Guide to buying an offshore investment contract

Transcription

1 Guide to buying an offshore investment contract What you should know before you buy Offshore investment contracts are only available for sale to nonresident aliens of the United States and are not subject to U.S. taxation as the products are issued and custodied in a foreign jurisdiction. Offshore investment contracts are designed generally for long-term investments and should not be considered a short-term investment option. This guide will help you better understand the features, risks and costs associated with offshore investment contracts, as well as how your Financial Advisor and Wells Fargo Advisors are compensated when you invest in an offshore investment contract. What is an offshore investment contract? An offshore investment contract is a product offered by a financial institution, usually an insurance or asset management company, domiciled in a tax-neutral jurisdiction, such as Bermuda. The issuing company creates a group trust or preferred share offering with a Bermuda-based bank. This bank acts as trustee on behalf of the investors of the offshore investment contract. Within this trust, the issuing company offers a wide variety of investment choices including money market funds, equity funds, bond funds, asset allocation models and guaranteed term options (GTOs) for a predetermined fixed period of time. In addition to offering investment choices, offshore investment contracts also may offer optional living or death benefits for an additional cost. The Bermuda Insurance Act of 1978, as amended, governs all the offshore investment contracts offered at Wells Fargo Advisors. In particular, these products fall under section 57(a) of the Insurance Act. In some cases, issuing companies have chosen to petition the Bermuda parliament for a designation known as a separate account act. This stipulates that the products being offered by the issuing company are eventlinked financial instruments and are considered investment contracts as opposed to insurance contracts. Wells Fargo Advisors provides access to a limited product suite of offshore investment contracts. Before you buy any investment, it is important to review your financial situation, investment objectives, risk tolerance, time horizon, diversification needs and need for liquidity. Wells Fargo Advisors wants to make sure that if you are considering purchasing an offshore investment contract, you have also considered other investment options available to you, including offshore mutual funds and life insurance. While you will be able to have access to your money in an offshore investment contract by surrendering your contract or making a withdrawal, an offshore investment contract generally contains a surrender penalty, assessed by the issuing company, for premature surrenders or withdrawals greater than the permissible amount. Before making any investment decision, you should read the offering documents carefully. How can this guide educate me, and how can I educate myself? This guide is not meant to replace any applicable disclosures, underlying investment prospectuses, statements of additional information, or other materials prepared by the issuing company. Please read such documents carefully before purchasing an offshore investment contract. The documents will describe the investment contract s features and should be kept with your important documents. 1 of 11

2 As always, please contact your Financial Advisor if you have questions about your investments. Types of offshore investment contracts Offshore investment contracts can be divided into three categories: fixed, variable and equity-indexed. It is important to note that Wells Fargo Advisors may not offer all product types. Please discuss availability of each product type with your Financial Advisor. Some offshore investment contracts are offered as a combination of fixed and variable. A variable offshore investment contract fluctuates depending on its investments performances. A fixed offshore investment contract is credited with a fixed or set interest rate, which is guaranteed by the issuing company. Throughout this guide, the word guarantee refers to guarantees that are backed by the claims-paying ability of the issuing company. In addition, aside from the guarantees, funds invested in offshore investment contracts are considered separate and distinct from the liabilities of the issuing company, thus providing a degree of bankruptcy protection from the creditors of the issuing company. The following is a more detailed look at the various types of offshore investment contracts available today. Fixed offshore investment contracts A fixed offshore investment contract has a guaranteed fixed interest rate for a set period of time. Depending on the terms of the contract, the issuing company may adjust the rate periodically. When you buy a fixed offshore investment contract, your money is placed in the general account of the issuing company. A specified rate of return is guaranteed by the issuing company for a specified period of time. If, for some reason, the issuing company is unable to pay the claims, payments could be forfeited. How the issuing company sets its rates depends on the contract s terms. Some offshore investment contracts offer multiple guaranteed interest periods with differing guaranteed interest rates. At the expiration of a period, you may choose to continue the contract for a new period at a new guaranteed rate, and so on. Depending on the contract, other options may be available, such as making a withdrawal, surrendering the contract without a surrender charge or arranging to receive periodic payments. If you make a withdrawal or surrender before the expiration of the guaranteed interest period, this may decrease the amount of interest credited to you, which could result in a negative return. Sometimes an issuing company guarantees the initial interest rate for a period of time typically one year but then resets the interest rate periodically, at its own discretion. In addition, if you make a withdrawal or surrender during the surrender charge period, a surrender charge may be assessed (see discussion of fees and charges below). Since fixed offshore investment contracts offer a guaranteed minimum rate of interest, they generally are typically less volatile than variable offshore investment contracts. The rate, once set for the period, is guaranteed by the issuing company and is not affected by market fluctuations. Please read the prospectus and/or offering material and consult with your Financial Advisor on the interest rates and interest-rate guarantee terms before purchasing a fixed offshore investment contract. 2 of 11

