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The true cost of an IFA

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  1. #1

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    The true cost of an IFA

    @shri - I hope you can let this post stay, I will try my best to avoid naming names.

    The reason for me to sharing this post is to show the actual "true" cost of using these IFAs.

    The backstory is that I had been in HK for about a year and had started getting some savings. The interest rates in the banks were c*ap and there were no real tax fee / retirement investment products similar to what was available in the UK. I asked my boss at the time his thoughts over a beer and he put me in touch with the IFA he used.

    I ended up signing up to a life insurance wrapper. I was sold on the longest possible term, being 25 years on the basis that I would get 18 months worth of bonus contributions at the beginning. At that time I didn't know anything about the huge commissions and management fees taken by the IFAs and insurance investment companies, however, probably just through sheer laziness I carried on putting in the monthly amount (which in my case was US$1,500 a month). I was expecting these to be actively managed, because after all I was paying management fees and had an IFA who was acting in my best interest (isn't that a joke) and would get good returns.

    What the IFA failed to tell me, or in his defence, he may have told me, but I wasn't really paying attention (quite likely) was that I was committed to the full 25 years and if I wanted to pull out earlier there would be some serious early redemption fees. Well he may have told me, but probably skirted round the issued (and no surprise there really).

    In 2015 the IFA told me that the insurance scheme would be changing its structure so it would be limiting the types of investments it made. He then suggested an "executive bond" with a one off payment (again using a life insurance wrapper). I was able to shift US$100K from the life insurance wrapper to the executive bond.

    Again, I thought this would be great, a different pool of assets and again it would be actively managed. This time I do remember that he really didn't go into details about the fees and to my detriment I really didn't press this point (which I should have). Again, the fees were very high.

    Since 2015 and thanks to this board I've become a bit (and yes, only a tiny bit) wiser about my investments and have now started doing a bit of investments myself in various tracker ETFs, shares and low cost funds (amongst other things).

    I have also looked into the two products that I own through this IFA in a bit more detail. As things presently stand:

    Insurance wrapper: Total invested (after taking out the US$100k) US$71k. Value to date US$91k. Surrender value US$68k.
    Executive bond: Total invested US$100k. Value to date US$105k. Surrender Value US$102k.

    As you can see, on paper the value of my insurance wrapper isn't doing too bad, up US$21k, but I've looked at the underlying funds and they are ones I can purchase directly and then avoid the fees that the insurance company is charging. As for the Executive bond, its value has increased by US$5k in close to two years, which really isn't that much for what is supposed to be an actively managed fund, again the true increase has been eaten up by fees.

    I'm looking at pulling out of both these products and overall my total "loss" will be around US$3k (hopefully), which doesn't sound too bad, compared to what some other people have lost. However in the 9.5 odd years I've had these schemes, I won't have made any money at all when these were supposed to be investment products for me to well, invest.

    Anyway, I hope this is a cautionary tale to anyone even contemplating going with an IFA in HK.


  2. #2

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    @pin - great analysis. Been there done that, luckily was only in for 7 years in the early/mid 90s and was able to freeze payments after that. Withdrew a bit by bit and ended up about 10-15% over what I'd invested. Not too bad, but it was definitely not due to any genius work done by either the organisation my funds were with, or the IFA "I'm unable to give you advice as I'm not allowed to" type shit.

    The thing is, I'm of the belief that we're close to the end of this investment cycle. What is the upside over the next 2-3 years of those funds remaining in that account? What is the upside of pulling out and dollar cost averaging over 12 months?

    Fiona in HKG and pin like this.

  3. #3

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    Quote Originally Posted by shri:
    @pin - great analysis. Been there done that, luckily was only in for 7 years in the early/mid 90s and was able to freeze payments after that. Withdrew a bit by bit and ended up about 10-15% over what I'd invested. Not too bad, but it was definitely not due to any genius work done by either the organisation my funds were with, or the IFA "I'm unable to give you advice as I'm not allowed to" type shit.

    The thing is, I'm of the belief that we're close to the end of this investment cycle. What is the upside over the next 2-3 years of those funds remaining in that account? What is the upside of pulling out and dollar cost averaging over 12 months?
    Cheers. Well the upside of pulling them out is any benefit isn't getting eaten up in fees. I could freeze I guess, but I might as well get out.

  4. #4

    Sold my flat in Hong Kong and went to see FA at the bank to see what they can offer. I was offered the same, insurance scheme and executive bond. This seems to be common advice. Without investment knowledge, these offerings do sound tempting. Ended up not signing though. Reading your feedback is valuable insight for anyone contemplating these.


  5. #5

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    Original Post Deleted
    Yeah, I get you. On paper its a US$23k hit I am taking on the insurance wrapper. They say the other option is I can withdraw US$55k now based on my accumulated investments without taking a hit. I guess I could then freeze, but that is just delaying the inevitable.

