Investments always come with some risk, but there are certain things within your control that you can do to reduce your chances of walking into a disaster.
In the offshore financial services industry, expatriates are often exposed to broad spectrum of potential pitfalls, ranging from well-intentioned-but-poor advice to blatant mis-selling to outright scams.
Based on what I have experienced in the industry over the past decade, here are 10 things I recommend you do and don’t do when it comes to investing or meeting with a financial adviser as an expat.
DO work with an adviser who has qualifications. Many regions are not regulated and do not require the advisers to have any form of financial planning qualifications, but even if that is the case, a good financial adviser is committed to an on-going financial education and should care about doing as much as possible to achieve and demonstrate competency.
I mean, come on! You’re dealing with someone’s money for Chrissake!
If you’re working with someone that can’t be bothered to study for a couple of exams to demonstrate that they might actually know what they’re talking about, then why are they going to give a damn about your investments, right?
Of course, qualifications do not guarantee you’ll get a competent, morally and ethically sound adviser, but not having them says to me that the adviser is only interested in making money and not does not really care about providing the client with accurate, meaningful and useful advice.
DO work with an adviser who can provide references. There’s an old joke about a prospect and a client that goes something like this . . .
There once was a salesman who lived his whole career taking advantage of anyone and everyone. He made the sale no matter what it took and no matter what he had to promise, be it true or false.
One day he was hit by the proverbial bus and was killed instantly. The next thing he knew, he was being greeted by St Peter at the gates of Heaven.
St. Peter tells him that his record is passable (seems being in sales does not necessarily block your entry to Heaven), but that he can still choose between Heaven and Hell. But before he does, he gets the chance to check out both options. So, first of all, St. Peter ushers him into a lift and sends him down to Hell for the day.
After what seems like forever, the lift doors finally open and the guy finds himself stepping out onto the putting green of a lush, green golf course. In the distance, there’s a country club and standing in front of him are all his old mates, dressed in tuxedos with beautiful women perched on their arms. Cheering his arrival, they run up to him and slap him on his back and they talk about old times.
They play a fantastic round of golf and at night they go to the country club where they enjoy an exquisite steak and lobster dinner with champagne. The Devil, who seems like a top bloke, comes over and offers him a Cuban cigar and pours him the best single malt he’s ever tasted. Then he and all his friends pile into a limo and head on to the most amazing night club he’s ever been to.
He’s having such an incredible time, but before he knows it, it’s time to leave.
Everybody shakes his hand and waves goodbye as he gets into the lift.
Up, up, up he goes and when the doors open again, he’s back in front of the Pearly Gates, being greeted by St Peter.
“Now it’s time to spend a day here in Heaven”, he proclaims.
And he leads him through the gates for a tour.
Heaven seems like an okay place. Everything is nice and clean. You’ve got angels walking around playing harps and singing hymns and stuff and he can lounge around on the clouds to his heart’s content. But overall, the guy feels it’s a bit on the boring side.
And so, when the day ends and St. Peter asks him how he wants to spend eternity, the guy replies, “I never thought I would ever say this and don’t get me wrong – Heaven’s great and everything – but I think I had a better time in Hell.”
So, St. Peter sends him back down to Hell in the lift.
And down he goes. When the doors of the lift open this time, nothing is like it was the day before. He’s in a desolate wasteland covered in rubbish and filth. His friends are dressed in rags, picking up the rubbish and putting it into sacks. Hideous, beast-like women are beating them with golf clubs if they move too slowly.
There are flames and horrible gases pouring out of the ground and a wretch-inducing stench fills the air. There’s screaming and there’s suffering and there’s Billy Ray Cyrus singing “Achy Breaky Heart” on repeat at full blast.
The new guy stumbles over to the Devil and stutters, “I-I-I don’t understand! There must be some mistake. Yesterday there was a golf course and steak dinners and beautiful women and we danced and drank and had a great time. Now there’s . . . there’s . . . this!”
The Devil looks at him and grins. “Yes,” he says, “But yesterday you were a prospect. Today, my man, you’re a client!”
