Investment plans built on smoke and mirrors

Illustration by Gary Clement for The National

I had been approaching it all wrong. There is no war if we don't engage. Stick with me.
I had been sucked into the vortex. After many, many hours contemplating how to simplify and include all the types of charges we incur when we take out so-called expat investment plans, reading research and reaching out to people, I realised I was swirling around in ever-decreasing and increasingly more cognitively painful circles. Then I saw the light and took a giant step out of the black hole created by the clever people who create these policies.
Anything that is so painful to dissect and decipher is out. If you are not provided with clear, simple to follow, see and understand fee structures, then don't sign up.
Part of the problem is that, as the US politician Donald Rumsfeld so brilliantly put it: there are known knowns, known unknowns (like what is an initial unit anyway, and how much will it cost me over the lifetime of the policy) and total unknowns such as embedded mirror fund fees. It felt like a war, and we, the people, were losing.
Disengage. Abort. Stop trying to figure it out.
The one thing to look for is the answer to this: what are all fees charged? This is what an investment costs you.
Remember this golden rule: gross return minus cost = net return.
The higher your fees, the less your return.
In the process of unravelling this for myself, I realised that we've become conditioned to accept things we shouldn't. Like fees for fees' sake. And then comparing them with other unethically created structures and feeling better if our charges are, comparatively speaking, lower.
Example: this from the adviser who sold me the product I shared with you last week. I reached out to her to get reaction to the charges her firm believed I had incurred. If you read the piece you'd see that the total was deemed over US$7,000. This is her reaction: "So XXX are the platform provider, like Royal Skandia or Zurich who have similar monthly savings plans. They take a fee for providing the platform, executing the purchase and sale of managed funds, collecting the monthly payments and reporting back to you. Royal Skandia charges 1.25 per cent of the total funds under management, Zurich 1 per cent of the funds under management, and XXX 1.5 per cent of the initial units (which are the first 18 months of contributions which is why they are non redeemable for the length of the policy contract) plus $6 per month. All collect monthly based on fund value which is why these amounts look a lot and fluctuate."
What? I'm lost. All the percentages seem so harmless. They're not. Plus it doesn't make me feel any better, or richer, to know that other firms charge even more.
In my case this added up to 3.97 per cent before mirror fund charges.
It doesn't outline bid/offer spreads, which can be 7 per cent. Are you adding this up? Are you worried? You should be.
Then there's the cash position your mirror fund holds. There is no requirement for this. All it does is further diminish and compound losses relative to the original fund.
My adviser's parting words were: "Encashing now would not be a good idea. Get your fund strategy right and keep making the monthly minimum payments. Let the plan mature. That's when you'll see your consistent earnings pay dividends."
I beg to differ. Cashing in means I crystallise losses, yes. But I know where I stand. Cash in hand, deposited somewhere where you can get an annual interest of anything above 0 per cent is a good thing compared to these types of policies.
Some very clever people out there have worked out what you can get for your lump sum, capital hit and all, if you put in a passive investment and compound returns. This from Andrew Hallam - he writes and blogs about money - who had this to say when answering a query about getting out of a Friends Provident policy. The question was whether to take a massive US$45,000 hit on capital put in or stick with the plan:
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:
The $105,000 is what the investor would have if they cashed in their policy, compared to the $150,000 paid into the policy.
I don't think a comment regarding the end value is necessary.
The other thing that Andrew does a great job of laying out is the difference between up front charges, and ongoing fees. The single digits we're lured with add up to a massive accumulative fee. Here's his example:
Invest $10,000:
One option is to pay a whopping 20 per cent up front fee plus a 1.4 per cent annual ongoing fee for 35 years.
Another is to pay zero up front charges and an ongoing 4 per cent annual fee over the same duration.
The assumption is that you'd run a mile if you were told to pay 20 per cent up front.
Here's what happens: after 35 years the 20 per cent up-front fee example gives the investor $1,357,416 compared to $948,363 for the seemingly more attractive annual 4 per cent charge.
There's no two ways about it, these policies only line the pockets of the people that create, run and sell them. Don't do it. Just don't sign. If you do, you'll be dancing to an imaginary tune - because your coins will be jangling in someone else's pocket.
Nima Abu Wardeh describes herself using three words: Person. Parent. Pupil. Each day she works out which one gets priority, sharing her journey on finding-nima.com.
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