The odds are stacked against you
As the graphs show, you need some pretty exceptional investment performance over a long time to have any growth left after paying the extortionate charges.
How do you achieve that?
In many cases, the adviser’s answer is to recommend racier investments that on paper look as though they could deliver that exceptional performance.
However, the racier the investments, the higher the risk of them suffering a horrific fall. If that horrific fall happens within the first few years from the establishment of the bond, there might be a chance to recover. But what if it happens a couple before you need access to the money?
To add insult to injury, these types of investment often attract much higher charges than more mainstream ones. So, typically an adviser profits much more from recommending them. often attract much higher charges than more mainstream ones. So, typically an adviser profits much more from recommending them. This does not mean highly risky investments should always be avoided.
They can play an important role as part of a well balanced and diversified portfolio, subject to indepth research and continuous monitoring.
However, many of the portfolios we see are stuffed full of expensive esoteric investments (e.g. structured products, hedge funds, etc.), dangerously undiversified. This leaves the client at risk of losing a huge portion, if not indeed all, of their investment.
In my experience, this is because of the two reasons
I have mentioned earlier:
1. A well-diversified portfolio will aim to avoid excessive volatility (the very high highs and very low lows typical of more specialist investments). However, this means the potential returns of a diversified portfolio may well not be enough to cover the charges.
2. As a rule of thumb, the more ‘alternative’ and opaque the investment, the higher the commission the salesman receives, therefore, sadly, the more likely they are to recommend it. Would you be happy to have an investment portfolio that is in effect an elaborate gamble, in which the only guaranteed winner is the outwardly trustworthy, charismatic broker?
In addition, this type of portfolio is far from a ‘buy and forget’ investment. It calls for in-depth research both at the outset and ongoing. Yet, in my experience, very few IFAs have the time, resources, expertise or even incentive to conduct quantitative and qualitative analysis on the investments they recommend.
What could you do?
If you have even the slightest concern that you have been sold an expensive offshore bond, loaded with unsuitable investments, you should look into it. If I were reviewing my own portfolio, the main questions I would ask are:
1. How much am I paying in charges – and, indeed, what charges am I paying?
2. Where is my money invested? I would like to see a full breakdown of all the investments in my bond.
3. How have the investments performed to date?
And how does that compare to the relevant benchmark? So, for instance, if I hold a fund investing in emerging markets, I would want to see its performance compared to the average of the sector.
4. How diversified is my portfolio? I would want to see what exposure I have to different asset classes, sectors and geographical regions.
5. How risky is my portfolio? I would want to make sure I am happy the risk profile matches my appetite for risk.
6. Are there any alternatives that offer lower costs,better potential returns, or ideally both?
7. What are the charges or penalties if I were to change my investments or transfer out of the bond?
This information should be included in statements or valuations you might have received from your adviser.
Failing that, you could contact the bond provider and the investment companies to find out the different elements you need to unwrap the opaque charges and build up the full picture.
This could be time consuming and potentially involve dealing with a number of companies, with different procedures and rules.
Can someone help?
