Background
Mr Rossi is an Italian citizen who worked in London for several years before returning home. He was approached by a large international financial advisory based in Milan and strongly persuaded that he would be better off if he transferred his UK pension to a Malta QROPS. The benefits explained to him were that he would have more control over his pension and it could be at risk in the UK after Brexit (see our QROPS Myths articles for more on this subject)
Mr Rossi’s pension – worth £300,000 – was transferred to a QROPS in Malta with STM Malta as its trustees. The money was then sent to an insurance bond in Gibraltar provided by STM Life. Mr Rossi simply understood that his money was with STM in Malta and was perplexed to hear that it was being held in Gibraltar.
10% of Mr Rossi’s pension was withheld in a cash account with the remaining 90% available to be allocated to investments. This money – now £270,000 and not £300,000 – was invested into multi-asset funds provided by GAM Asset Management and VAM Driehas and some structured notes. An up front fee of 5% was charged for entering the multi-asset funds and 4% for the structured notes. From the £300,000 transferred, the client now had £257,850 invested.
Mr Rossi was informed that the bond would cost him 1% a year for 10 years which would be deducted from the cash account. While it might appear on statements, the money held in cash is not really the client’s anymore as it has been put aside to pay fees. If the fees were presented properly then it would be more accurate to say that the real cost is 10% UP FRONT.
Further costs for the trust are £750, another £400 for administration of the bond, expense ratios of 2.87% for the multi-asset funds and 1% per annum for service and management from the advisory in Milan.
We determined that the total running cost of the QROPS was more than 5% – 1.31% for the trust and bond, 1% to the advisory and 2.87% for the investments. This is AFTER £42,150 was deducted in fees at the point of transfer.
What we did
Unfortunately in these circumstances there is little that can be done to recoup what has already been paid out.
We focused on evaluating the costs of the investment portfolio and switched to a more diversified portfolio with an average cost of 0.5%. This cut the clients fees in half. We looked at the cost of surrendering the structure to move to a cheaper to alternative but arrived at the conclusion that this could not be justified from a cost perspective for at least another few years. We also removed the 1% advisory fee being paid for a service that involved little more than the occasional statement sent to the client.
Structured notes are not suitable investments for an average retail client with a pension – we wrote an entire article on the subject here. The same article also examines the cost of multi-asset ‘actively’ managed funds such as those provided by the likes of GAM Asset Management which have layers of costs to pay ‘marketing and distribution’ costs – i.e. commissions to advisors.
Anyone with GAM investments in their portfolios should also be aware of their current problems as an organisation. A simple Google search for ‘GAM Asset Management’ will shed light on this matter.
We therefore reduced the fees from more than 5% to less than 2% and improved Mr Rossi’s ongoing management and continuity of advice.