transport jock
I promised you a post about the Zurich Vista product and here it is, with apologies for the length of the post. This product (and others like it) are extremely complex, and they use a jargon that is not familiar to a lot of people. I have done my best to use plain language, but I’m not sure how successfully!
So, some background. Most people living in the Middle East are making a little more money than they would if they were at home, and with our parents’ words about thrift and saving for a rainy day ringing in our ears, we intuitively understand that we should be saving for that rainy day, or retirement, or university fees etc.
The fact that a person may be a successful pilot, or engineer or teacher etc., earning agood income, does not necessarily mean that their level of financial capability is any higher that their peers back in their country of origin. Study after study in the UK, the USA, Australia and other developed countries have shown that consumers have a lot of difficulty in understanding savings/investment/pension products.
We can of course simply let our money accumulate month after month in a bank account, but the temptation to upgrade the car or go to Hong Kong for the weekend can be difficult to resist and can disrupt the establishment of a regular savings habit. In addition, we also know that banks pay very little interest at the moment.
The solution that financial advisers often suggest is a regular contribution to a collective investment scheme.
A collective investment scheme is a type of financial product where the investments of a large number of people are pooled together. The rationale is that economies of scale can be brought to bear (thus, in theory at least, reducing investment costs) and also so that smaller investors can participate in opportunities that might otherwise be limited to larger investors.
There are three common legal frameworks used to create a collective investment scheme:- A unit trust;
- A variable capital company; and
- A unit-linked insurance policy.
Perhaps the key difference between unit-linked insurance policies and the other collective investment schemes is that the underlying assets of the unit-linked insurance policy are owned by the insurance company rather than by the investor, and the investor has no legal claim to those underlying assets.
The onlything that the investor owns is an insurance policy issued by an insurance company in the Isle of Man or the Channel Islands. The value of that policy may be linked to the performance of other assets (such as funds managed by Morgan Stanley, JP Morgan etc.), but those assets are owned by the insurance company.
P
This is an important distinction. These policies are often sold on the basis of the portfolio diversification benefits that they offer, but the truth is the opposite - if you buy a Zurich Vista policy you have a 100% counterparty exposure to a single company – Zurich International Life Limited, and if Zurich International Life Limited goes under those assets are available to meet the claims of all creditors.
Holborn Assets is authorised as an insurance broker by the Insurance Authority in the UAE, and I can find no evidence that it is authorised in any other capacity. That means that Holborn Assets can only sell insurance policies, and that any investment products that it sells are unit-linked insurance policies.
The history of these products is complicated, but suffice it to say that if you die while you own one of these products the insurance company will pay to your estate the value of your contributions to that point, plus a small margin, say 1%. That extra 1% makes these product, legally, insurance policies.
Now let us turn to the charges/costs of these policies. As the poster referenced Zurich I will look only at the Zurich Vista product, but others in the marketplace are broadly similar. Charges/costs fall under two broad headings – initial charges and ongoing charges.
The key documents containing most of the information on charges can be found here:
http://media.zurich.com/international/pdfs/MSP10238.pdf
https://www.zurich.com.sg/_/media/db...37856270E082E4
https://www.zurich.com.sg/_/media/db...DC4348370C7D7B
Initial Charge. The first and most devastatingly expensive charge is made at the commencement of the savings plan. It is not called an initial charge, and you would really need to know your way around financial products to recognise if for what it is. It is called the “initial contribution period”, a period at the start of the savings plan (up to 18 months long) where your money is used to buy special units which have “no encashment value” (i.e. they are worthless).
Co-incidentally (not!) on the day you sign the application form Zurich will pay a commission to the selling broker of up to 18months’ worth of your savings!
Let us use the example (here and later) of a policy where you save $1,000 per month for 25 years – not an unusual scenario. That means that the day your broker lodges the application form with Zurich they get $18,000 in commission, cash, upfront!
It also means that after say 24 months, the value of your investment of $24,000 is just $6,000 (assuming no growth) because ofthe $18,000 in charges.
OngoingCharge. Sticking with the example of a $1,000 per month 25 year savings plan the ongoing charges (equally devastating for your financial health) are:- Policy Charge: $7.50 per month = 0.75%;
- Policy management charge: 0.75 per annum;
- Credit card payment charge: 1%;
- Mirror fund charge: 0.75%
- Average underlying fund charges: 1.5%
- Underlying fund – other expenses: 0.5%
This gives us an ongoing charge rate of 5.25% per annum.
Now, the rate of return that can be expected from a balanced stock portfolio over the long term, adjusted for inflation, is generally accepted to be around 7%. If you are paying ongoing charges of 5.25% you haven’t a hope of achieving a 7% return.
Those ongoing charges are much more likely to result in poor investment performance than the “downturn in market forces” cited by your adviser.