3 Variable offshore investment contracts A variable offshore investment contract generally offers a diverse selection of offshore investment options, usually referred to as subaccounts. These subaccounts have varying investment objectives and risk levels. The return on a variable offshore investment contract will depend on your investment allocation and the performances of the subaccounts you choose. You may experience a negative return in a variable offshore investment contract. If you make a withdrawal prior to expiration of the contingent deferred sales charge (CDSC), a surrender penalty may be assessed. Transfers among the various subaccounts are not subject to a CDSC. This is an important feature because it permits you to change your investment strategy (from moderate risk to conservative risk, for example) or change from underperforming subaccounts to other subaccounts without surrendering the contract. Often a variable offshore investment contract also includes a fixed account, or guaranteed term option (GTO), which offers a guaranteed fixed interest rate for a set period of time. This offers you the ability to allocate your investment not only to one or more variable investment options, but to the fixed account as well. Equity-index offshore investment contracts An equity-index offshore investment contract is designed for those who wish to access the potential benefits of a variable interest rate based, in part, on gains in an equity index. Many offshore investment contracts offer a guaranteed minimum interest rate (a floor) to protect against a downturn in the index. An equity-index offshore investment contract typically provides an interest rate that is related to the positive return, if any, in an index such as the S&P 500, while guaranteeing that you will receive at least a minimum fixed return on your purchase payment, less any surrender penalties in the case of a premature surrender. In addition, the potential upside return of the index may be capped, or other limitations may apply. Please refer to the prospectus or offering documents for additional information. Equity-index offshore investment contracts generally offer a holding period of five years. Liquidating or surrendering the contract prior to the end of the holding period may reduce your return, may void any guarantees, and may result in a loss of the contract s value. In addition, if you make a withdrawal or surrender during the surrender charge period (see below), a surrender charge may be assessed. Please refer to the prospectus or offering documents for specific information regarding surrender charges. Offshore investment contract fees and charges There are several types of fees and charges related to an offshore investment contract. Be sure you understand all of these expenses before you invest. They will reduce the value of your account and the return on your investment. If you withdraw money from an offshore investment contract or surrender the contract within the surrender charge period typically three to five years the insurance company may assess a surrender charge. Usually, the surrender charge is a percentage of the purchase payment withdrawn and declines gradually over the surrender charge period. For example, a 7% charge might apply in the first year after investing, 6% in the second year, 5% in the third year, and so on, until the surrender charge no longer applies. New surrender charge periods usually start with each new purchase payment. 3 of 11

