The shittiest, most expensive, most complex, and purposely confusing investment products pay the highest commission. This is a logical necessity. If these lousy products weren’t accompanied by excessive commissions, then they wouldn’t exist, because no advisers would recommend or sell them.
Some countries, like the UK and Australia, have made it illegal for product issuers to pay commissions to advisers for selling their products. This is because it creates an inherent conflict of interests, whereby advisers are financially rewarded for selling unnecessary and exploitative investment products to clients, and it has led to millions of consumers being ripped off.
In Hong Kong, commissions remain a form of legalized corruption, which has resulted in the Lehman minibond scandal, the ILAS scandal, and probably other scandals that the media has failed to report on.
The Hobbins Lawsuit Awakens the Public
A growing segment of the public is concluding that ILAS commissions are actually illegal. This began happening after the highly-publicized Jeremy Hobbins lawsuit in which Hobbins argued that these commissions violate Section 9 of the Prevention of Bribery Ordinance. Anyone who reads the law can see that Mr. Hobbins was correct, and it means that thousands of people who’ve been selling ILAS have been breaking the law and could face fines and prison time.
Unfortunately, the judge handling the Hobbins case, Anselmo Reyes, lacked the testicles to speak the truth and stand up for justice. He could have single-handedly ended a $17 billion HKD dollar scam and set a precedent for ILAS victims to receive redress. But since that would have pissed off too many rich scumbags and risked political blowback to himself, Reyes instead ignored facts and spewed bullshit excuses so that he could save his own skin while hanging Mr. Hobbins and the rest of the Hong Kong public out to dry.
Hobbins Was Right, Reyes Was Wrong
According to Reyes’ contrived logic, the commissions paid to Mr. Hobbins’ adviser were not bribes because they were not in excess of the inflated commission rates paid by insurers in the rest of the self-regulated (i.e., cartel) ILAS industry. Conspicuously, Reyes neglected to admit that ILAS is a type of investment product (a fund platform) that competes with a wide range of non-ILAS investment products for investor’s money. This means the legality of an ILAS commission can only be fairly evaluated relative to commissions paid in the broader market. Since Reyes only compared ILAS commissions with other ILAS commissions, he could pretend like the commissions paid to Mr Hobbins’ adviser were not abnormally high. In fact, all ILAS commissions are abnormally high. Some are so obscene that insurers have used fraud (a criminal offense punishable by 14 years imprisonment) to conceal them. I will write about this fraud more thoroughly in my next blog post.
ILAS vs Its Competitors
Since Reyes neglected to compare ILAS with its direct competitors, I am going to do it. I hope the following analysis serves as a useful resource for anyone contemplating a lawsuit against the swindlers who create and sell the garbage known as ILAS.
Because ILAS is a fund platform, the most appropriate non-ILAS investment product to compare it with is a competing fund platform. iFAST Central is one that offers access to far more funds than many ILAS products at a fraction of the cost. Compared to ILAS, it is a fantastic bargain. In the vast majority of cases, there is absolutely no justification for an adviser to recommend ILAS over something like iFAST—except that upfront ILAS commissions can be hundreds of times higher. If these supersized commissions induce advisers to sell ILAS to clients when other products (such as iFAST Central, voluntary MPF accounts, iFAST’s Fundsupermart, individual mutual funds, or ETFs) are clearly more suitable, then it’s a clear-cut case of bribery.
Irrelevant Differences Between ILAS and iFAST
Because regular premium ILAS policies, also known as monthly savings plans, are the most criminal types of policies, I am going to compare them with monthly savings plans sold through iFAST. Before I do that, so that no one says my comparison isn’t fair, I will note that there are two main features of ILAS (besides its insane costs) that can potentially distinguish it from competing fund platforms. These features result from the fake shell of insurance wrapping the underlying funds and are called “tax wrapping” and “regulatory wrapping”. Both of these things are ethically and legally dubious. They are potentially useful only to expats and rich people and are useless to the vast majority of Hong Kong citizens to whom ILAS is sold. Tax wrapping—ILAS can help expats avoid taxes, but in most cases it’s self-defeating since ILAS fees are so high that they devour all the tax savings and more. Regulatory wrapping—Certain types of ILAS products called portfolio bonds, which are sold primarily to rich expats, can be used to circumvent a number of SFC regulations and provide access to unauthorized funds. A lot of expats have gotten burned because unethical advisers used the regulatory loophole to screw them. One way advisers do this is by “double dipping”, which is industry slang for collecting two layers of high commissions: one from selling the portfolio bond, and another from selling a ripoff fund to be wrapped within it.
