For what is considered a major financial centre, I am having difficulty in finding reasonably priced advice for a small investor. Most companies only appear to want large sums of money, the banks just insult you with their interest rates. Where can one invest $50,000? It is my life savings and I don’t want high risk, just long-term steady growth.

Auntie’s answer: To the reader who asked this question, I know you have been waiting a long time for the answer, but it took a while to find the right person to approach. I also took it upon myself to seek advice on larger investments of up to $500,000 in case other readers might find that information helpful.

I asked this question of Rich Ellison of OneTRADEx, who said that “in the investing world there currently isn’t much difference between $50K and $500K in terms of options”.

Mr Ellison also pointed out, “Finding reasonably priced advice for small investors is generally a problem the world over. The returns that one may expect from a small portfolio would not be sufficient to cover the cost of full discretionary account management by an investment advisor or portfolio manager. For small investors this means there is a slightly more limited range of options to manage their savings and investment.”

Below are the investment options he shared (and I thank him for his very comprehensive answer):

1. Bank deposits — the most liquid assets, however the rate paid on bank deposits is currently at historic lows and for a number of bank accounts in the Cayman Islands there is currently no interest being paid. Bank depositors also take on the credit risk of the bank where they deposit and are unsecured creditors in the event of a bank failure.

2. Annuities — a form of insurance that provide holders a series of payments at some point in the future in return for a lump sum payment or series of payments made to the annuity provider. This can be a good product for providing a monthly or annual stream of income during retirement but it is not suitable for short to medium term saving and investment. Purchasers of annuities should be sure to check the history and rating of the company they are making payments to as there needs to be a high level of confidence that the annuity provider is well capitalised and will be around in 10-20+ years to pay out on the annuity.

3. Bonds — investors loan companies or governments money by buying their debt securities, essentially an IOU to pay back the amount loaned plus an agreed rate of interest. The bonds run out or ‘mature’ on a fixed date in the future when, all being well, you get your money back. For small investors the most accessible type of debt securities are referred to as retail bonds. For these bonds the minimum amount starts at a very low level, sometimes as little as $1,000, with companies using the money raised to grow or to fund their business objectives.

While bonds offer the promise of an annual return there is always a risk that the borrower runs into financial difficulty and is unable to pay the interest on the bond or the full amount borrowed back.  In terms of interest paid on a bond, the rate will increase with the risk associated with the borrower and term or duration of the bond. To put this another way, the interest rate will be higher if the funds are tied up for a longer period of time or when there is a greater chance that the investor might not be paid back in full or on time. For reference, the BofA Merrill Lynch US corporate seven-to-10-year effective yield as of 8 May 2017 was 3.63%, reflecting the yield on US investment grade bonds with a maturity between seven and 10 years out.

4. Mutual funds — are pooled funds from a large number of investors that are used to invest in securities such as stocks and bonds; this allows for professional management at a reasonable cost that could not be achieved by most investors on their own.

5. Direct share investments — many companies will allow investors to purchase shares directly in the company without setting up a brokerage account. Often transaction costs may end up being higher than using a low-cost brokerage account. CUC (5.12% dividend yield) and Consolidated Water (2.58% dividend yield) are examples of Cayman Islands-based companies that allow for direct investment.

6. Self-directed brokerage accounts — expand your investment options beyond a preselected investment lineup that may be presented by a bank or financial planner. It gives participants more flexibility to select individual investments across markets and countries. In general, self-directed accounts offer a broad range of securities such as stocks, bonds, options and futures at a reasonable cost; however, being self-directed investment, advice is not provided.

Investors looking at brokerage accounts should inquire as to the full cost of trading, including any custody fees, minimum account size and fee levels. Other questions to ask are whether the provider is regulated as well as where funds and securities are held and how they are held. Securities may be held in segregated accounts under the client’s name or on an omnibus basis where securities of a number of investors and the brokerage itself are co-mingled inside of one account. Segregated accounts are preferred and safer for the investor should there ever be a problem with the brokerage.

And, as a final point, Mr Ellison said, “The above products are accessible through brokerages, banks, insurance companies and financial advisors. Unfortunately, we are currently in a low-return environment and the expectation is that this will last for an extended period of time. The Vanguard Group, with US$4 trillion in client assets invested through various products, recently forecast that the return on a typical 60% stock and 40% bond portfolio would range from 5.5% to 6.5% into the next decade. This is fully 2-3% lower than the historical return on this type of portfolio.”