A good salesman can promise the world, but when it comes to your investments, it is the on-going service that really counts. Always ask for references, including contact details and check for recommendations given on the adviser’s LinkedIn page.
Contact a few of them to gauge their experiences as a client. If possible, choose those that have been clients for more than a year or so. It’s not a completely guaranteed method of assuring that you’ll be looked after, but it can definitely be a good indicator of what’s ahead if you choose to work with the adviser.
DON’T accept a recommendation without seeing a breakdown of how much you will actually pay. Some financial products have notoriously complicated charging structures, so make sure you get the breakdown. Not in percentages or fancy illustration charts showing growth over time.
Ask to be told what your bill will be each quarter or year in actual Dollars or Euros or whichever currency you are using.
Immediate red flag if they stall on this.
DO work with a fee-only adviser. Many expats sign up for financial products that pay advisers upfront or on-going commissions.
They may be referred to as finder’s fees or something else, but they are the same thing, which means that their recommendations for you are based on or limited to the products that pay them commissions. And guess who’s footing the bill in the form of higher fees, hidden charges and/or exit penalties?
Yup. That’s right.
Instead, make sure you work with a fee-only advisor who doesn’t get paid via commissions on the funds or products he selects for you. This ensures impartiality and it’s much more likely the adviser is working with your interests at heart.
Always find out how they get paid during the first meeting and put yourself in the driving seat.
DON’T work with companies that offer you their own fund range or insist you use a portfolio made up of funds with particular fund houses – they’ll be making extra here and at whose expense? Yeah, yours!
DON’T ever invest in any esoteric, non-mainstream alternatives without doing your due diligence. These pay advisers big commissions, which generally means the investor gets stung somewhere sooner or later.
There are some genuine ones out there, but most of them are not worth even looking at and invariably get ‘suspended’ and/or closed down, taking your money with them.
From my experience, the bigger the commission paid to the adviser, the dodgier the investment.
DO stay flexible. Most advisers in expat regions will try to get you to commit to long-term contractual savings plans. This is because they get paid based on the amount you are saving AND the duration of the policy.
These benefit the adviser and the product provider only. If a 25-year plan is being justified by the need for discipline or some such bullsh*t, step away from the man in the pin-striped, 3-piece suit.
Investment options are evolving all the time and your personal circumstances are going to change several times over a 25-year period, so go with a flexible option.
And if finding a flexible option means you need to start with a lump sum, but you don’t have it yet, save for year or two in the bank first until you do have it.
DON’T get talked into using structured notes. I have seen portfolios packed full of these and whilst there may be some justification for use in small amounts in the occasional portfolio sometimes, the only people that really stand to gain from these ‘capital-at-risk’ (actually, much higher risk than is usually conveyed by the adviser) are the issuers, who make a big chunk of cash from your investment, the distributors who get paid by the issuers and the advisers who get paid by the distributors for recommending them.
You may not see an actual deduction from the value of your investment, but this will be achieved by exposing you to more risk than may be necessary to achieve the projected gains.
DON’T believe anyone who says they can guarantee high returns. There are no guarantees in the stock market. They can’t control the markets, but you can control where and with whom you choose to invest your money, so make sure that you do it as carefully as you can.
DO stick to the plan. If you’re investing for the long-term, choose a long-term strategy and stick with it, rather than chopping and changing your holdings every 5 minutes. There is no need to buy and sell funds frequently if you have a longer term investment horizon.
If your adviser is doing it, question him. Some firms make changes to justify their management fees and to be “seen to be doing something”. Hardly the mark of good portfolio management.
If it’s you that’s demanding the constant changes, stop reading Bloomberg, Yahoo Finance and Motley Fool. Chasing performance is a sure way to failure. Don’t get side-tracked by short-term financial journalistic sensationalism.
I believe that if you can stick to at least half of these tips, you’ll massively reduce your chances of a bad experience with investments as an expat.
Have you had bad expat investment experiences? Do you have any tips to offer? If so, please feel free to comment below!