QROPS? SIPPs Fact or Fiction or Is It Just Scaremongering?

5I have been in Dubai for a while and have observed that QROPS (Qualified Recognised Overseas Pension Scheme) is often marketed as a solution to SIPPs (self-invested personal pension).  It is as if SIPPs was a disease and QROPS was the cure, especially when you see QROPS being so aggressively marketed.

However due to the change in the tax laws QROPS have lost some of the advantages vs SIPPs.

As such I will try and explain the difference.

1.   SIPPs have the legal jurisdiction of the UK, QROPS are overseas.

2.   SIPPs at the age of 55, can pay a tax free lump sum of 25% (may be subject to residence tax if overseas.

3.   QROPS at the age of 55 (potential of 50) can pay 30% tax free lump sum of 30% (may be subject to residence tax if overseas.

4.   A typical QROPS valued at gbp 150,000 could cost gbp 5,500 up front and gbp 7,950 p.a.

5.   A typical SIPPs valued at gbp 150,000 could cost gbp 400 up front and gbp 3,000 p.a.

There is no IHT (inheritance tax) as such there is no need to have a Portfolio Bond or Insurance wrapper unless you want to pay huge commission to the advisor.

Always ask the following questions

1.   What is the setup and annual charges for a QROPS or SIPPS

2.   What are the Portfolio Bond or Insurance wrapper charges which should include admin fees, dealing costs, annual fees etc.

3.   What is the cost of the underlying investment? Such as ETF fees, Mutual Fund fees, commission on the products etc.

4.   What are the advisor fees and commissions?

5.   Get a written statement that all fees and charges have been disclosed (typically advisors are encouraged to sell Portfolio Bonds or insurance wrappers where they get paid about 7% in fees and commissions by the provider, these fees and commissions are ultimately recouped by charging you as the investor).

6.   Ask why they recommend a portfolio bond or Insurance wrapper when they most likely are not required,

7.   Ask about any redemption fees if you need your money back.

8.   Ask about PII (Personal Indemnity Insurance)

9.   SIPPs have a lot of protection as they are more regulated, however QROPS can hold esoteric (also high commission) investments with less checks and balances, so what legal protection do I have.

Warning

Often your annual fees are based upon the initial investment, if you take out money later, the fees will still be based upon the original investment amount thus making it almost impossible to have any growth in your portfolio.

Once you count up all those fees, you now know what you need to make in returns just to stand still. In times of low returns this could end up giving you negative growth.

When talking to an advisor ask check these important points:

1. size of the company is not important; the question would be if the company is regulated.

2. what are the qualifications of the advisor.

3. check complaints/feedback against the advisor or company from websites such as www.pissedconsumer.com

4. is the advisor compensated with commission (potential conflict of interest when recommending a product) or with an annual fee (compensation drives behaviour and the wrong compensation drives the wrong behaviour). Fee based encourages the advisor to work in your best interest as he is only compensated if you stay with them.

Taxation questions:

1.   Do I live in a country such as the UAE where there is currently no taxation?

2.   When will tax be a consideration? (Why pay high fees with less consumer protection if it is not necessary)

3.   Does the country where I live recognise a QROP structure for tax reasons. (US, France; Spain or Australia does not recognise this structure)

At InvestME Financial Services LLC, we believe in driving costs, commissions and fees down. These savings are passed back to the clients. We believe in full transparency in costs.

The author Gordon Robertson is not qualified to give tax advice. Any specific questions regarding tax should be referred to a tax advisor experienced in the relevant tax jurisdiction.

Gordon Robertson is a highly qualified advisor and both he and InvestMe are regulated by the Securities and Commodities Authority (SCA) in the UAE.

To know more or if you have any questions please contact me at gr@me-group.ae

6. Our notes have never lost money!

This may be true, but this does not reflect the entire structured note market, or the history of structured notes.

In the aftermath of the 2008 crisis, many financial institutions defaulted on the structured notes. Lehman alone defaulted on usd76 Billion.

7. You get access to a particular asset class normally onlz available to institutions.

This may have been a fact many years ago, however there are so many investment structures you can access via ETF’s (Exchange Traded Funds) and Mutual Funds with lower costs and lower risks.