4 Many contracts will allow you to withdraw part of your account value each year generally your annual interest earned, cumulative earnings, or up to 10% or 15% of your purchase payment without paying a surrender charge. Your Financial Advisor can discuss any surrender charges associated with the contract you are considering. When choosing an offshore investment contract, you should consider all charges and fees not just surrender charges. Fixed offshore investment contract fees and charges When you buy a fixed offshore investment contract, your money is placed in the general account of the issuing company. When the issuing company sets the interest rate, it usually considers not only the prevailing market rates, but also the costs of issuing and maintaining the contract. In addition to the surrender charges discussed above, some offshore investment contracts assess annual fees, such as an account maintenance fee. Your Financial Advisor is paid a commission for selling the fixed offshore investment contract. The issuing company pays this commission out of its assets. Variable offshore investment contract fees and charges In addition to the surrender charges mentioned above, variable offshore investment contracts have other expenses you should be aware of. These fees and charges will reduce the value of your account and the return on your investment. They can include: Mortality and expense (M&E) risk charge. This charge is equal to a certain percentage of your account s value, typically 1.25% to 1.90% per year. The M&E risk charge can be used by the issuing company to offset the costs such as your Financial Advisor s commission of selling the variable offshore investment contract. It also compensates the issuing company for some of the guarantees that it assumes under the contract. Administrative fees. The insurer may deduct charges to cover recordkeeping and other administrative expenses. This may be charged as a flat account maintenance fee (perhaps $25 or $30 per year) and/or as a percentage of your account s value (typically about 0.15% per year). Some issuing companies waive the flat account maintenance fee on larger account values. Not all offshore investment contracts charge these fees. Please ask your Financial Advisor for details on the specific product you might be considering. Subaccount expenses. You will also pay fees and expenses imposed by the underlying investment options in a variable offshore investment contract. Fees and expenses related to subaccounts include annual operating expenses such as management fees, 12b-1 (distribution) fees, cost of shareholder mailings, and other expenses. These expenses can range from 0% annually for money-market subaccounts to as much as 2% or more annually for certain equity subaccounts. For a detailed explanation of these expenses, see the prospectus for the underlying funds. Fees and charges for other features. Certain features offered by some variable offshore investment contracts such as a stepped-up death benefit, a bonus credit feature, a capital guarantee or a principal protection rider often carry additional fees and charges. Some of the features and options will be discussed below. Often, once you have elected a particular benefit, you cannot later have that benefit removed. Be sure to discuss the long-term costs and consequences with your Financial Advisor. 4 of 11

5 Other charges, such as fees for transferring part of your account from one investment option to another, may also apply. You can find a description of all charges in the prospectus. Equity-index offshore investment contract fees and charges Surrender charges and annual charges may apply to an equity-index offshore investment contract. For complete information on interest rates and on the fees and charges associated with your contract, please consult your Financial Advisor. Your Financial Advisor is paid a commission for selling an equity-index offshore investment contract. The issuing company pays this commission out of its assets. See the discussion of fixed offshore investment contract fees and charges above. Types of variable offshore investment contract structures Issuing companies offer many types of structures to meet various investor needs. The structures vary in many ways. For instance, issuing companies can offer variable offshore investment contracts with no surrender charge periods (often called C-share offshore investment contracts), and surrender charge periods of six to seven years (B-share offshore contracts). Bonus credit offshore investment contracts offer a bonus credit of 2% to 6%, based on the amount invested, and can have even longer surrender charge periods of seven to 10 years. This is discussed more fully below. B-share offshore investment contracts do not have an initial sales charge, but they do have a contingent deferred sales charge, also known as a surrender charge. You will pay this sales charge when you partially or fully surrender the contract. The product prospectus will specify the terms of the surrender schedule. A typical surrender schedule averages six to seven years, with the surrender charge ranging from 5% to 7% and decreasing by 1% each year the contract is in force, until it reaches zero. Most B-share offshore investment contracts impose the surrender charge only during the period following the purchase of the contract, but some will begin a new surrender charge period with each subsequent payment. Once the surrender charge period ends, the contract is out of surrender and no further surrender charges will apply to withdrawals. C-share offshore investment contracts provide more liquidity for investors by allowing cash surrenders without the front-end or back-end surrender charges associated with other variable offshore investment contracts. Typically C-share contracts have significantly higher M&E charges. Premium enhanced or bonus offshore investment contracts offer a premium enhancement or purchase payment credit that provides the purchaser with an upfront return on the principal. The amount of the credit will vary by contract. In all cases, purchase payment credits are treated as earnings for distribution purposes and may be subject to income tax. Premium enhanced or bonus offshore investment contracts typically have a surrender schedule that averages seven to 10 years, with the surrender charge ranging from 7% to 10% and decreasing by 1% for every year the contract is in force, until it reaches zero. Typically premium enhanced contracts will have significantly higher M & E charges, and they are subject to investment risk when invested in the variable subaccounts. 5 of 11

