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  • Writer's pictureOwen

Should I put a fund account inside a portfolio bond?

When should you use a fund platform via your life company Portfolio Bond?

The short answer is: “absolutely never“.

If you are American, then this post isn't for you. Stick to a discount brokerage and come back for posts on other topics. This post is for our British friends who can have a good reason to invest via life company portfolio bonds for a QROPS (Qualifying Recognized Offshore Pension Scheme). 

Portfolio bonds are one of the better options in the offshore investment world, though cheaper and more liquid options exist like discount brokerages in most other situations. 

The issue to focus on today is cost.

For a portfolio bond there is an initial charge spread out over a 1-8 year period, plus an annual administration fee. A portfolio bond is actually a fund platform and can access many funds at discounted rates without the initial 1-5% fee. It has become common amongst some so-called advisors to place this portfolio bond into yet another layer of a fund platform.

The good reason is the better technology. But it just doesn't stack up cost wise.

On the other side, there are several new offshore fund platforms, many of which, are white labelled options (aka named something else) that behind the scenes use Bank De Luxembourg or a similar company's fund platform.

To be clear, We are not blaming Bank De Luxembourg. They aren't in the advisory business. It's the advisors fault. 

It is possible for some to use their fund platform solely and can be an alternative to the life company’s open platforms. But layering it in makes it expensive.  

These platforms charge the client in a different manner.  There is no initial charge to get into the platform but when you go to invest into funds you are hit with the maximum initial charge that is published by the fund house (that 5-6% mentioned above), the bulk of which goes to the advisor. 

For example, if you buy the “Aberdeen Global Emerging Markets Fund” via the platform you will be hit for a 6.38% initial fee. We don't know for sure, but your advisor could see half to two-thirds of that initial fee, depending on their deal.

Used alone, and correctly the two platforms are tolerable but not ideal. When you put them together, you get an intolerable layer-cake of fees.

This will be a serious drag on your portfolio. You'll have the:

  • QROPS Trust Layer

  • Portfolio Bond Layer

  • Fund Platform Layer

  • Managed Fund Layer

Each one of these layers adds their fees. Your advisor might be sharing the income from each of the bottom three layers in various ways. No wonder they love the layers!

Better to remove the bottom two and use your portfolio bond to buy ETFs. Even better, negotiate with your advisor to waive or significantly reduce the upfront fee on your portfolio bond and replace it with a simple management fee.

Unfortunately, that's not what's happening out there. There is strong evidence this is what advisors in Shanghai are doing from what we have seen recently.  They are linking client’s life company portfolio bonds some of which are QROPS, with the fund platforms.

That's double charging their clients. 

Once there, they are then investing into funds that they can get into for free via the life company and charging their client an additional 6+% when linking to the fund platform.

When you link the two platforms the fees are astronomical. The investment in the Aberdeen fund listed above is not only charged a 10% initial fee by the life company but is also charged another 6.38% by the fund platform to get into the fund.  You don’t need a calculator to add that to a total of 16.38%.  Given the advisor earns a 2-6% commission every time he switches your funds, do you think that some “advisors” might find reasons to switch more often because they “react to the markets”?   Of course they will, but it won’t be for your benefit.

That's triple charging.

Good work if you can get it. Awful impact on returns though.

On top of this, some shameless advisors will charge you another 1% management fee to obtain their so-called "expert advice" that will help them churn your account for commissions. You'd have to agree they are experts on building return; their returns.

If you find yourself in this situation, we suggest you confront your advisor and question them on why the platform is necessary, especially as you already have access to these funds via your portfolio bond. Ask about ETFs and conflicts-of-interest while you are there.  

If your current (or potential) advisor is advising fund platforms, lock-ins and entry fees, then perhaps talk to an advisor who prefers to work for a simple management fee. Without the layers of complexity, lock-ins and costs. Get in touch with us here.

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