The only benefit that makes sense is that structured notes can have customised pay-outs and exposures.  Some notes advertise an investment return with little or no principal risk, some quote higher returns in range bound markets with or without this protection and yet other notes often sold as generating high yields in a currently low yield environment. Sounds complicated but it is not.

Whatever you choose, derivatives allow the structured note to replicate a particular market or forecast. It is synthetic (does not use the actual shares) and often uses leverage (borrows money) to generate returns higher or lower than the asset it is supposed to replicate.

7. If a client asks about liquidity

The advisor may tell you there is a secondary market.

Liquidity, what liquidity? –. Structured Notes do not tend to trade after being issued

In fact, the term is “Illiquid” You are expected to hold the note till maturity.

However, in life, changes happen, what happens if you require money due to losing a job, another investment opportunity that you should take, what happens if we have another financial crisis similar to 2008. The only possibility is to go for an early exit and take any price the issuer offers you, that is assuming they are willing to make an offer.

Daily Pricing is extremely questionable. – As most of those notes do not trade after being issued, then it is logical that the prices being quoted on your statement are not actual prices you can sell at.

They are instead calculated using algorithms which is completely different than a net asset value.

As such the valuation is merely a guess at the best. If it is not the market that gives the price, who do you think it is?

So what are the disadvantages of Structured Notes?

Credit Risk – I mentioned that they are an IOU (promise) from the issuer, as such you bear the risk that the financial intuition can make good of the guarantee. ARC Capital, Keydata, Bear Stearns and Lehman are just a few that defaulted on the guarantee, Lehman alone defaulted on USD 76 Billion of structured notes. As such it is possible that the market is down 50% but the note is still worthless. It could even have a positive return and also be worthless. You are basically adding credit risk on top of market risk. Notes mostly do not have a risk rating, unlike bonds. If the financial institution goes into insolvency, then these notes are worthless.

In fact, the UK financial watch dog Martin Wheatley referred to them as “spread betting on steroids”

Mutual funds, stocks, ETF’s etc. will be segregated assets in your account. They may be down, but they still belong to you and have a chance of recovery. If the financial institution holding your account goes into bankruptcy, your assets will be transferred to another institution. Structured notes will remain as a promise by the institution to pay you after all other creditors have been paid.

Fees – fees and commission can be very high. This is what makes them attractive for the issuer and the advisor selling them “The higher the fees the lower the returns”. It is however possible to create your own structured notes with higher returns.

Who cares about credit risk, liquidity or pricing? – Let me give you an actual recent case study:

1.   RBC Phoenix A/Call Note Linked to 5 stocks

Cusip XS1978174411 issued July 18 2014 mature July 18 2019

Potential to return 12% p.a. with a defined level of risk and potential quarterly redemption.

Regular income and considered defensive.

What the client was not informed was that it was only meant “for professional investors only and not for Retail distribution”

The client was a low risk investor with issues about job security.

The position was valued on Jan 14 2016 with a loss of 59.28%

To know more or if you have questions please contact the author

Gordon Robertson: gr@me-group.ae

Brooklands appoints administrator, Heritage takes over Sipps

*This article is taken from http://www.international-adviser.com/news/1030608/brooklands-appoints-administrator-heritage-takes-sipps and only reposted on this site.

By Richard Hubbard

 Brooklands Trustees, an FCA authorised Sipp provider, has gone into administration and sold its assets to Heritage Pensions, according to a note to clients from the new administrator Duff and Phelps.

With effect from 25 July 2016, Heritage Pensions is now the operator of the Brooklands Sipp and IVCM Heritage Trustees are the trustees of the Brooklands Sipp, the administrators said.

Continue reading Brooklands appoints administrator, Heritage takes over Sipps

Baby Boomers – Retirement – Houston I think We Have a Problem

I remember my parents in retirement having a life style I envied.

They did not have as much fun while they worked compared to myself, but I am referring to how comfortable they were in retirement. The reason is due to us having two behavioural issues.

The first one being “Present Bias” this is where we put our current enjoyment and hobbies before our long term requirements to achieve the same quality of retirement my parents had.

Continue reading Baby Boomers – Retirement – Houston I think We Have a Problem

What Does You IFA Represent?

The term IFA stands for Independent Financial Advisor.

This is a term that is often used in Dubai. 

