Costs, Benefits & Risks - The questions to ask investment advisers so that you make the best Investment Decisions possible.

To make the very best investment decisions possible, any investor MUST identify all of the above, otherwise the investment being made is no better than a “stab in the dark”. Below I outline the questions you should ask investment salesman to ensure you have the information needed to make the best investment decisions for you and your family.

It may seem obvious, but if you make any investment decision without being in possession of any of these three vital pieces of information, then whether or not the investment is successful is “in the lap of the Gods”. Making an investment without these details is akin to throwing darts at a dart board blindfolded, it is not impossible for you to hit the board, nor impossible for you to score the maximum 180, but it is highly unlikely.

You may be thinking, “I would never make an investment without these facts” but let me share a story with you of a talk I gave to a group of about 100 investors, pre-pandemic. I was talking about this subject and my audience were shuffling in their seats, with some noticeably shaking their heads, which I interpreted to mean they were thinking “I know this already”, but then I asked them a couple of questions: -

“May I have a show of hands please, who here has a pension plan”? About half the audience hands rose into the air (which is typical as about half of Irish people have a pension).

“Now keep your hands raised if you know how much your pension costs you”, I added, and all the hands remained raised.

“If you are thinking of how much you pay into your pension, then lower your hand as this is not the cost. My question relates to how much of what you pay actually reaches your investment fund, becomes part of your pension assets and contributes to the benefits you will enjoy when you retire. Now, again, how many of you know how much your pension costs?” All the raised hands in the room were slowly lowered and, I think, the penny dropped, all were now admitting they did not know the costs at all. To save the blushes of those that had raised their hands, only to drop them once I explained the question, I went on to say: -

“For those of you that did not raise your hands, if I asked the same question about your Mortgage, your Car Loan, your savings plans, would you have been able to answer it?” The shaking heads amongst the others told me they could not, which I am afraid is true of most clients I deal with (before I deal with them, of course).

The reason so few of us know the answers to the cost question is that, for the most part, we are SOLD investments by agents of the product manufacturers, who carry business cards with descriptions like “independent financial adviser” and who purport to work for us, but this is not true! If you wish to know who someone works for, you look to how they get paid, and these so-called independents are being paid by the financial institutions to SELL us their pre-packaged products. Despite the fact that the Irish Law allows such people to describe themselves as financial advisers (defined in Irish Law, by the way, as someone licenced to sell regulated financial products), they would be far better described as product sellers.

Recognising these are salesmen, not advisers, you can immediately understand that it is NOT their job to explain all the COSTS, nor all the RISKS for that matter, as neither helps sell the product. They tend to focus almost exclusively on the BENEFITS, and why you should make the investment being sold. Now that you know this, it is up to you to either seek out a truly independent adviser (like me), who will charge you a fee and effectively allow you to access the investment without the sales commissions and other charges, or to arm yourself with a set of questions to be asked of ALL investment salesmen before you make any decisions. The questions I recommend are: -

·       What are the maximum returns possible from this investment and what evidence can you provide that proves this potential? – While the past performance of any fund being offered is informative, most past performance figures DO NOT include charges and so what you want here is an example of a real investor, who invested for a period of time and who received back more than invested. If this cannot be provided then, other than in brand new funds that have no history, I would suggest avoiding the investment being offered.

·       What are the maximum losses possible from this investment and what evidence can you provide to prove your answer? – Knowing both the maximum positive and negative returns possible clearly demonstrates the RISK being taken and will allow you to avoid investments that promise high returns (which are always attractive) but often have the potential for 100% loss too.

·       How much of the amount I invest reaches the investment fund and what will be the value of my investment the day after I invest? – This will give you an indication of the up-front COSTS being levied and will also allow you to manage your own expectations as any future positive returns will not be on the total investment, but on the net amount after initial charges.

·       What is the Annual Management Fee (AMF) and how will this impact on future returns? – Let’s imagine the AMF is 1.5% and the maximum potential return being suggested is 6% per annum. What you want to see is a quotation that estimates the future value of your investment if 6% per annum was added to your investment amount and then, what will be the estimate based on a 4.5% per annum return too. Comparing the results will clearly show you the impact of the AMF COST.

·       What is the investment term and are there any early redemption charges and, If so, what will they be? – While if you are investing in, say, a property, the investment term is up to you, most fund investments come to market either with fixed terms and/or early redemption charges, with the latter often used to hide up front charges from investors. So, for example, you ask the third question listed earlier and are told 100% of your investment (and sometimes it might be even more, as extra allocations can be added for larger investment amounts) is allocated, you may think there are no charges. However, such funds will typically come with these early redemption COSTS, which will fall away as years pass. So, you may be told the early redemption costs in year one are 5%, year two are 4%, year three 3%...etc and now you know the up-front COST in this example is “5%”.

·       What taxation will be paid if the investment delivers positive returns? – The success of any investment can only be judged based on the amount of future gain you get to KEEP and so having this question answered means you will know the COSTS of investment success. Some funds have internal taxes, some are subject to Income tax, others to Capital Gains Tax, while still others can be completely tax-exempt. This means that taxation could be as low as 0% and could be as high as 52% (income tax, plus PRSI, plus USC) and, of course, the tax charged changes the end result. You need to not only know this COST, but also need to ensure you do not choose an investment that exposes you to more taxation than you need to pay.

So, there you have them, questions that will allow you to truly identify all COSTS and RISKS (I have ignored benefits as the salesmen are usually very proficient at outlining them) of any investment you care to contemplate and will, in many cases, send Salesmen running for the hills and withdrawing their “recommendation” (which is really a “sales pitch”).  One last piece of advice, make sure you get the answers “in writing and on the letterhead of the adviser/institution SELLING the product” as Ireland’s Financial Regulator has but one mantra: -

“If it isn’t in writing, it doesn’t exist”

Good luck!

Paul A. Overy QFA, FLIA