Despite the regulatory efforts under MiFID II, retail investors – that is, ordinary investors trying to protect their savings from the greed of the banking and financial sector – remain condemned to mediocrity in their investments. The new regulations will essentially serve two purposes: Firstly, to make the work of independent financial advisers even more difficult, stifling their growth and thereby benefiting the sector’s major players – namely the banks; and secondly, to shield these major players from potential legal action by long-suffering investors. The only positive aspect of the regulations will be greater transparency regarding the fees charged to clients; however, knowing the banking sector and the regulator’s endemic collusion, where there’s a law, there’s a loophole.
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The fact is that retail investors – whether dealing with high street banks or even private banks – remain forced to invest their money in investment funds of a lower quality than those available to qualified or institutional investors. This may still come as a surprise to many investors, but the reality is that the universe of fund managers and investment funds is by no means limited to UCITS or AIFMD funds registered in Spain for distribution through financial institutions and platforms. What’s more, the percentage of funds registered with the CNMV – and which are therefore theoretically investable by any retail or private banking investor in Spain – is only approximately 10,000 investment funds, representing 10% of the total of over 100,000 funds existing worldwide. And we say they are «theoretically» investable because, in practice, Spanish financial institutions do not even offer that 10% of funds to their clients; instead, they sell a catalogue of three or four thousand funds at most. Why? Well, obviously because they only sell the funds with which they have commercial agreements in place. Is this going to change with the new regulations and the so-called clean classes? We’ll have to wait and see. But in any case, if part of the banks’ profits comes from management mandates (or other creative means…) rather than from the fees they charge on funds, will only potentially increase the options available to the average Spanish investor up to a maximum of that 10% of funds worldwide that are registered in Spain for distribution. In other words, even in the best-case scenario, investors will still be unable to access approximately 90% of the funds available worldwide.
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The blame does not lie solely with the financial institutions that limit their product range, as the CNMV is also restrictive when it comes to authorising the products that can be marketed, and above all because it imposes tax penalties on those funds that are not marketed by Spanish banks and have previously passed the Spanish regulatory screening process:
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Protectionism + Arbitrariness = Harm to investors.
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And how do qualified or institutional investors gain access to the 100% range of existing funds, whilst deferring capital gains tax in the same way as if they were investing solely in the 10% range of funds registered in Spain? Well, mainly through their own foreign investment vehicles held with international banks. There’s something to suit every taste, but unfortunately not every budget… or almost none. Let’s take a look. For example, there are investors who hold Luxembourg SICAVs or SIFs, whose annual costs are around 100,000 euros, which makes these vehicles unviable unless the investor has at least 8 or 10 million euros. However, there are also investment vehicles such as Luxembourg savings insurance policies, also known as unit-linked policies, whose moderate costs make them perfectly viable options for portfolios as small as 250–300 thousand euros. These are undoubtedly the cheapest vehicles available today that will allow small investors (>€250k) to gain access to the world’s 100% investment funds whilst deferring their tax liability, just as with any fund sold by your local bank. You can read more about them in «The advantages of investing from Luxembourg»
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Unfortunately, however, the difficulties faced by ordinary investors are not entirely resolved by the creation of a Luxembourg savings insurance scheme. Most of the world’s top investment funds are aimed at qualified and institutional clients, and the minimum investment amounts required by these fund managers are prohibitive for small and medium-sized savers. In many cases, the minimum investment amounts to $500,000, $1,000,000 or even more. And if we take into account reasonable portfolio diversification, in practice we may find that we have an investment vehicle accessible to those with modest assets, such as a unit-linked policy, but within which we cannot invest in the world’s best funds because their minimum investment thresholds are beyond our reach. At this point, non-institutional or non-qualified investors holding a unit-linked policy may choose to invest only in funds that offer retail classes – naturally paying higher fees – or to use the increasingly numerous institutional funds of funds which, in exchange for a fee on top of the fee, provide access to a diversified portfolio of funds with prohibitive minimum investment thresholds starting from as little as 125,000 euros. It goes without saying that these institutional funds of funds do not, either, fall within the 10% category of funds accessible to retail investors without their own investment vehicle.
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The million-dollar question is whether it is worth paying that ‘fee on a fee’ charged by institutional funds of funds. And the answer is that, naturally, it will depend on the amount of that additional fee and on the quality of the institutional funds held in the portfolio (As we explained in our article on the COBAS blog: Passive management, active management). As with any fund, institutional funds of funds also include some that are poor, some that are mediocre and some that are outstanding.
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In any case, having a personal investment vehicle such as a Luxembourg-based unit-linked fund, within which we can invest in the vast array of funds available worldwide, whilst transparently deferring taxation, is vital to ensuring that the money of small and medium-sized investors is managed by the best fund managers on the planet, just as they manage the money of the wealthiest and most powerful. Because the list of the world’s top fund managers does not end with Paramés, McLennan, Guzmán, Mobius, Martín, Lanternier, Kirrage, etc. The world is a vast place, and within that 90% of inaccessible funds there is, logically, a very significant proportion of star fund managers who, unfortunately, will never manage the money of Spanish retail and private banking investors.