I was introduced to this fund, Global Wealth Builder, by my financial advisor. You know that I am not a fan of funds and so I was quite critical towards the plan especially when it came to charges. She told me that this is a private banking fund and it used to be only accessible by high networth individuals. They have made it available to retail investors in the recent years. My first question is that why would they want to ‘lower’ their image to serve retail clients? Especially when the cost of managing so many accounts would go up? The answer was that they want to have more business – who doesn’t want to be richer. Would Loius Vuitton compromise their image by selling $50 wallets, just that they want to sell to more people?
Anyway I went to scrutinize the details in the product brochure, disclaimers and websites. I would like to present here and you make your own call if it is a good deal.
Where is the company based?
The company is Friends Provident International and it is based in Isle of Man. It is part of the British Islands but the relationship with UK is a little complicated. It is not part of UK, and it is not a commonwealth country. It is also not in the European Union. The relationship with UK is defined as “one of mutual respect and support, ie, a partnership”. I would take it that it is self-governed but UK has strong influence to this country.
Isle of Man is a tax haven. There are “no capital gains tax, wealth tax, stamp duty, or inheritance tax”.
It is a an investment-linked life insurance product
Upon reading, I understand that the Global Wealth Builder (GWB) is a life assurance contract. It is not different from the Investment-linked Policies (ILPs) that we are familiar with. Traditional life insurance would invest your premiums in fixed income securities but ILPs would invest your money in higher risk assets like equities. The sum assured of GWB is 101% of bid value. What is the point if you give me 1% more than the market value of my funds? I would prefer the sum assured to by 100% of my principal (amount of capital I put in), and not fluctuate based on market condition. I see this as an exit strategy employed by GWB, terminating the fund when the holder pass away, and not so much as to assure the owner’s life.
Fund Charges
Instead of buying into funds directly, there is another middleman that you would need to pay. This extra middleman is the insurance company (Friends Provident). What are the charges like? It is a little complicated but I will try to explain.
- Admin charges: 1.2% of the fund value per year
- External fund charges: Varies. It depends on the mutual funds that you invest in through GWB
- Initial charge: The premiums for the first 18 months are known as the Initial Units. There will be a 1.5% charge quarterly on this Initial Units for the entire duration of your plan (if you choose a 10 year plan, the 1.5% charge on the Initial Units will apply every quarter throughout the 10 years)
- Plan Fee: US$6 per month or US$72 per year
- Switching fee: You may switch funds for free but the company may charge up to 1% or US$15, whichever is higher.
- Surrender fee: As this is an insurance policy, you need to pay a surrender fee when you terminate it prematurely. The plan duration starts from a minimum of 5 years to a maximum of 25 years. The Surrender fee can range from 6% to 100% of your Initial Units.
What is the value proposition?
As you can see the charges are high. What is the value of investing in GWB? What my advisor told me is that I would be able to access some funds that would not be available if I was to invest it personally. She quoted examples of Blackrock and Baring. Of course I would demand a good return since I am paying above average costs. Let’s look at the performance of the top funds (funds that yield more than 8% annual return over a period of 10 years or more):
- Baring Hong Kong & China
No of years: 27 years
Annualized return:15.61%
Fund charge: 1.7% - Nevsky Capital Eastern Europe
No of years: 11 years
Annualized return: 18.45%
Fund charge: 1.75% - Schroder Latin America
No of years: 16 years
Annualized return: 8.83%
Fund charge: 2.03% - Baring Australia
No of years: 26 years
Annualized return:8.37%
Fund charge: 1.8%
And the worst funds operating more than 10 years:
- Adberdeen Global Technology
No of years: 11 years
Annualized return: -10.35%
Fund charge: 2.03% - Fidelity Global Communications
No of years: 11 years
Annualized return: -7.93%
Fund charge: 1.94% - JPM Global Healthcare
No of years: 11 years
Annualized return: -6.57%
Fund charge: 1.9% - BlackRock US Flexible Equities
No of years: 13 years
Annualized return: -1.56%
Fund charge: 1.82%
Risks
In the event that Friends Provident goes bust, what will happen to my money? There is a compensation act that in the event the insurer becomes insolvent, you can make a claim for 90% of the liability stated in the contract (I would assume it is the sum assured). However, there is another caveat – provided the remaining fund is sufficient to compensate.
