What is a death bond? Also known as a life bond, portfolio bond, executive bond, offshore bond – or, if you are a commission-based broker – an 8% commission bond.
Who provides death bonds? The usual suspects (many of whom also provide ghastly long-term savings plans that ruin savers):
| Old Mutual International | RL360 |
| SEB | Lombard |
| Generali | Hansard |
| Friends Provident | Investors Trust |
Reasons to use a death bond:
If you are a broker, and you have a client you hate and never want to see again, a death bond is an excellent product to use. Once your client realises you didn’t disclose the 8% (or sometimes 10%) commission you got paid, and that he is trapped in the useless, expensive bond for ten years, he will resent you forever. You can just pocket your commission and forget about the client because you’ll never see him again. Yes, he will complain about you, but you can just ignore him and eventually he will go away. He’ll find another adviser – who doesn’t drive nearly such a fancy car as you do – and try to find out how to undo some of the damage you have done. But it’s not your problem – you just concentrate on finding your next victim.
More reasons to use a death bond:
If you are an investor, and you want to get rid of your life savings as quickly as possible (perhaps you want to make sure your relatives don’t benefit from your hard work), a death bond is an excellent tool to use. The 8% (or 10%) commission your broker earned (and, remember, there’s a reason why there’s a “broke” in “broker”) will help make your fund go broke. (See!).
The insurance company (or death office) will claw back your broker’s commission over the ten-year period and add on its own profit. So you could be paying 1.5% a year commission to the death office for the next ten years. If you take out some cash and reduce the balance of your death bond, you will still pay 1.5% a year on the original balance – thus hastening the death of your funds. Additionally, if your broker is gambling with your fund by investing in high risk crap like structured notes, “esoteric” assets, or expensive funds, any reductions in portfolio value will further increase the damage done by the death bond charges.
Reasons not to use a death bond
If you need a safe haven for your savings or pension, there are plenty of low-cost platforms that give you easy access to your funds. And you can leave any time you want – with no penalties. Your broker won’t earn his 8% or 10% commission – but he might, instead, agree some reasonable fees in a transparent and honest manner.
Death bonds are, simply, bad for the health of your life savings. They lock you in for an unnecessary period of time; cost you high fees and redemption penalties; give you no protection from high-risk, toxic investments; and bugger up your retirement planning.
If you access your funds for any reason, you will still be charged the same fees as you were paying on the original amount. Pretty soon, 1.5% a year can become 5% a year as your fund decreases. We have quite a few tragic examples of an entire fund getting wiped out due to a combination of the high fees and investment failures.
Death offices such as OMI, SEB, Generali, RL360, Friends Provident etc., facilitate and encourage financial crime. The way death bonds are sold in Spain is illegal, and yet all the leading brokers are still flogging them. And this is not my opinion: the Spanish insurance regulator has ruled that all insurance products must be sold in accordance with the regulations – which, in Spain, are treated as laws (and not as optional dress at a party). So when I say “illegal” I do mean: criminal offence – i.e. handcuffs, prison, the works.
So why would you want your life savings stored in a death bond provided by the likes of OMI – when you know that they have been part of widespread crime during the past ten years?
I had always associated death bonds with viatical settlement, synonymous with failed funds like Shepherds and Managing Partners Capital and EEA.
I find it incredible that upfront commissions are taken with the obligatory charging period that stuffs the investor for up to 10 years. I would agree, there is little incentive to provide advice after the sale if 8 to 10% is paid up front and cannot be clawed back by the insurance provider.
What I find pretty low, is that one of the companies that you mention offers a UK RDR compliant no commission product via its regulated UK company but only for those living in the UK who work with FCA regulated advisers. At the same time, they provide the non-UK investors with a more expensive product just to fund the commission of the salesman via their Isle of Man company.
I cannot comment on the legality of the sale of these products in Spain but I would suggest that anyone that is recommended such a product asks for evidence that the product is regulated for sale in the EU. One of the firms mentioned is based in the Caymans and others are in the Isle of Man. As I understand it, the firm based in Luxembourg is actually only sold by one “IFA” company in the EU as actual IFAs cannot get a contract to offer their products.
Correct on all counts. And now that it is confirmed by the Spanish insurance regulator that the way these products are sold is illegal, there will be prosecutions. If these bonds were sold legally – and the brokers/introducers were fully transparent and upfront about how they work and how much they cost (and what the many downsides are) nobody in their right mind would ever agree to having one. But that is assuming the consumer knows he has a choice – most of the brokers/introducers/salesmen tell their clients there isn’t a choice and that the investor “must” have one. That is part of the fraud.