Last week’s post on finance minister Pierre Moscovici’s newly announced measure of a PEA for SMEs in France prompted some feedback that caught me off guard.
Beyond the customary reactions wavering between praise and consternation (usually tilting toward the latter), I found myself in the unusual position of being solicited for tax planning advice.
“Should I put my money in a SCPI ?” one person wrote in an email. Others asked about different franco-French tax-optimizing investment vehicles like FIPs, GFVs, or SOFICAs.
I prefer not to provide tax advice on these products because frankly I am not qualified to do so. If you’re feeling pressured to place your money into such tax schemes, I recommend you first read this recent piece in Le Particulier. Albeit a hair sensationalist, its buyer-beware anecdotes will at the very least inspire you to ask the right questions of your tax advisor.
What I do feel qualified to do, however, is point out a few basic tenets of common sense and fundamental economics. The most obvious one is this: do your own homework and make your own informed analysis before risking your life’s savings on any unsecured investment, no matter how attractive the tax benefits may be. Moreover, if a tax advisor or other intermediary is steering you toward certain products, make sure you understand the link between your choice and their compensation.
Watch those fees
This brings me to a topic on how Vanguard founder John Bogle disrupted an entire industry: the pernicious effect of fees. Bogle observed back in the 1970s that very few active mutual fund managers consistently beat the market over extended periods of time. And of those selected few star performers, the net performance to the individual investor was often eaten away by fees. Thus spawned a whole new sector of index funds, and later trackers, which simply sought to match market returns while keeping operating costs as low as possible (and thus limiting fees to the investor).
Fees can come in many shapes and sizes: one-time up-front ‘loads’, annual ‘management fees’ or ‘distribution fees’, even one-time ‘redemption fees’ at the back-end. And fees may be paid to all sorts of people: the tax advisor, the distribution network, other ‘experts’, as well as of course the people who actually manage your money.
It is especially important to carefully examine the fee structures of France’s tax optimization schemes because they are not always the most transparent of beasts, as the article in Le Particulier underscores, and their fees can dilute investment performance to the point of off-setting the very tax benefits that made the scheme attractive in the first place.
In a future post I’ll try to pull back the curtain a little more on the wizard of tax schemes by working through a quantitative real-world example..