Most of them are denominated in USD and investors are exposed to currency risk. It was stated under the “Notes of caution”:
“mirror fund may nit be denominated in the currency of that fund and, as a result, fund prices may rise and fall purely on account of exchange rate fluctuations.”
Conclusion
The charges are too high in my opinion and there is no proof that the funds were superior in performance. I just don’t see the incentive in this. Investment results are not guaranteed but the costs are confirmed. It is like running an obstacle course with an extra bag.
regarding your post on friends providend, you have left out, whether by deliberation, or ignorance some facts which will cast positive light on the investment vehicle. .
Hi kelvin
I invested in friends provident for 10 years and made nothing
Could you please explain this positive light ?
Or would you be an advisor selling this stuff ?
Kelvin, would you like to enlighten me?
Kelvin can you give me few possitive facts on friends provident ,hence i started investing in.
The 101 plan here in HK is an entice and slice plan. Here they get you in my juicing your investment up front during the 18 month beginning period. What unscrupulous agents don’t point out is you are obligated to invest each month for the term. Should you stop investing, the contract reads the fees you would have paid continue at 11 percent of the principal, not including the other basic charges gobbling up your principal.
The agent is motivated to sell you for the longest term possible to get a bigger commission which will be paid out of either the money you invest, or out of your principal if you should discontinue your investments.
The life insurance part is worthless as they only will pay you YOUR money back.
It’s all there in the brochure, so can’t call this a scam, but there are many people who are unwary out there, who make the mistake of trusting an agent or financial adivsor who is motivated by greed to sell for such a long time period.
All of what I say has to be well understood by FP who IMO lacks any kind of moral compass to sell an instrument filled with traps to part you from you hard earned money….
I agree 100% with David. I so regret tying up part of my money with this organization. Why did I invest? Because I trusted my “friend” that sold me the policy. I didn’t dig into it myself. Oh well, lesson learned. Now I have to try to get my money out from this mess.
Same experience here. My wife and I started working in 2009 and wanted to invest early for our retirement. We lacked financial planning knowledge but we were certainly not stupid people. Our biggest mistake was to trust a good friend’s financial consultant (multi-million dollar roundtable award or something) who recommended the crappy GWB to us. For years we just bit the bullet seeing the charges just munching away into our initial deposits. We were lured into the marketing tactics as we were vulnerable then with lack of background knowledge on the products and investment in general.
With the US stock market performing well in the past 2 years, I am seriously considering surrendering or doing partial withdrawal of my accumulation units. Makes better sense to invest them elsewhere. As for the initial funds, well, thinking of switching to that one and only Vanguard index fund available (70%) and prob another bond fund (30%) to minimise cost.
If anyone else can provide better advice it will be much appreciated!
Friends Provident are a complete scam. I invested with them. Numerous cock-ups, mis-adminstration. Cost me thousands. Now the one remaining fund I have with them is in administration and they are still trying to claim close to £30K in fees! Even though I have basically lost everything.
Sorry to hear that Rachel. Hope you can get the money back!
Still waiting for Kelvins insightful knowledge of the wonderful benefits…………..
I would be fascinated to know if anyone has surrendered this fund. It strikes me that it might be the best thing to do given the charges. With current returns I am co concern that it is going to end up being a very bad investment.
Never invest in one of these plans!!! I worked for a FPI financial planner, more like scam artist, that only sold FPI and NO ONE makes money except FPI and the agent that sold it to you. The reason why, on top of the charges mentioned every fund switch requires you to pay an entry fee to get into the fund. This can be to the tune of 5%. So technically there is no commission for fund switches however, you are paying much more than any commission a broker charges. Furthermore, the funds are not great so many financial advisers, once again if you want to call them that as the majority have no formal training or securities licenses, will put you in the most high risk funds in a leap of faith that you may be able to outperform the fraudulently high fees. YOU WILL NOT! STAY AWAY!
Hi Kelvin,
I have also invested in FP for a 10 year contract.
Is there a way to cancel this plan without paying the termination fee? Any advice on how to break this contracts?
Thanks
You would have to work it out with your advisor or FP on this. I am afraid I cannot help you much on this.
Steve Young has been selling Friends products in Singapore. In a video interview, it is clear his sole aim is book new commissions and investment advice takes a back seat. See video in link attached. He has been suspended from all financial advisory activities a few days ago. Currently under investigation for allegedly not adhering to integrity and honesty as required by MAS.
http://therapeofhongkong.com/2013/12/15/this-is-your-brain-on-commissions/