Regular Savings Plans for Expats
The infamous 'offshore regular savings plan' was many advisor's default option for years, but it still being promoted in some regions. As products from some of the world's largest insurance companies, it's easy to assume you're getting a quality product, but this is simply not the case. Insurance-wrapped offshore savings plans are costly, restrictive and generally produce poor results.
Are There Alternatives?
Absolutely. A good investment platform can receive regular contributions using either direct debits or ad-hoc cash transfers. Monthly or quarterly contributions are possible, which with good planning can coincide with review meetings promoting regular contact with your advisor, improving service and overall outcomes.
With low custody and fund fees and clear charges, platforms offer a welcome change to offshore contractual savings planes. Securities can be sold easily without penalty and monies returned to you quickly, giving you a flexible savings vehicle to invest in when it suits you.
The motivation for advisors to sell these products is the large upfront commission on offer, which leaves little incentive for advisors to manage policies going forward which often have terms up to 25 years. If you have a savings plan and you are unhappy with performance, read on.
I Have a Savings Plan - Should I Keep It?
The answer depends on how long the policy term remains and your desire for something better. Either way, it usually involves a financial forfeit which can be tough to accept. However, we can often demonstrate that by taking the financial hit, there is a very realistic chance of recovering your losses over time, supported by a wider range of higher quality assets through open-architecture platforms. Many investors are often prepared incur financial penalties just to remove the psychological burden these policies can create.
How Much Advisor Commission Was Paid?
We want to look forward not backwards, but if you are relatively new investor with a savings plan it may help to understand why these plans underperform so you can raise it with your advisor, and query it if you believe their advice was not clear. We've provided a breakdown of the advisor commission on offer which is based on the contributions due over the contracted term, not on the amount invested. Longer-term investments pay bigger commissions which get deducted from the first two year's 'initial period' contributions. This 'front-end load' makes it very restrictive or even worthless if cancelled in the early stages.
The 'initial period' usually ranges between 6 and 24 months, during which terminating a policy means forfeiting all of the payments made until that point. So, cancelling a longer-term plan of 25 years with a 24 month initial period after just 4 years (48 months), could result in a 50% loss of contributions.
To calculate how much commission an advisor is paid, the following formula is used in this example of paying $2,000 a month for a 25 year term at the standard product commission rate of 4.4%:
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Term of contracted term: 25 years
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Contracted contributions: $2,000 per month ($24,000 a year)
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Total amount payable over contracted term: $24,000 X 25 years = $600,000
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Commission payable: $600,000 X 4.4% = $26,400
This is a huge amount to pay an advisor for doing very little work and more so, if you are unaware you are paying it. If you compare this scenario with paying a fee for regulated advice on a fully flexible, non-contractual savings plan, with low-cost funds and without exit charges, the difference is clear.
If you have a contractual savings plan and you'd like to make up for lost time and performance from your offshore savings plan, get in touch today and we'll show you how it's possible.