6 These offshore investment contract structures vary in features, the fees and expenses charged, and the compensation paid to your Financial Advisor. Please ask your Financial Advisor to explain the structures available to make sure that any offshore investments you purchase match your investment time horizon and financial goals. Variable offshore investment contract features Variable offshore investment contracts offer many features you may want to consider. They may be included as part of the contract, or they may be optional features or riders that you elect at the time of purchase. Each optional feature typically carries a charge. Since you often will not be able to change your initial selection later, you should carefully consider optional features before making a selection. Optional features that can be added to contracts include guaranteed minimum death benefits, bonus credits and living benefit options. These features do not guarantee against day-to-day market fluctuations and may be affected by subsequent additions to or withdrawals from your investment. Guaranteed minimum death benefit (GMDB) Offshore investment contracts may provide for a death benefit if the owner and/or the trust participant dies while the contract is still in effect. The payout structure of the death benefit varies by contract. The GMDB is generally equal to the greater of (a) the market value of the contract on a predetermined date or (b) purchase payments less prior withdrawals. Many variable offshore investment contracts allow you, for an additional charge, to step up or ratchet the death benefit up to the value on a specified date (annually or every five years). In addition, some contracts will raise the GMDB floor at a specified rate (for instance, 5% annually) for an additional charge. Bonus credit feature Some issuing companies offer variable offshore investment contracts with a bonus credit feature. These contracts promise to add a bonus credit to your value based on a specified percentage (typically from 2% to 6%) of the initial purchase payment. Example: You purchase a variable offshore investment contract that offers a bonus credit of 3% on the initial purchase payment. You make a purchase payment of $20,000. The issuing company adds a bonus credit of $600 to your account, raising the total initial amount of the investment to $20,600. Issuing companies frequently offset the cost for bonus credits by charging higher surrender or M&E charges or setting longer surrender charge periods, in some cases for the life of the contract. The resulting charges may equal or exceed the amount of the bonus credit. You should carefully consider the net benefit that the bonus feature can offer you. In some products, the bonus credit does not vest until after a period of time or in increasing percentages over a period of time. In other products, the bonus credit is credited immediately but may be recaptured if the contract is surrendered or a withdrawal is made during a specified period of time. 6 of 11

7 Living Benefit Features Offshore investments contracts may also provide a living benefit that provides a guarantee for an additional cost. These benefits may impose investment restrictions and limit the number of investment options available. These features typically come in two forms, a guaranteed minimum withdrawal benefit (GMWB) and a guaranteed minimum accumulation benefit (GMAB). A GMWB guarantees that a certain percentage of the contract value or benefit base can be withdrawn each year. The withdrawal amount may guarantee the return of your initial investment through systematic withdrawals over time and/or for your life. The amount of withdrawal that can be taken each year is typically between 4% and 7%. This feature often includes a step-up provision if withdrawals are deferred that are based on an annual interest rate and/or the contract value at specified periods (i.e. annually). Once withdrawals begin, the step-up provisions may change. This feature does not require you to make withdrawals from your contract, and the withdrawals may be started and stopped at any time. It is important to note that a withdrawal exceeding the guaranteed annual amount may have a detrimental effect on the benefit base. A GMAB guarantees that after a specified period of time you will receive a minimum contract value. This minimum amount may be the amount of the initial premium or the initial premium with a growth or step-up component. This growth component may be based on the performance of the underlying investments or on a set percentage of the initial premium. The specified time period for these benefits ranges from five to 10 years. At the end of the specified period, if your contract value is less than a guaranteed amount, the insurance carrier will add the difference into your contract. Offshore investment contract tax issues We strongly encourage you to discuss with your personal tax attorney or accountant the tax implications of buying an offshore investment contract based on your country of residence, or of citizenship. Wells Fargo Advisors is not a legal or tax advisor. You should consult with your tax advisor prior to purchasing an offshore investment contract. Offshore investment contracts are available for sale only to nonresident aliens of the United States and are not subject to U.S. taxation since the products are issued and custodied in a foreign jurisdiction. Historically and currently, Bermuda (a typical country of domicile for these products) does not impose an income tax, corporation tax, profit tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax on the separate account holders (clients) of these products. This information reflects the current law, which is subject to prospective and retroactive change. It is not intended as tax advice, does not consider your particular circumstances, and does not consider tax consequences other than those arising under Bermuda law. Please consult a tax advisor and consider all tax consequences before you purchase an offshore investment contract. Issuing company ratings and what they mean The issuing company guarantees many features of an offshore investment contract, including rates of return for fixed accounts and the features discussed above, like the GMDB and living benefit. For that reason, the financial strength of the issuing company is very important. 7 of 11