Since these two ILAS features are useless to most Hong Kong investors, the only difference between ILAS and iFAST that matters to them is cost. So let’s compare those costs.
iFAST Central Commissions
When selling through iFAST, advisers have the discretion to determine the amount of commission they receive. It can be anywhere from 0 to 5%. According to one of my contacts at iFAST, the average commission advisers charge for selling a monthly savings plan is 2% of the money invested at the time it is invested. This means that, on average, when an adviser sells a $1,000 per month plan, he and his company will receive a $20 commission (2% of the first $1,000 invested). They will receive additional $20 commissions each month thereafter, as long as the client doesn’t cancel the plan. Because a client pays no penalty for canceling, the adviser must keep his client satisfied or face losing future income from that client.
Selling ILAS is fundamentally different. As reported by SCMP, an adviser and his company will typically receive an immediate commission of 4.2% of all the money a client is expected to invest in the future. If an adviser sells a 25-year plan, he and his company will receive 25 years of commissions instantly. For a $1,000 per month plan, this is $12,600 (4.2% x $1,000 per month x 12 months per year x 25 years). In other words, at the point of sale, the ILAS commission is 12.6 times more money than the client has even paid into the policy. It is a 1,260% upfront commission, which is 630 times larger than the average 2% upfront commission received through iFAST. An adviser would have to service his client for 52 and a half years to earn the same amount of commission through iFAST that he earns instantly by selling ILAS.
If an adviser quits his job shortly after selling an ILAS policy, he gets to keep his commission even though he will not provide the decades of service he was paid for in advance. (This is convenient for swindlers who plan to defraud as many investors as they can, and then abruptly leave the industry, if not the country, after a few years.)
When a client later discovers that he has been ripped off and angrily cancels the ILAS policy, the adviser gets to keep his commission while the client loses nearly everything that was invested during the first year or two, since much of that money was secretly used to pay for the adviser’s commission. Insurers deceptively call this an “exit charge” so that policyholders don’t understand what has really happened to them.
The only way an adviser will be forced to give back some of his commission (to the insurance company, not the client) is if the client cancels the policy before the insurer has collected enough payments to cover the cost of the commission. This clawback guarantees that insurers won’t lose money from bribing advisers. Only clients lose.
As I mentioned earlier, iFAST provides its service at a mere fraction of the cost of ILAS, and ILAS is so expensive that advisers must be bribed to sell it. To clarify this point, let’s take a closer look at the charges of a specific ILAS product, Standard Life’s Harvest 101, and then compare it to iFAST Central’s charges. (Harvest 101 was mis-sold to my girlfriend, whose case was reported in SCMP).
Platform Fees: Harvest 101 vs iFAST Central
Harvest 101 provides access to 290 funds with “free” fund switching. It has three main levels of fees. For the sake of simplicity, lets ignore the annual 6.0% administration charge on the initial account (since its primary purpose is to secretly recoup the commission paid to the adviser), and let’s also ignore the annual $720 policy fee. Let’s only focus on the annual 1.5% accumulation account charge.
Now let’s look at iFAST Central, which provides access to 471 funds with free fund switching. iFAST only charges a single platform fee of just 0.1% to 0.3%, depending on the amount of money invested.
This is 5 to 15 times cheaper than Harvest 101‘s 1.5% accumulation account charge.
