ZURICH (Reuters) - Wealthy investors could be missing out on tax savings made through insurance policies known as wrappers because of hidden charges and fees, a Swiss wealth management consultant told Reuters.
Insurance wrappers are instruments into which investors can place stocks, hedge funds or virtually any other bankable assets, allowing them to pay less tax on investment income.
Financially savvy clients who are able to navigate their way through the opaque charging structure usually get good deals, said Martin Straub of Zurich-based consultancy Envisage Wealth Management Services.
But less knowledgeable clients usually end up paying more, and brokers and asset managers need to be more transparent about how they charge for their services to lower the costs to these clients, he said.
“Unfortunately, as soon as you say ‘tax savings’, ‘tax optimization’, or ‘you can save this much tax’, many clients turn deaf and blind,” Straub said in an interview.
When Straub’s team analyzed the cost structure, they found in the worst case a client had no return over 20 years. In the median case clients were losing about two thirds of their returns over the same period. In fact, the true cost appeared to be equal to the value of the projected tax savings.
Lax disclosure requirements for a multitude of charges and fees placed on products by intermediaries means clients are often unaware of exactly how much they are paying for the policies, said Straub.
“They are a very valuable and efficient wealth planning tool. But it is this flexibility that makes them rather prone to abuse.”
Swiss financial regulator FINMA is starting to look at insurance wrappers, potentially putting an end to a cozy arrangement that has proved very lucrative for asset managers and brokers.
“FINMA is clearly signaling more transparency is going to be demanded, both of the insurance company and of the asset manager,” Straub said. “More regulation is on the way.”
Increased transparency could go a long way to fixing the problems by requiring the asset manager to reveal the full range of charges and fees to the policyholder, but it was up to regulators to enforce this, Straub said.
“Most people in the industry are not interested in shedding any light on the cost structure of the setup,” he said. “When you increase transparency and reduce market inefficiency, excess profits accruing to industry participants tend to go down.”
Editing by Erica Billingham