    If we are coming to the end of the investment cycle, I would still want to use this time to start building up funds at a lower cost basis and also start building up bonds and other defensive stocks.

  6. #6

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    Never trust banks and people who work in banks.

    I've done a couple of investments sold to me by my bank's "relationship managers" and both lost money. I stopped the monthly payments, but the money is still sitting in the investments until they go up a bit more at least.

    In the future, i will only trust myself to make investments i directly have control over e.g. stocks, property, businesses etc. Then if they tank, i only have myself to blame and it is easier to pinpoint mistakes in my strategy.

    If i give it to some IFA to invest and i lost the money, i wouldn't know whether to blame my naivety or to blame the banker for being crap.


  7. #7

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    Quote Originally Posted by pin:
    Yeah, I get you. On paper its a US$23k hit I am taking on the insurance wrapper. They say the other option is I can withdraw US$55k now based on my accumulated investments without taking a hit. I guess I could then freeze, but that is just delaying the inevitable.

    If we are coming to the end of the investment cycle, I would still want to use this time to start building up funds at a lower cost basis and also start building up bonds and other defensive stocks.
    That product sounds very similar to one I got hoodwinked on a while back. Based on my experience:

    - take out the $55k that you can withdraw without penalty now and invest it in an ETF - whether the market goes up or down in the future won't matter comparatively because pretty much the same will happen to that $55k if it remains in the insurance wrapper.

    - suspend any further payments into the fund. Be aware though that some funds may force an early redemption if you keep the plan suspended for a while (say 3 years). Just keep track and make a contribution once every 3 years or so and then withdraw it again.

    - That will then give you the choice of keeping the remaining $36k of the contribution funds in the existing scheme or take a $23k early redemption hit on those funds and withdraw $8k. Calculate what the value will be at the end of your 25 years based on say 7% p.a. investment return, 2.5% inflation and XX% charges on $36k and say 6% returns on 0.2% charges in an ETF for the $8k. It is not likely that you would be better off with early redemption, but if it is better take the money out.

    - quite importantly, contact the insurance company to notify them that you are no longer having the IFA represent you on this account. Until you do so, possibly a share of the ongoing fees you are paying are still going to them.

    Lastly, don't beat up yourself about it.

    If you don't want to name names, then send me a PM and I can confirm whether or not you got the same scheme as me.
    pin and shri like this.

  8. #8

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    @shri - I'm OK disclosing the names of the products, are you fine with that? I presume you don't want me to name the IFA though.


  9. #9

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    Quote Originally Posted by pin:
    @shri - I'm OK disclosing the names of the products, are you fine with that? I presume you don't want me to name the IFA though.
    Products should be fine.. IFA no.... Most if not all recommend the same shit...

  10. #10

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    Quote Originally Posted by greenmark:
    That product sounds very similar to one I got hoodwinked on a while back. Based on my experience:

    - take out the $55k that you can withdraw without penalty now and invest it in an ETF - whether the market goes up or down in the future won't matter comparatively because pretty much the same will happen to that $55k if it remains in the insurance wrapper.

    - suspend any further payments into the fund. Be aware though that some funds may force an early redemption if you keep the plan suspended for a while (say 3 years). Just keep track and make a contribution once every 3 years or so and then withdraw it again.

    - That will then give you the choice of keeping the remaining $36k of the contribution funds in the existing scheme or take a $23k early redemption hit on those funds and withdraw $8k. Calculate what the value will be at the end of your 25 years based on say 7% p.a. investment return, 2.5% inflation and XX% charges on $36k and say 6% returns on 0.2% charges in an ETF for the $8k. It is not likely that you would be better off with early redemption, but if it is better take the money out.

    - quite importantly, contact the insurance company to notify them that you are no longer having the IFA represent you on this account. Until you do so, possibly a share of the ongoing fees you are paying are still going to them.

    Lastly, don't beat up yourself about it.

    If you don't want to name names, then send me a PM and I can confirm whether or not you got the same scheme as me.
    Thanks for that.

    So the products are Friends Provident Premier Ultra and Old Mutual Executive Investment Bond.

    Yeah, I could bite the bullet and swallow the US$23k from the upside in the portfolio performance or just leave it in knowing that gains will get sucked up by fees fees and more fees. And as I understand it these fee interests get compounded.

    I have checked the terms of my policy and it seems I can only take a payment holiday for up to one year maximum and in any case during that time I will still get charged the fees. Also it seems that if I surrender payments, the policy will be deemed to be fully surrendered.

    So if I do decide to take the US$55k, I'm still putting in US$1.5k a month in and getting charged the fees on that.

    Useful info thought about the IFA not being represented though.

    I've already submitted my surrender request in for Old Mutual. Need to see how to play FPI though.

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