A common but poorly understood category of investments has had some harsh scrutiny recently. A wealthy businessman took his financial adviser, the Hong Kong-based Clearwater International, to court over the high commission he paid on on a class of products called investment linked assurance schemes (ILAS).
Jeremy Hobbins, a director of trading firm Li & Fung, was shocked when he found out how much Clearwater had been paid by insurer Royal Skandia on the ILAS products it had sold him. He complained to the court that he paid almost US$1 million in fees over eight years.
According to court documents, Hobbins traded actively through Clearwater in transactions involving tens of millions of US dollars.
Hobbins claimed that, while Clearwater had disclosed it would be earning commission, it failed to specify exactly how much this would be, according to court documents.
The Clearwater case was closely watched by Hong Kong's independent financial advisers, given that their industry depends quite heavily on the sale of ILAS plans to individual investors.
These complex and high-fee instruments are viewed with some ambivalence by the financial advisory community. While the plans can pay advisers a lot of commission income, they are a source of client complaint.
Hobbins was the rare client who actually sued his adviser - in December 2011 - over the scheme. He alleged that by recommending the ILAS plans, Clearwater was not acting in his best interests, but 'acting solely so Clearwater could profit from commission and fees paid by Skandia and other insurers', according to the court documents.