As such I thought I would expand on this. 

We are seeing regulatory changes happening throughout the world which is now defining the responsibilities of both an IFA and a broker.

There is a difference between a broker and an IFA, but for some reason in this region this role is rather muddied.

Brokers have historically been allowed to sell expensive products regardless if it made sense for the client. I.e. the broker was not legally required to act in your best interest.
Many did, but many did not.

However, an IFA is different

An IFA has always been required to act in a fiduciary function. I.e., he has to work in the client’s best interest.

In the region we have very few requirements for qualifications as an IFA. This is now changing for the better. However, the exams are really not that difficult which puts into question:

  1. is the advisor offering an investment solution using financial modelling tools

B is the advisor using external resources to come up with an investment solution.

  1. is the advisor selling expensive products that benefit him more than me.

Let me recall an incident last week. I spoke to someone who had the required qualifications but really had little experience in the financial world. I doubt if many of them really read financial websites, financial news and articles. His lack of knowledge in financial structures which cover risk vs. return and volatility puts into question how he is sharing his knowledge.

Continue reading What Does You IFA Represent?

Structured Notes

Low risk high yielding? Or high risk moderate yielding?
jam

Structured Notes were banned for sale to retail clients in the UAE by the Central Bank in 2009

Structured notes are not regulated and are meant for institutions and professional investors.

If you are going to invest or have invested, then please read this.

What is a structured note?

A structured note is nothing more than a promise from a financial institution to pay you in the event of certain market movements.

They use derivatives to simulate an investment structure. The combinations are limitless and as such they can create anything you want, but this may not necessarily something you need.

  1. The stated advantages of Structured Notes used by sales people debunkedDiversification of portfolio

This makes no sense if the portfolio already consists of equity investments. There is such a thing called over diversification and pointless diversification. This one goes under the category as pointless. All it does is create a concentration of risk (too many eggs in one basket). Due to the risk it would only make sense if it was a small portion of your diversified portfolio.

      2. An income with an element of capital protection or is it possible to produce a low risk note? 

It is but you will not get the level of income and you still need to understand that you have now added credit risk (the ability of the issuing institution being able to honour the note.

When the note comes to maturity this provides an opportunity for the adviser to sell another note generating a similar amount of commission. These high commissions come from the return you should be making. These structured notes are very illiquid and will not help if you suddenly need liquidity.

     3. Participation in the upside of stocks or a collection of equity markets with an element of capital protection

As the saying goes “There is no such thing as a free lunch on Wall Street.”

There has to be a trade-off, if you add a benefit then you have to decrease the benefit somewhere else, you may be getting paid dividends or coupons but you are limited to the profit you can make. It may belong as a small portion of a portfolio, however due to the credit risk it should never be a large part of your portfolio. If the risk was really so low, we would have seen financial institutions putting lots of money into those notes instead of issuing notes.

Most of the notes have worked well in the last few years due to the side ways market movement, however history paints a different picture.

  1. No entry costs or exit costs upon maturity (basically the charges are built into the lower returns)

Unfortunately, the answer in many cases comes back to how the adviser is paid. A lot of the structured notes that are available in the market pay commissions to the advisers of 3, 6 or 7 per cent when they are purchased.

Tip: If you were needing to buy a note it might be a better option to buy the product on the secondary market after the note has listed. You will almost certainly buy the note at a large discount to its original price and the cost to buy will be the trading fees. However, you would still have to accept that the underlying price of the note will fluctuate in value and not necessarily in a positive manner. 

  1. The ability to receive an element of protection in the form of a limited capital guarantee from a highly rated bank

Sometimes the word guaranteed is accidently used. The term is capital protection. What must be understood is who is providing the protection. This is in the small print. Who is providing the protection and where is this institution based? It is often the subsidiary of a major bank, not the major bank itself. Ratings normally start at AAA and once you get to BBB- then you are at junk status. Ask your advisor what the risk rating is as he “should” know. If he does not know then you should avoid investing in any product where the risk is not clearly defined. Lehman defaulted on USD 76 billion in Structured Notes despite the guarantee.

  1. Our notes have never lost money!

This may be true, but this does not reflect the entire structured note market, or the history of structured notes.

