Financial nuclear waste

A client asked me to review a savings plan that they acquired a while back through a distributor in the Middle East.

Unfortunately it was a financial tragedy.

The client has been paying into this plan for some time, nearly 3 years and the accumulated value of the plan was? Less than 25% of what he had diligently paid into month after month. Unbelievable!

In fact the client was still paying for the commission to the agent who has left the company. How sad! These kinds of products that are prevalent in the Middle East. And what makes them financial nuclear waste is the way in which they are sold. High pressure tactics. Non disclosure of fees. Poor advice on fund selection. The list is endless.

My problem with these products is that the client does not actually get what they think they are getting. To disguise these products as “forced savings plans” is disingenuous and insulting. Savings implies that the funds will be available and wont necessarily decline in value. By putting money into a collection of ill selected funds is not only financial suicide – its crazy.

Here is a better option.

When approached by a salesman “selling” you a bunch of funds wrapped in glossy packaging ask the following questions:

1. What is your commission and how long do I pay it for?
2. What rebates does your firm receive for distributing these funds?
3. On what basis is fund house selected?
4. If the plan is life insurance wrapped, ask to see the split of the life insurance component and savings component of the premium. If there is more money going to the life insurance then its not a savings product its a life insurance product.
5. What is the consequence of early cancellation? This is a huge red flag. If you pay any penalty for a “savings product” then its not a savings product.
6. Ask what guarantees for performance are built in. Poor fund selection by the company should not be your issue. If they claim to use "sophisticated screening techniques" don't believe them. The funds that pay the largest rebates are usually selected.

Savings “problems” come in all shapes and sizes. Even banks are after you and in the world of finance, without the armoury of effective questions, you are vulnerable to slick sales pitches. Putting your money into one of these products is a waste of your time and effort.

If the above does not scare you how about giving up to 40% of your annual return away to the sales company and even paying when you don’t make anything on your money?

I encourage you to question hard when approached and take note of the answers. If you have any doubts, don’t sign anything and even then if you still have concerns feel free to contact your local Banking regulator.

Take care out there!