When we shop, generally, 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. Did you ever purchase a new TV and later, some money simply disappeared from your bank account; an amount you did not know about, were not expecting and it is not even clear what it is for?
Sadly, however, historically, 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:
- Anyone selling a fixed product range with no advice, such as banks and direct internet companies
- Those advisers, in France, who are not independent, thus legally tied to selling a fixed product range
Notice, for point two, I said “in France”. This is because the French professional associations, successfully lobbied for commission to continue for those advisers who are not independent. I view this as a tragedy and a travesty.
I recall, many years ago, when starting Kentingtons, I met 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 the order of the highest commission first, so all the highest paying funds (so 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!
A more recent recollection is a client who was, essentially, being forced to invest his money with his bank in order to get a mortgage with them.
They recommended an “assurance vie”, which is great, with no upfront fees at all 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 there I found:
- All funds had a fixed entry fee of 2% (incredible as it was their own funds)
- The “Frais Courants” (total annual cost) was an average of 2.88% per year
- 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 is with absolutely no initial or ongoing financial advice, so no help or aid and indeed no liability or comeback on the seller.
What about the 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 assurance vie structure being what we would commonly describe as a wrapper. One then has to consider what is held within the wrapper, thus the funds inside.
From these companies we have seen internal fund charges of over 3% per year.
Some UK nationals have been tempted to leave their money in the UK, managed by UK advisors. This does not make any sense as a UK qualified adviser would not know about French financial regulation, however, familiarity is very comforting, and human nature is that we like our comforts, no matter how illogical.
There is absolutely no concern, in keeping your savings French friendly, if you follow this simple guidance:
- Take appropriate French qualified independent financial advice (it makes sense to get professional advice anyway).
This “independence” must be clearly stated on their terms and conditions. This way you know that no incentives may legally be taken, all costs specifically stated and, importantly, that they are legally liable. Make sure that 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.
- Ask for a DICI (Document d’information clé pour l’investisseur) for all funds being suggested.
These are 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, or “Frais d’entrée” will also show.
- Read everything in detail
Just look for costs that do not make sense and challenge anything that was not explained. If they tell you a charge does not apply, get it in writing before signing anything.
Taking French independent advice ensures that you get things set up correctly, in a way that works for you as French residents. Furthermore, you will know exactly what you are paying, and to whom.
Take charge of your charges!
This article was first published in the Connexion October 2021