Every year around the world, greedy financial advisors and international insurance companies persuade expatriates to invest an estimated $5,000,000.00 or more in offshore savings/retirement schemes that are little better than a swindle
Imagine an advertisement couched in the following terms:
COLOSSAL INTERNATIONAL INSURANCE LTD
Expatriates - How to Save For Retirement
For regular savings toward retirement our Offshore Pension Plan is the perfect vehicle. Here are the great features:
1. You contribute, say, $1,000 per month over the next 25 years.
2. If we achieve, say 10% p.a. growth your fund at maturity should, in theory, be worth about $1,065,308
3. But our charges will have swallowed up around 47% of the $300,000 you contributed. That means about $140,000 of the growth is lost to you.
4. If you stop payments, for any reason whatsoever and at any time during the first 23 months you get not a penny back; we shall keep all the $23,000 you had paid in.*
5. If you stop payments at any time for any reason whatsoever we shall hit you with a substantial penalty. For instance, had you paid for, say, 7 years and then cashed in, the amount you would get back is uncertain but is unlikely to exceed the $84,000 you had paid in over the seven years.
6. You can reduce your monthly contribution at any time. However, If you do so we s hall continue taking our charges as if you were still Paying at the original level. That means if you reduce the $1,000 per month to $200 per month we will keep levying the charges that would apply to a contribution of $1,000 per month.
7. You can increase your contribution at any time but if you do we shall apply to the increase a fresh 'initial period' - i.e. the period during which you would get little or nothing back if you stopped payments.
8. You could stop payments at any time and leave the fund invested with us but we will still, month by month, take out the charges to a total of around $140,000 (see 3 above).
9. There are offshore savings vehicles that give access to all the same investment areas but with much lower charges and no hidden penalties but we prefer not to tell you about these.
(Throughout this article the $ sign stands for any major currency. e.g. EUR, GBP, YEN, AUD, CAD)
The above "advertising" copy is very different from the hype in the real advertisements but it accurately sums up the typical features of International "Contractual Regular Savings and Retirement Plans" offered by some offshore insurance companies.
If they were advertised as above, would anyone ever buy them? Surely not. Consider some of the details:
1. Forty Seven percent of payments gone in charges!
2. All of your money confiscated if you stop contributing before you have made 2 years payments!
3. Crippling ongoing charges applied even of you reduce or stop payments.
4. If you increase payments a new set of charges and a new zero return period is applied.
And yet every year, thousands of expatriates are talked into joining such schemes.
Accurate figures are not available but reasonable estimates suggest that over $500 million is directed to such plans annually.
Who has the effrontery to market such nonsensical investments?
1. International Life Insurance Companies
These companies are mostly the offshoots of British 'household name' insurance Companies, and
2. Offshore Independent Financial Advisors
An Offshore Independent Financial Advisor is anyone who chooses to call himself an Offshore Independent Financial Advisor (IFA). Anyone? What about training? What about experience? What about background?
In most countries there is no legislation to prevent anyone setting up as an Independent Financial Advisor (IFA). Offshore insurance companies make cursory, far from thorough, checks on background before giving agencies but they cannot check qualifications because none are specified.
For an experienced, sometimes unscrupulous, salesperson it is easy to "spin" the negative features into looking like advantages. He/she is usually a skilled communicator, subtle in gaining the trust of his 'prospects'.
Why do so many IFAs take advantage of the expatriate's vulnerability in a new and unfamiliar personal financial situation?
The answer, of course, is money. The salesperson is paid a percentage of the client's first year premiums equal to 3 times the years of the contract. On top of that there is normally a 40% over-ride.
Actual figures depend on the amount being invested and the contract term but where an expatriate is saving $1,000 per month:
If the plan is for 10 years the salesperson's commission with over-ride = $12,600
If the plan is for 25 years the salesperson's commission with over-ride = $ 5,040
For no extra work, simply by extending the savings term from 10 years to 25 years the Salesperson/IFA/Consutant receives an immediate extra payment of $7,500. No wonder the consultant often pushes hard for the longer term often using falsehoods to achieve it.
With very few exceptions the financial consultant is self-employed. He/she receives no salary. In practice, the IFA works not for the insurance company, not for his brokerage but as a self-employed consultant retained to look after the client's best interests.
Unbelievable as it may seem, the IFA does not have to wait for premiums to be paid in order to receive his commission. The insurance company calculates the commission that would arise gradually month by month from regular premiums over the term of the plan, then pays it all, the entire amount in USD, GBP, EUR, or YEN to the IFA just as soon as the client's very first monthly payment is made.
The average period for which payments are actually continued on these plans is a little over 7 years. When the expatriate stops payments the penalties will probably come as shock. Almost certainly he/she will be sorry he ever heard of the deal.
A complaint to the insurance company will get nowhere. '"Sorry"', they will say "you bought the plan through your Financial Advisor who works for you not for us. Take it up with that Advisor".
Complaining to the IFA will also be futile. Even if he/she can be found, no laws have been broken and civil action in a foreign country is likely to be hugely expensive and pointless.
It is easy to say the victim should have read all the small print in the policy rules but deciphering all the meaning of that small print is often difficult. Easy too to say that he was foolish to contract for 10, 20, 25 years or other long term only to find he had to stop payments within 24 months and lost all or almost all of his contributions.
But the expatriate life is full of uncertainty. Right now thousands of expatriates are fleeing Lebanon. How many will also face job changes? How many will unexpectedly have to stop contributions to contractual savings plans?
There are, of course, offshore insurance companies that, to their credit, refuse to market these types of high products. Likewise, there are Offshore Financial Advisers who possess the skill, knowledge and integrity to offer service of great benefit to their clients.
One might suppose that expatriates would be better advised to deal with advisers based where there is regulation of the financial services industry. But home based advisers are not subject to regulation on business conducted overseas. In addition, many home based advisers will lack sufficient breadth of experience and skill to deal with the requirements of an international clientele.
To sum up, expatriates are financially exploited by being enticed into saving through offshore contractual policies that are little better than a swindle, presented to them by ill trained but persuasive and unprincipled sales 'consultants' masquerading as professional practitioners.
How many expatriates might be at risk is uncertain but with an estimated 6 million Americans living and working overseas and other countries' nationals probably amounting to a similar number, the total must be substantial.
Could anything be done about this abuse? Almost certainly it could. If the insurance companies simply abandoned contractual savings plans or at least did away with 'indemnity commission' the shady offshore advisors would almost certainly disappear because they would be deprived of the mechanism that gives instant high income for little effort.
Copyright 2006 Hugh Stevenson