8 Several independent, internationally recognized rating agencies regularly review the financial records of issuing companies to assess their strength and claims-paying ability. The stronger and more secure the issuing company, the more likely it is that it will be able to pay the benefits offered. However, even a strong rating does not ensure that the issuing company will be able to meet all of its obligations. For information about issuing company ratings, ask your Financial Advisor to provide the ratings, or contact the following rating agencies: A.M. Best Company (ambest.com), Fitch (fitchratings.com), Standard & Poor s Corporation (standardandpoors.com) and Moody s Investor Service (moodys.com). These ratings do not relate to the past performance or potential performance of an offshore investment contract s subaccounts. Wells Fargo uses a careful review process to select the companies that we do business with. We utilize the rating agency reports, third party research, and internal risk management research to approve carriers that we offer, and we monitor financial strength on an ongoing basis. What should I consider before investing in an offshore investment contract? Offshore investment contracts are long-term investments designed to meet long-range goals. They are not suitable for pursuing short-term investment goals, and substantial charges from the issuing company may apply if you withdraw your money early. Variable offshore investment contracts also involve investment risks. Before investing in any offshore investment contract, you should request a disclosure statement, sample contract or any other available material from the issuing company or from your Financial Advisor and read it carefully. The disclosure statement and sample contract contain important information about the contract, including risks, fees, charges, investment options, death benefits, payout options and other important information. You should compare the investment s benefits and costs to other offshore investment contracts and to other types of investments, such as mutual funds and life insurance. Before you decide to purchase an offshore investment contract, consider the following questions: Will you use the offshore investment contract primarily to save for a long-term goal? Are you willing to risk an investment loss if the underlying investment options in a variable offshore investment contract perform poorly? Do you understand the features of the variable offshore investment contract under consideration? If you are considering a fixed offshore investment contract, do you understand how interest will be credited to it? Do you understand all of the fees and expenses? Do you intend to keep your money in the offshore investment contract long enough to avoid paying any surrender charges if you withdraw money? 8 of 11

9 If a variable offshore investment contract offers a bonus credit, will the bonus outweigh any fees and charges that the product may carry? Are there features of the offshore investment contract that you could purchase separately at a lower cost? Have you consulted with a tax advisor in your country of residence and considered all of the tax consequences of purchasing an offshore investment contract, including any effects on your tax status in retirement or on death-benefit payments to your beneficiaries? If you are exchanging one offshore investment contract for another, do the benefits of the exchange outweigh costs such as surrender charges you will have to pay if you withdraw your money before the end of the surrender period? How compensation is paid to Wells Fargo Advisors and your Financial Advisor For helping you choose an offshore investment contract, Wells Fargo Advisors and your Financial Advisor are paid in ways that vary based on the type of offshore investment contract, the issuing company and the amount invested. Within our Wealth Brokerage Services Division (our division that operates in bank financial centers), a Licensed Banker (LB) may refer you to a Financial Advisor because they generally work as a team. In this case, the LB will be compensated through a referral arrangement with the Financial Advisor. Wells Fargo Advisors is paid by the issuing company for selling you an offshore investment contract. Under an agreement with the issuing company, Wells Fargo Advisors is paid based on the amount of the purchase payment. Your Financial Advisor s initial compensation is based on a compensation formula applied to the invested purchase payments. This type of compensation is typically referred to as a commission. Commissions paid to Wells Fargo Advisors usually range from 2% to 6.5% of purchase payments. For example, a $10,000 transaction for an offshore investment contract would pay a commission ranging from $200 to $650. A portion of this commission is credited to your Financial Advisor. Wells Fargo Advisors also receives ongoing payments, known as residuals or trail commissions, on invested assets that are held in a variable offshore investment contract. These ongoing payments are set by the issuing company, and Wells Fargo Advisors pays a portion of the trail commissions to Financial Advisors. Trail commissions paid to Wells Fargo Advisors usually range from 0.25% to 1% per year on invested assets. For example, $10,000 of invested assets in an offshore investment contract would pay a maximum trail commission of $100 annually, assuming no growth on the contract. In general, higher commissions mean lower trails and lower commissions mean higher trails. The compensation formula used to determine the amount Wells Fargo Advisors pays your Financial Advisor is the same for all offshore investment contracts. Some issuing companies pay Wells Fargo Advisors higher compensation for sales of their offshore investment contracts than other companies. Branch managers may also receive monetary incentives based on the revenues and profits of their branches, but they are not based on the sale of any specific product. Feel free to ask your Financial Advisor how he or she will be compensated for an offshore investment contract transaction. 9 of 11

