IFA stands for “independent financial adviser”. The first thing you should know about Hong Kong’s largest IFA company is that it is not a legitimate IFA company.
The Definition of “Independent”
In order to be truly “independent”, an adviser must have no conflicts of interest when offering advice. This means one cannot accept commissions, because it creates an incentive to recommend products that pay higher commissions. One must also be licensed to offer advice on all products available on the market, so that one doesn’t have a bias towards recommending the only product that one sells.
In the UK, these preconditions for advertising oneself as “independent” have even been written into law. If one is not truly independent, then one must call one’s self “restricted”. And no one, not even restricted advisers, are allowed to accept commissions.
The Fiduciary Responsibilities of an IFA
As an IFA, one has a legal and moral responsibility to prioritize clients’ interests above one’s own interests. This means recommending products which accomplish clients’ investment objectives at lowest cost and lowest risk. It means giving unbiased advice and eliminating conflicts of interest. Convoy acknowledges this fact in its product application forms:
Convoy Has Abused the Term “IFA”
Despite calling itself an “independent financial advisory” company, Convoy is not “independent”, and it doesn’t sell “financial advice”. It sells investment-linked assurance schemes (ILAS), a pseudo-insurance product which has become synonymous with the word “scam”. For performing this disservice, insurance companies pay Convoy lavishly, via obscene commissions that have historically not been disclosed to clients (aka victims).
Convoy has been doing this for 20 years, and in most years, ILAS commissions accounted for nearly 100% of the company’s revenue:
The History and Usage of ILAS
ILAS originated in the UK. Most ILAS products are basically just fund platforms wrapped in a fake life insurance policy.
According to a British IFA (who wishes to remain anonymous), “the insurance wrapper was a very tax efficient way to buy investments when income and capital gains taxes were high. However, UK tax benefits were gradually removed, making ILAS less and less attractive for most UK residents.”
In other words, ILAS is and was primarily a tax savings product. Owning it is sensible only when the tax savings offset the extra fees. Over time, those tax savings have eroded to the point that ILAS is no longer sensible for most people.
The Majority of Hong Kongers Have No Good Reason to Own ILAS
The main reason for owning an ILAS product is to reduce or defer capital gains and investment income taxes. Because Hong Kongers aren’t required to pay these taxes, they have no good reason to wrap their funds in an insurance policy. It just adds an unnecessary layer of high fees.
Investing in funds directly, such as through ETFs or Fundsupermart, is far cheaper and simpler. A real IFA company would inform clients of this fact.
Convoy Has Historically Sold ILAS Almost Exclusively to Hong Kongers
Even though almost no one in Hong Kong should own an ILAS, Convoy shamelessly pitches it to everyone here. According to its IPO Prospectus, 98.2% of its customers were based in Hong Kong, as of Dec 31, 2009.
This statistic is damning, as it suggests that Convoy has offered bad, self-serving advice to the vast majority of its clients.
ILAS In the UK Today
Unlike in Hong Kong, where it’s rumored that self-regulated insurers and brokers collude to keep fees and commissions artificially inflated, the pricing of ILAS products in the UK is much more reasonable.
My British IFA source says that all investment products in the UK, including ILAS, are now sold at “wholesale” prices.
The high, opaque fees that were once used to secretly recoup commission costs have been eliminated, due to commissions being outlawed.
ILAS in Hong Kong: The Notorious “Savings Scam”
The most exploitative ILAS products in Hong Kong are often referred to as “savings plans”. (I call them “savings scams”.) They lock investors into payments for up to 30 years. The first two years of savings are not saved, but instead used to pay for decades of fees and commissions in advance. This is not disclosed to investors. Instead, it’s purposefully concealed using a deceptive fee structure and a phony account balance. If an investor terminates one of these plans early—as 99% of them do—none of the fees and commissions are refunded. Investors will lose up to 100% of their investment. The products are extremely dangerous, and a group of advisers recently called for them to be banned.
Because these products pay the highest commissions, they are flogged harder than any other ILAS product in Hong Kong.
“Savings Scams” Were Eradicated from the UK Market Decades Ago
My British IFA contact says that the most exploitative ILAS savings plans were eradicated from the UK market around two decades ago. He says the products “withered on the vine” due to tax changes and due to mandatory commission disclosure legislation introduced in 1995. In his opinion, it’s a scandal that these products continue to exist in Hong Kong.
Lucrative for Advisers, Toxic for Investors
Due to excessive fees and commissions, all ILAS products in Hong Kong are bad, but some are a lot worse than others.
The most toxic ILAS products are those with the longest lock-in periods. That’s because a longer lock-in period entails both a higher exit penalty and a much higher risk of suffering that penalty.
Perversely, a longer lock-in period also generates a proportionately higher upfront commission for advisers. If an adviser sells an ILAS with a 5 year lock-in, he will be paid 5 years of commissions in advance. If he sells one with a 25 year lock-in, he will be paid 25 years of advanced commissions.
It is therefore in investors’ best interest to buy ILAS products with the shortest possible lock-in period (and preferably no lock-in). At the same time, it is in advisers’ best interest to sell ILAS products with a maximum lock-in.
This misalignment of incentives is a massive conflict of interests, and, arguably, anytime an adviser recommends a plan with a lock-in that is longer than necessary, it is an act of theft.
Convoy Has Systematically Recommended the Worst ILAS Products
Since Convoy’s executives claim to be running an IFA company, which means they have a legal duty to prioritize clients’ interests above their own, they have no excuse for allowing employees to sell ILAS products with excessive lock-in periods. But they’ve allowed it anyway.
I have met and heard the stories of numerous Convoy victims, and without exception, all of them were sold a savings plan with at least a 20 year lock-in.
An ex-Convoy employee, Shawn Wong, confirms that it is standard practice for Convoy advisers to recommend maximum lock-in periods.
Public data also suggests that this is true.
According to Convoy’s 2010 IPO prospectus, nearly all of the products the company had been selling were issued by Zurich International, Standard Life, Friends Provident, and Generali International—four insurance companies which issue four of the most notorious savings scams: Zurich Vista, Harvest 101, FP Premier, and Generali Vision.
Conspicuously absent from Convoy’s list of top insurers is Royal Skandia, which offers the least dangerous ILAS savings plans on the market. The Executive Wealthbuilder Account, for example, has relatively low minimum contributions ($2,400 HKD), no lock-in period, and the fees are totally transparent. In those rare instances that ILAS is actually suitable for a client, any IFA who doesn’t recommend a product like this one, or at least mention it, is not doing his job.
Convoy Could and Should Be Sued Out of Existence
All evidence suggests that Convoy has screwed nearly every investor it has come in contact with and that it has shamelessly violated all the principles of its alleged profession.
I strongly believe that almost anyone—literally almost anyone—who has ever bought an ILAS product from Convoy could successfully sue them for breach of fiduciary duty. I aim to test this theory very soon.
Convoy’s Executives Must Be Held Accountable
Quincy Wong, Rosetta Fong, and Mark Mak were three of Convoy’s largest shareholders until they dumped more than half of their stock 5 months ago. Why did they do it?
It’s hard not to suspect that they were motivated by a desire to lock in their ill-gotten gains—by transferring losses to public shareholders—before their company’s stock collapses under a pile of lawsuits.
As the architects and main beneficiaries of the evils perpetrated by their company, Convoy’s top executives should not be allowed to escape with millions of dollars as their company goes up in flames. Regulators, law enforcers, and the media should make sure that it doesn’t happen.
[Click here to view Convoy’s current stock price.]