Robert Landau knows a thing or two about teaching. He has worked overseas for four decades. He has spent the past 25 years working as a school superintendent in Switzerland, Indonesia, the Czech Republic, China, Cambodia, and Singapore. But there's one thing that bugs him. A lot. “Many schools allow investment ‘salesmen’ through their doors. But they rarely research the advisors, their firms or the products they sell."
Steve Batchelor is a teacher at Hong Kong International School. A few years ago, he worked for a school in Beijing. At his former school, teachers were encouraged to invest in an offshore pension. But they shouldn’t have been.
Let me define pension. If Steve received a pension in the United States, his pals might think he had it made. Money for life, until Steve pushes daisies. Or even longer, if a surviving spouse is included in the deal. European firms that sell offshore “pensions”, however, rarely define them the same way. In most cases, they're just portfolios of mutual funds. But their fees are high enough to cause nose bleeds.
Just ask Steve Batchelor. He bought an offshore pension. He added $9,266 during the first 18 months. But this money will hemorrhage for 25 years. He’ll pay fees of 9.17 percent per year on his $9,266. It’s a two tiered cost system. His investment firm charges more on the money deposited during the first year and a half. It charges less on deposits thereafter. Deposits made after 18 months, will cost Steve about 3.5 percent per year. These aren’t one-time commission fees. They’re worse. These are ongoing costs that drag on the account each year. Most of them are hidden. They include establishment costs, annual account fees, and mutual fund expenses.
Steve didn’t buy the worst offender. Most offshore pensions are similar.
Peggy Creveling, a Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP) based in Bangkok says, “What the sales literature does not expressly tell you may become clear—once you agree to purchase the [pension] scheme. Your investment is subjected to a layered fee structure that can lower your earnings…perhaps by 30 to 40 percent per year.”
They’re bad products. But they’re sold prolifically. Benjamin Robertson found out why. In 2013, he published an article for The South China Morning Post. It explained a common commission structure from which profits gush. If an advisor convinces a client to invest $1000 per month for 20 years, the advisor would receive an upfront commission of $10,800. It would be split between the broker and his or her employer.
In 2008, Tony Noto got a job at an investment firm that sells offshore pensions. But he quit, after realizing that the products weren’t fair. He explains a similar commission structure.
International schools often slip on sales rhetoric. When they embrace such a plan, their teachers pay the price. Some catch on to the high costs. But they can’t make a clean escape. By selling before a predetermined date, teachers could pay a penalty equal to 80 percent of their invested proceeds. I receive plenty of emails from international schools. Many ask the same question. “Is there a better investment firm we could use for our non-American teachers?” Fortunately, there is. It’s called Veracity.
They’re based in Singapore, a capital gains free jurisdiction. Senior Financial Consultant, Jarrad Brown says, “We can invest for non-American teachers living almost anywhere.” Veracity builds lower cost portfolios, combining indexes and actively managed funds. International employers have to shoulder some of the cost.
Here’s an example. An international school would pay a one-time set up fee. It would cost between $3000 SGD and $15,000 SGD, depending on the size and complexity of the program. Brown says, “The annual trustee fee costs $5000 SGD per year. But the employer would be responsible for the set-up and annual trustee costs.”
Teachers would pay a 1 percent fee for each contribution made. For example, those investing $1000 per month would pay a commission of $10 per month. Investors can choose from a variety of balanced portfolios. Some are more risky. Others are less so. But they’re all diversified and rebalanced each year.
Jarred Brown says, “Investors can’t liquidate their investments and withdraw the funds from their account until they retire or until they leave the company they’re working for. If they do find another job, and wish to keep contributing, they can convert their pension to an individual account. Their investment fees and investment choices would remain the same.”
Veracity charges investors 0.5 percent per year to have the portfolios managed and rebalanced. When Jarrad showed me the firm’s model portfolios, I researched the fund fees. Investors would pay total costs of about 1.69 percent per year. That includes fund costs and Veracity’s 0.5 percent management fee.
American investors using index funds might scoff at such costs. U.S. expats, for example, could have a portfolio of indexes managed for less. But in the offshore world, Veracity’s costs are like those of a relatively small 401(k) plan.
So teachers, do what you do best. Teach. Show your school’s administration that there’s a far better firm on the block.
Andrew Hallam is a Digital Nomad currently living in Chapala, Mexico. He’s the author of the bestseller, Millionaire Teacher and The Global Expatriate's Guide to Investing: From Millionaire Teacher to Millionaire Expat.