Generally, when we shop, the cost of the things we buy is evident. We see the object we want, assess the price, decide if we are happy, order or pay, and walk away.
You would not expect to purchase a new TV and, later, see a random amount unexpectedly disappear from your bank account without really knowing what it is for. Historically, however, this lack of transparency was par for the course when it came to saving and investing.
I say ‘was’ and ‘historically’ because, since January 2018, it has been illegal in Europe for anyone offering any kind of counsel to accept commissions, or ‘inducements’, under the rules of MIFID II (the second part of the Markets in Financial Instruments Directive).
What it does not cover is:
1. Anyone selling a fixed product range with no advice, eg. banks and direct internet companies;
2. Those advisers, in France, who are not independent, and thus legally tied to selling a fixed product range.
Notice, for point two, I specified ‘in France’. This is because the French professional associations successfully lobbied for commission to continue for advisers who are not independent.
I view this as a tragedy and a travesty.
I recall, many years ago when starting Kentingtons, meeting a representative from one of the world’s largest investment firms. He presented me with a 50-page book of all the available funds on offer.
“Only the first page is really interesting,” he said with a wink. It was because the book had been put in order of the highest commission first, so all the highest-paying funds (the most expensive for the investor) were on the first page. It was a jaw-dropping moment. I asked him to leave, explaining that we were absolutely not on the same page!
The assurance vie example
A more recent recollection is a client who was, essentially, being forced to invest his money with a bank in order to get a mortgage with them.
They recommended an assurance vie, which is great, with no upfront fees and a management fee of 1%. This is what the client was told, and nothing else. There was a 25-page ‘book’, which came with the recommendation, all in small text. In it, I found:
1. All funds had a fixed entry fee of 2% (incredible as it was their own funds);
2. The frais courants (total annual cost) was an average of 2.88% per year;
3. There was an exit fee of up to 8%, reducing year on year after eight years.
This meant total costs of around 4% per year, indeed 6% in year one. The result is a return of 5%, therefore a net of just 1% (from year two).
This is very different to the free entry and 1% per year promised. Let us also consider that this came with absolutely no initial or ongoing financial advice, so no help or aid and, indeed, no liability or comeback on the seller.
What about direct internet companies offering super-low costs?
These companies offer everything for free, or almost free. However, it is essential to understand that this costing relates to set-up and ongoing annual charges for the assurance vie structure itself – the structure being what we would commonly describe as a ‘wrapper’. One then has to consider what is held within the wrapper: the funds.
From these companies we have seen internal fund charges of more than 3% per year.
Some UK nationals have been tempted to leave their money in the UK, managed by UK advisers. This does not make any sense as a UK qualified adviser would not know about French financial regulation. Familiarity, however, is incredibly reassuring and, no matter how illogical, we tend to stick with what we find comfortable. In reality, there is absolutely no concern in keeping your savings French-friendly, as long as you follow this simple guidance:
1. Take appropriate French-qualified independent financial advice (it makes sense to get professional advice anyway). This ‘independence’ must be clearly stated on the adviser’s terms
and conditions. This way, you know that no incentives may legally be taken, all costs will be specifically stated and, importantly, they are legally liable. Make sure the advice is independent in the country you are in, so France. We have seen international advisers make the claim of independence based on their position in other countries and not France.
2. Ask for a DICI (Document d’information clé pour l’investisseur) for all funds being suggested. This is the same as a KIID (Key Investor Information Document) in the UK. Look for frais and frais courants, which is the total annual costs of the fund. The entry cost, called the frais d’entrée, will also show.
3. Read everything in detail. Look for costs that do not make sense and challenge anything that is not explained. If you are told a charge does not apply, get it in writing before signing.
Taking French independent advice ensures things are set up correctly, in a way that works for you as a French resident. Furthermore, you know exactly what you are paying, and to whom.
This article was written by Robert Kent of Kentingtons