10 Wells Fargo Advisors relationships with insurance companies In addition to the commissions described above, Wells Fargo Advisors may receive marketing support payments from the issuing companies whose offshore investment contracts we sell. These payments are made by the insurance company or an affiliate of the insurance company or by the investment management company that serves as manager of the underlying investment options. These payments may be used to pay for training and educational conferences and meetings for our Financial Advisors, various administrative and recordkeeping costs, educational meetings and seminars for our current and prospective clients, and due-diligence evaluations of the claims-paying abilities of the issuing companies whose offshore investment contracts we sell. Marketing support payments are generally calculated as a percentage of offshore investment contract sales and/or the total assets held in offshore investment contracts sold by Wells Fargo Advisors. These payments are not made directly by you; they are paid by the issuing company, an affiliate of the issuing company, or the investment management company that serves as manager of the underlying investment options for variable offshore investment contracts. The payments based on sales can be as high as 0.25% of your total purchase amount. If, for example, you invested $10,000 in an offshore investment contract through Wells Fargo Advisors, we could be paid up to $25 for marketing support. In addition, for invested assets that continue to be held in your offshore investment contract a year later, we can receive an additional payment of up to 0.10% annually of the dollar value. On a $10,000 holding, that would be an additional $10 per year. None of these payments are passed on to your Financial Advisor as commissions or ongoing payments. However, the payments may be used to fund some of the general benefits provided to your Financial Advisor, such as training and educational conferences. We believe that these financial arrangements do not affect the advice your Financial Advisor offers you. Issuing companies and their affiliates use a variety of sources for funding the commissions and payments described above. The funding sources may include, but are not limited to: the fees and charges assessed by the issuing company via the offshore investment contract revenues from the underlying investment options, if any, received by the issuing company, an affiliate of the issuing company, or the investment management company that serves as manager of the underlying investment options for variable offshore investment contracts investment earnings on amounts allocated to the general account of the issuing company Some of the information on certain of these funding sources and payments for variable offshore investment contracts can be found in the offering documents or disclosure statements of additional information, which are available on request from the issuing company. You can also find additional information about revenues from the underlying investment options in their prospectuses and statements of additional information. 10 of 11

11 Additional resources To learn more about offshore investment contracts, ask your Financial Advisor or visit the following websites: Wells Fargo Advisors wellsfargoadvisors.com (in-bank Financial Centers) wellsfargo.com Financial Industry Regulatory Authority finra.org Securities and Exchange Commission sec.gov Other insurance company relationships Wells Fargo & Company (Wells Fargo), one of the largest financial holding companies in the United States, may provide a wide range of financial services to various insurance companies through their subsidiaries and affiliates, including Wells Fargo Advisors. These other relationships may provide financial and other benefits to Wells Fargo as well as Wells Fargo Advisors. In addition, Wells Fargo and/or its affiliates may have business relationships with some of the insurance companies that could include, among other things, providing underwriting services and other financing activities, advice on mergers and acquisitions, reinsurance, and commercial lending arrangements. Securities and insurance products: Throughout this guide, the word guarantee refers to guarantees backed by the claims-paying ability of the issuing insurance company. If, for some reason, the insurance company is unable to meet the claims, payments could be forfeited. Offshore investment contracts are available through insurance subsidiaries of Wells Fargo Advisors and other underwriters. Occasionally, offshore investment contract marketing companies pay Wells Fargo Advisors for marketing support, account administration or recordkeeping services. The companies that pay marketing support and the formulas by which they compensate us are subject to change going forward. Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company , 2015 Wells Fargo Clearing Services, LLC. All rights reserved. E of v6BDC