Could you walk away from $39,000?
[Estimated time to read: 6 minutes]
If you discovered you’d signed up to an out-dated savings plan after investing in it heavily, could you walk away from it…with nothing?
Or would you keep throwing good money after bad in the hope that one day things will come good?
This is the real dilemma facing one reader of Millionaire Teacher Andrew Hallam’s blog.
The reader, let’s call him Mr. Smith, asked Andrew to help him decide what to do…
Let’s look at the dilemma and the options, and then you tell me – what would you do?
The road to Hell is paved with good intentions
Mr. Smith is an expat, like many of you reading this.
He was persuaded to sign up for a 24-year term on a Zurich International Vista Savings Plan.
Here’s our detailed review of the product.
In the past the Zurich Vista plan was a widely used offshore savings plan, used by IFAs and big banks such as HSBC and CITI. It may have worked for some users, but times have changed, and for many there are simply far better options available now.
No doubt Mr. Smith was persuaded to believe he was doing the right thing: after all, he was committing to saving really hard for the long-term in order to secure his financial future.
He cannot and will not be criticised for his good intentions.
From everything Andrew Hallam says in his response to this reader’s dilemma, it seems that Mr. Smith was not made fully aware of the limitations, restrictions, risks and especially the costs of this policy.
So, with only the benefit of hindsight, Mr. Smith now realises his deposits over the first 18 months have attracted total fees, including fund expense ratio charges, of an absolutely crippling and frankly unforgivable 9% per annum – and he was never told this when sold the policy.
How can anyone make positive returns these days when they’re facing a lag of 9%?
Thereafter his fees do drop, but only to about 4%, and so when you average them out over the term of the entire policy, that’s about 4.5% per year every year.
That is too expensive to ever make a decent return for the investor.
It’s our view that Mr. Smith may never achieve enough growth with this plan to even match the charges, let alone beat them and make a decent profit.
In the past it may have been a different story – there weren’t the options that we have available to us today.
But Mr. Smith only signed up to this 18 months ago, he should not have been sold the plan.
Things can’t only get better
Mr. Smith has realised this…but he’s also realised something far worse.
When considering his options by reviewing his contract and deciphering the baffling language and fee structures all by himself, Mr. Smith has realised that if he cancels his policy now he won’t get a single penny back from his scheme.
The units acquired with his investment during the first 18 months have no value until 18 months are over; in other words, the surrender value during this specific period is nil.
Those who sold it to him – the people who will do well out of his policy – never mentioned any of this.
What do you do when every choice is a bad choice?
Mr. Smith obviously doesn’t want to lose his first 18 months’ deposits.
He doesn’t want to lose the $39,000 that he has put in during that period of time.
He doesn’t feel able to walk away from the plan.
But here’s the rub - that money is gone…
If Mr. Smith cancels the policy, he loses all that he invested as his penalty for pulling out of the policy early.
What’s more, whether he cancels his policy or sticks with it, as he is currently contemplating, and invests the minimum annual amount of $3,600, his initial $39,000 invested over the first 18 months is still effectively gone.
It really is.
It’s never coming back to him.
It’s been spent.
Show me the money
Today, the market average commission paid to the financial salesperson who convinced Mr. Smith to buy into this scheme is 4.5%.
That’s 4.5% of the total amount Mr. Smith contracted to save over the entire 24 year duration of his plan, whether he saved that much in reality or not.
That’s a lot of money.
So, if Mr. Smith cancels his policy within the first 18 months, everything he’s put in will be kept by the provider, because the provider will already have paid the salesperson their commission.
Does Mr. Smith really have any choice?
Having realised his Zurich Vista is not what he thought, Mr. Smith can cancel now and walk away with nothing.
Or he can continue to save the absolute minimum he has contracted to save, and the $39,000 comes back in to play… sort of… even though really, it’s been spent.
So, surely there’s actually only one real choice – right?
Keep throwing good money after bad in the hope of coming out on top.
The truth is that Mr. Smith’s policy as it stands isn't good; it’s ruinously expensive, inflexible and failing.
It’s highly unlikely to achieve growth to even match the charges.
You see, even if he stops paying into the plan and leaves it alone, the charging structure keeps on incrementally increasing based on the originally agreed monthly premium amounts.
In effect this means the charges are applied on every premium - whether Mr. Smith pays the premium or not.
This will wipe out any returns and the original savings if he reduces the amount or stops paying altogether.
Mathematically, logically and factually speaking, Andrew Hallam says his reader should walk away from his $39,000, but could you do it?
Are you affected by the same issues?
If you have a contractual savings plan in place like Mr. Smith, or a savings or investment policy that’s being dragged down by burdensome fees, you’re not alone.
It's entirely possible that yours may have been the best policy available at the time to your adviser or that you understood every contractual term...but probably not anymore.
Not only has the world moved on and presented you with better, cheaper, higher-returning options, but people’s lives change – and what was right for you 5, 10, 15 or even 20 years ago might not be serving you so well now.
(Click to view our investment code)
So, Mr. Smith has got options, and he is likely to be young enough (assuming he was going to be working for at least the 24 year term of his Zurich Vista plan), to repair his financial position relatively quickly and easily.
And you have options too – if you care about your future financial position you can do the following:
- If you’re unsure how much you’re paying out in fees and charges, or if you’re concerned your financial portfolio is just not doing as well as it might, find out what you’re dealing with so you can understand your choices.
- Get everything x-rayed, reviewed and assessed with a simple investment portfolio review, and be armed with the facts about how much commission was paid out from your investments, how much you’re paying in fees, and how your performance matches up to the benchmarks. Also learn about any surrender penalties.
- Be given your choices in plain English, along with the likely consequences of each. Discover any lower cost and/or higher returning alternatives that are open to you. Be fully informed so you can make intelligent decisions.
You can make a positive difference to your future…