, and even fewer would know where to start.
If you are in Singapore, check out a platform like iFast.
Honest Adviser says:
November 30, 2012 at 9:18 pm (UTC 8 )
Hi IFA Abroad,
I think this conversation is great as we are really clearing things up for people.
The 1.42% was calculated with my colleague who has a first in maths, the client (a maths teacher) and approved by the actuarial guys at Fpi.
It came about as their RIY figures on a flyer suggested the plan cost less than 0.3% p.a.
The 1.2 admin fee is the “mirror fund” charge. The underlying fund fee can’t be included in a projection as there are over 230 funds with different amc’s.
It involved a pretty massive spreadsheet and factored in every measurable cost.
You are correct in pointing out that you need to maintain payments to get all the bonuses whereas costs are a definite. Loyalty bonuses are not paid in years you do not contribute. This should be explained to all clients. Some like this aspect as it pushes discipline though I don’t think it’s ideal in most cases.
How you charge and the vehicle you use is important if you are concerned about the clients TER. One option has been denounced but no others truly explained.
Singapore is a no for me as I and my clients are in bed when they are at work as I am in LATAM.
Best,
HA
IFA Abroad says:
December 3, 2012 at 9:06 am (UTC 8 )
HA
I explained how I got to my number – and with FP’s own illustration that gave it to us (not transparently, but it’s in there). And that number is the best case scenario.
You ignored what I explained and say you need to be a math professor to figure it out.
It’s misleading to say that net charges are xx while excluding fund fees. Most portfolios I have seen for people in these plans had 1.8-2% total expense ratios. I have never seen one come in with a TER below 1.7%. Why are the fees high within the plans? Because the insurers get kickbacks from the fund managers for listing them on these platforms. Why can the funds charge so much? Because they’re the only ones available.
If you understand the benefits of index investing, you understand the importance of cost, which rules an investment like this out.
Andrew Hallam says:
November 28, 2012 at 7:27 pm (UTC 8 )
Looking though the Generali material, I can’t see any inexpensive insurance linked products.
I have seen variable annuity like products offered from Vanguard that are about as cheap as actively managed mutual funds, with no penalties for early withdrawals. And I have seen some decent fees (although much more expensive) associated with products from TIAA Cref.
Other company products I have seen seem to have 3% fees associated with them, when counting expense ratio costs.
Honest Adviser says:
November 28, 2012 at 8:01 pm (UTC 8 )
Hi Andrew,
Unless you have terms of business with Generali you will not get to see everything. I am in that position and as such am able to comment.
This all revolves around client circumstances and what is best for the individual. To advise un-sophisticated investors to buy a couple of ETF´s that may not remotely match their risk profile or investment goals would not be allowed in any regulated market on earth.
It may however work out well and by chance match goals. It is certainly a low cost way (depending on trading fees and transfer costs) to attain generic investment exposure. I would be very keen to know a lot more about the broker and the investor protection laws in the jurisdiction. (I do not work or live in Singapore but DBS Vickers do recommend any non Singapore resident takes advice where they live)
The concept of know your client is key. I fear the majority of advisers in the “offshore” market do not worry too much about this and rather look to their own bottom line.
I have clients at Generali that are paying 0.8% for an open architecture investment platform.
An example of one that I reviewd last week is about 60% in ETFs. We also hold direct company stocks, some currency deposits, actively managed funds and some alternatives and structured funds. The vehicle is held under trust and can accept further capital injections from anywhere but the US.
This was the right solution for this client. He is the Regional Director of a household name company and I have worked closely on this with his Canadian lawyers and accountants. All of them are very pleased with the advice and the value of it.
I think the key is that everyone is different and so are their goals and attitude to risk. The right solution for the right person at the right price. Investors who know what they are doing and do not want or need advice can always look online for accounts to trade. I normally point them to Saxo Bank if in doubt.
If somebody wants to save an amount each month though, transfer fees to a broker account (typically $50+ or so from most banks) is ludicrous for a teacher saving $500 a month who also wants the advantage of dollar cost averaging without trying to time markets.
Cheers,
HA
1 2 Next »