24 Sept 2022

A capital investment with a couple of twists

I DON’T think a week has passed in 12 years in writing my various personal finance columns in which I have not recommended that readers opt for fee-based financial advice.

I DON’T think a week has passed in 12 years in writing my various personal finance columns in which I have not recommended that readers opt for fee-based financial advice.

Thousands of you have been burned by taking the “free” advice of brokers and bankers – who are reimbursed by a sales commission payment take from your fund - instead of paying a qualified, independent and experienced advisor a proper fee for his or her time and expertise, just as you pay your doctor, solicitor or accountant.

The investment advisors (as opposed to general insurance brokers) to whom I regularly speak, are nearly all exclusively fee-paid, though sometimes will, at the clear instruction of their client, facilitate the purchase of financial products via commission payment. Usually this involves life insurance/protection products but sometimes investment-based ones as well.

They accept commission because this is how their clients want to pay, even after they are told that the commission will nearly always have a disproportionately higher, longer term impact on their fund.

You can’t legislate for some people’s bad judgment regarding the way they spend their money, but the whole murky business of commission remuneration can – and is – being discouraged. The new Consumer Protection Code 2012 requires that financial advisors offer a direct fee remuneration option and that clients understand the financial significance of such a choice.

I’m mentioning this because a unique new investment product, called the ‘Direct Investments Multi-Asset Solution Series 1’ has just been designed and launched by a well-known fee-based Dublin financial advisor, Vincent Digby under his new company, Direct Investments.

It is unique not just because of the size of the total charge to the investment fund – which is very competitive – but because Digby is incentivising prospective buyers to make sure they fully understand this product by re-imbursing them part of this total charge if they take (and pay for) independent, fee-based advice.

First, the product.

The ‘Multi-Asset Solution Series 1’ resembles a tracker bond (not my favourite investment product) insofar as it is a five year duration, 100% capital guaranteed that requires a minimum €25,000 investment. The capital is 100% guaranteed by KBC Bank, but unlike other trackers, this one comes with the five year ELG (Eligible Liabilities Guarantee) bank deposit scheme.

The money is invested in three different stock market indices: the equity based EuroStoxx 50, the property-based FTSE EPRA/NAREIT Developed Europe Index, and the commodity-based Dow Jones – UBS Commodity 3 Month Forward index.

Digby believes that collectively, the three indices represent a well priced, diverse ‘value’ investment for people who have a low to medium risk tolerance and can commit their money for five years. It offers diversity he says – by spreading asset risk amongst Europe’s top 50 companies, a selection of European property funds and commodities.

Most capital guaranteed index-tracking bonds set a limit on the total percentage return you will receive, based on the participation rate you get.

The caps are part of the cost you pay for getting your capital back at the end of the five years – and this product is no different.

There is a maximum, pre-tax, 52.5% total return over the five years (average 8.8% per annum) on your investment. Any returns are subject to 33% DIRT, but some people, including over 65’s whose income is below the income tax threshold, and organizations like charities may be DIRT exempt.

What sets this product apart from other capital guaranteed ‘trackers’ and many other investment funds, is that Direct Investments is only taking 2.5% - in total over the five years from investor’s money - for all the running and administration and management costs of this product.

For someone who invests €25,000, the total 2.5% charge against their investment will be €625; for someone investing €75,000, the total cost is €1,875. This is less than half the 5.44% charged by 10 other capital protected investment products on the Irish market. Digby’s lower fees represent an 8.22% better return at the end of five years if the fund achieves it’s capped return potential (the pre-tax 52.5% cumulative return.)

The other unique feature of this product is that prospective buyers who want a second opinion from their own fee-based advisor before they commit their money to this product will be re-imbursed to the equivalent value of 0.75% or 1.25% of their total investment fund charge of 2.5% if they do buy the product after consulting and paying an advisor’s fee. (The 0.75% reimbursement applies to sum invested up to €75,000 and 1.25% for sums in excess of €75,000.)

For example, if you want to invest the minimum €25,000 but you’d like your advisor’s impartial opinion and he charges you €150 for his time, Digby will reimburse you €187.50 or 0.75% of the 2.5% or €625 that is the total charge on your investment.

The direct sales commission that most investment providers and banks dangle in front of brokers to sell their products for them is absent here.

But there is an incentive – the refund for the cost of independent advice - for both the investor and their advisor, though the client is the one who decides how much they pay for that advice.

All investment providers should follow his lead. You can check out this product here:

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