In the aftermath of the 2008 crisis, many financial institutions defaulted on the structured notes. Lehman alone defaulted on usd76 Billion.

  1. You get access to a particular asset class normally onlz available to institutions.

This may have been a fact many years ago, however there are so many investment structures you can access via ETF’s (Exchange Traded Funds) and Mutual Funds with lower costs and lower risks.

The only benefit that makes sense is that structured notes can have customised pay-outs and exposures.  Some notes advertise an investment return with little or no principal risk, some quote higher returns in range bound markets with or without this protection and yet other notes often sold as generating high yields in a currently low yield environment. Sounds complicated but it is not.

Whatever you choose, derivatives allow the structured note to replicate a particular market or forecast. It is synthetic (does not use the actual shares) and often uses leverage (borrows money) to generate returns higher or lower than the asset it is supposed to replicate.

                  7. If a client asks about liquidity

The advisor may tell you there is a secondary market.

Liquidity, what liquidity? –. Structured Notes do not tend to trade after being issued

In fact, the term is “Illiquid” You are expected to hold the note till maturity.

However, in life, changes happen, what happens if you require money due to losing a job, another investment opportunity that you should take, what happens if we have another financial crisis similar to 2008. The only possibility is to go for an early exit and take any price the issuer offers you, that is assuming they are willing to make an offer.

Daily Pricing is extremely questionable. – As most of those notes do not trade after being issued, then it is logical that the prices being quoted on your statement are not actual prices you can sell at.

They are instead calculated using algorithms which is completely different than a net asset value.

As such the valuation is merely a guess at the best. If it is not the market that gives the price, who do you think it is?

So what are the disadvantages of Structured Notes?

Credit Risk –  I mentioned that they are an IOU (promise) from the issuer, as such you bear the risk that the financial intuition can make good of the guarantee. ARC Capital, Keydata, Bear Stearns and Lehman are just a few that defaulted on the guarantee, Lehman alone defaulted on USD 76 Billion of structured notes. As such it is possible that the market is down 50% but the note is still worthless. It could even have a positive return and also be worthless. You are basically adding credit risk on top of market risk. Notes mostly do not have a risk rating, unlike bonds. If the financial institution goes into insolvency, then these notes are worthless.

In fact, the UK financial watch dog Martin Wheatley referred to them as “spread betting on steroids”

Mutual funds, stocks, ETF’s etc. will be segregated assets in your account. They may be down, but they still belong to you and have a chance of recovery. If the financial institution holding your account goes into bankruptcy, your assets will be transferred to another institution. Structured notes will remain as a promise by the institution to pay you after all other creditors have been paid.

Fees – fees and commission can be very high. This is what makes them attractive for the issuer and the advisor selling them “The higher the fees the lower the returns”. It is however possible to create your own structured notes with higher returns.

Who cares about credit risk, liquidity or pricing? – Let me give you an actual recent case study:

  1. RBC Phoenix A/Call Note Linked to 5 stocks

Cusip XS1978174411 issued July 18 2014 mature July 18 2019

Potential to return 12% p.a. with a defined level of risk and potential quarterly redemption.

Regular income and considered defensive.

What the client was not informed was that it was only meant “for professional investors only and not for Retail distribution”

The client was a low risk investor with issues about job security.

The position was valued on Jan 14 2016 with a loss of 59.28%

To know more or if you have questions please contact the author

Gordon Robertson gr@me-group.ae

Risk Profiling

The very important reason why risk profiling before investing is so important.

Risk profiling is a process of finding the optimal level of investment risk by considering the risk required, risk capacity and risk tolerance. What is often overlooked is one’s capacity for loss assessment and the risk required to achieve certain goals.

To make suitable investment decisions, you should use a methodology to manage risk related investment issues (a free test is available at Risk Profile System) The process of shaping an appropriate investment strategy concerning risk is broadly called “risk profiling.” It involves: making separate assessments of risk required, risk capacity and risk tolerance – comparing the assessments to identify any mismatches – and finding a resolution for any such mismatches. The outcome will be an optimal solution for investors.

Investment always involves risk – the level of risk involved varies for each individual. The key issue is to control that risk in a way which is suitable for yourself.

Continue reading Risk Profiling

Gap Analysis

Gap analysis is not just a process. Understand today what you can expect when you retire.