But in practice, Harvest 101 will ultimately be far more than 15 times more expensive than iFAST, not because of the other two fees I ignored, but because more than 99% of 25-year ILAS policies are terminated early (and 93% of ILAS policies in general), which results in a so-called “exit charge“, meaning that investors will not be refunded the secret excessive commissions that were paid to their advisers.
iFAST doesn’t have a so-called “exit charge” because iFAST doesn’t pay decades of commissions in advance. iFAST commissions are purposely designed to be pay-as-you-go so that advisers have an incentive to provide long-term quality service, not to take their clients’ money and run.
Advisory Fees: Harvest 101 vs. iFAST Central
For purposes of comparison, we can largely ignore advisory fees, since these are fees ultimately charged and received by advisers, not Standard Life or iFAST. But I will mention them anyway. Advisory fees through iFAST range from 0 to 2.25% annually, and, according to my contact at iFAST, the average is 0.97%. The Harvest 101 brochure does not state the average advisory fee, but it does say they range from 0 to 2% per year.
It should now be clear that Harvest 101 is a ripoff in comparison to iFAST, since it offers 181 fewer funds and is multiple times more expensive. It’s no surprise that Standard Life bribes advisers to sell it using upfront commissions that can exceed 1,000% of clients’ initial investments.
The Real Reason Long-Term ILAS Contracts Exist
Most ILAS products have contract lengths that range from a minimum of 5 years all the way up to 30 years. Harvest 101 ranges from 5 to 25 years. My girlfriend and several other friends were sold 25-year contracts. Superficially, the longer contracts seem to exist for the convenience of clients with longer-term investment horizons (i.e., younger people), but I believe this is a deliberate misrepresentation meant to disguise their real purpose of juicing up commissions at the expense of clients, providing advisers with a motive to flog the hell out of ILAS.
Remember that ILAS commissions are 4.2% of all the money a client is supposed to pay in the future. This means a 30-year policy pays advisers a commission exactly 6 times higher than a 5-year policy, while simultaneously increasing the cost of an “exit charge” by a corresponding amount. It also makes the likelihood of early exit a statistical near-certainty. There is absolutely no good reason for clients to sign longer-term policies, which means advisers are accepting bribes and breaching their fiduciary duty when they sell them. I believe contract lengths are a minimum of 5 years because it takes at least 5 years worth of upfront commissions to successfully bribe advisers to sell a regular premium ILAS policy. Anything less and most advisers wouldn’t be be tempted to take the reputational risk of abusing their clients. Even if a regular premium ILAS policy were suitable for a client, an adviser would still have no justification for recommending anything other than a contract of minimum length, since this contract would carry lower risk and could be renewed after it matured.
The Real Purpose of “Bonus Allocation”
Many ILAS policies come packaged with “bonus allocation” intended to deceive inexperienced investors into believing they are getting “free” fund units for buying the policy. If they sign longer contracts, they receive a higher percent of these “free” fund units. As I will argue in my next blog post, these fund units are fundamentally fraudulent and serve no purpose except to make it easier for advisers to mislead clients into believing that longer policies offer better value, (while also temporarily hiding the damage caused by front-loaded fees, so that investors don’t notice it, shit their pants, and cancel the policy). This makes it easier for advisers to sell longer policies that pay higher commissions, which provides additional motivation to flog ILAS.
Essentially, longer-term contracts are not just a convoluted means of offering larger bribes, they are also a means for advisers to indirectly steal from investors—without investors realizing it. Bogus “bonus allocation” facilitates this process.
Lawsuits in the Pipeline
Because Hong Kong’s legislature is firmly in the grips of self-interested corporate bastards, class action lawsuits still do not exist in Hong Kong. Nevertheless, I am planning to help organize the nearest equivalent of one on behalf of ILAS victims, in hopes of receiving a fairer trial and more justice than Mr. Hobbins. I will write more about this soon.
While insurance companies have been using fraud and bribery to rip off investors, in the process, they have also been stealing potential clients from competitors like iFAST. Consequently, I encourage iFAST to consider taking legal action of its own. If iFAST decides to do so, I hope they seek compensation in a way that will benefit exploited investors as well. This would be an opportunity for iFAST to earn the good will of the public, build an unparalleled reputation, garner positive media attention, and potentially help catalyze much-needed regulatory reforms. It’s a potential win-win opportunity, both for iFAST and the general public.