All investors have future goals and objectives, whether it is buying a dream house, dream car, taking an exotic holiday, and much more. However, the difference between dreaming and accomplishing these dreams relies on actually planning and taking steps to fulfil these dreams. Knowing your present circumstances and financial situation can help you plan for the future and understand where you want to be. This is the first step in moving closer to your future goal. The process of identifying your present and planning to attain your future goal is termed “Gap Analysis”.

Gap analysis will provide important information to determine where your existing financial plan is strong and weak. The strong points and drawbacks of a financial plan are determined based on precise financial goals. Put it in another way, this is the stage in the planning development when you find out the gaps linking where you are and where you want to be.

Continue reading Gap Analysis

Fees, Fees and More Fees

Ever wonder why you find it difficult to make money? Fees, Fees & more uncessary Fees.

Just like buying anything else, investment products and services have related there are fees and costs.

These fees may seem small initially, but over time, they can have a significant impact on your investment portfolio. Fees come in two types – transaction and ongoing fees. Transaction fees are charged each time you do a transaction, such as when you buy a mutual fund. On the other hand, ongoing fees or expenses are charges you regularly incur, such as an annual account maintenance fee.

Continue reading Fees, Fees and More Fees

Cost Will Make A Difference

Keeping your investing costs as little as possible will help to increase your portfolio returns. Knowing how much you are paying for expenses related to your investment can be a daunting task, particularly when you utilize insurance products, mutual funds and sometimes low transparency investment tools.

What many investors do not realise when investing in mutual funds is the costs involved. Not only is there a cost to purchase, funds also have an internal cost structure. It is often quoted as an AMC (Annual management charge) of about 1.5%.

 

However, one should look at the TER (total expense ratio) not just the management charge, all of a sudden you are at the 2-2.5% range. Perhaps most importantly, the expense ratio typically excludes the amounts that fund companies pay in brokerage commissions to execute trades. Also, funds that frequently purchase securities often end up losing a substantial sum of money to what’s well-known as the bid-ask spread, which reflects the quantity that market makers assemble by standing poised to trade shares.

Investing in variable annuities, pensions, commodity funds, private equity, structured notes, or hedge funds can missile those expenses two or threefold.

Especially if purchased through an insurance product such as lump sum investments and Portfolio Bonds. Regrettably, in many occurrences, these costs are invisible to investors entering these investments.

 

Many banks and brokers like to sell hedge funds and certificates to investors. While these investments have a place in many portfolios, the fact that they mainly lack transparency is a cause for concern.  A lack of transparency can often be linked to high expenses.

When we had double digit returns till 2000, hidden costs could often be absorbed, however with returns of approximately 6% p.a. these costs do have a significant effect on returns, often bringing the returns to zero.

Most savings plan have an internal cost structure of about 6% p.a. for the first several years. It is almost impossible to generate positive returns.

Structured notes have good returns, but due to the high risk of structured notes, they are only supposed to be sold to professional clients and not retail clients. The main reason they are sold to retail is the high commission and the need to renew ever few years.

It is natural for most investors not to worry about cost if their investment is doing all right. However, this is far from the truth. A 0.5% variation in an annual rate of return can make all the difference between a successful and unsuccessful investment. A portfolio averaging 6% p.a. for 25 years would turn 100,000 into 429,187 yet a portfolio with a high cost structure may only result in 3% p.a. In this case 100,000 would turn into 209,378.

The cheapest and most effective way to invest is using ETF`s (Exchange Traded Funds”. They mirror an index and are also referred to as a passive fund. As such they have a cost structure which can be 1/10th of the costs of a normal (active) mutual fund.

Continue reading Cost Will Make A Difference

Asset Allocation

Asset Allocation is designed to smooth volatility which helping you still achieve your goals.

Asset allocation is a portfolio investment practice that aims to balance risk and return, by separating assets among major classes, for example, stocks, bonds, cash, and others. Each asset class will behave differently because they have different levels of risk and return. Therefore, while one asset goes upward, another may go downward or not do as well as expected.

Thanks to our team of professional investment experts, we take away the fear and uncertainties associated with investment. We do all the dirty work for our clients and make the whole investment process simple and risk-free. “Just like taking candy from a baby”.

Continue reading Asset Allocation