When you’re living and working abroad, wherever it is in the world, you are likely to be targeted at some point by an Independent Financial Adviser (IFA), who wants to help you make the extra income you are probably getting with your expat post “work harder” for you by recommending a suitable investment vehicle.
For the most part, investing money for the future is a good thing and can be highly recommended for most people, but you need to be sure that the investment is flexible enough for both your short-term and longer-term needs, particularly if you are an expat.
So, if you agree to meet with an IFA, keep this is mind.
What you are about to read below will not apply to all Offshore IFAs. There are some decent advisers out there, but I believe there are plenty that match my observations too!
As a potential investor, you need to be aware of what and who you are dealing with, so here are some important considerations for anyone thinking about investing while living and working overseas.
I make no apologies to any individual or company to whom or to which these points apply. If this post offends you, I don’t care. As they say, if the cap fits . . .
So, here are 5 things that offshore IFAs won’t tell you.
#1 What’s in it for them
They won’t tell you how much they receive in up-front commission.
Expat IFAs (sometimes known as ‘offshore’ IFAs) are almost always financial product salespeople.
That is, they are either selling products of a third-party institution with whom they have terms of business, or they are selling their firm’s proprietary funds and fund platforms. Either way, they get paid on what they sell, which means that your needs will always come after theirs.
It is not a personal criticism of those operating in this way – it is the model of business that still dominates the expat market and investors need to be clear on this. Some may say this is old news, but I think it still warrants mention.
IFAs won’t tell you how much commission they receive, because it is actually quite a scandalous amount.
Typically, this can be the equivalent of more than one year’s worth of investment, if you are sold a 25-year regular savings plan and over 7% of the value of a lump sum investment.
Commissions are ultimately paid by the investor in the form of up-front fees, which come via initial contributions that are ’locked in’ until a maturity date and via high on-going charges. If you want to avoid this, use a fee-only adviser.
#2 How the products really work
They don’t understand the products that they sell.
I am quite open about the fact that I fell into this industry, in that it was not planned and my previous background was not in finance.
When I was first offered a position as a Junior Adviser, I was hesitant to accept due to the fact I had no experience.
I was reassured that training would be provided and since it was my only point of reference in the finance industry at that time, I accepted this as common practice. It turned out that ‘training’ was really sales training, which focussed around delivering the perfect pitch to prospective investors, giving the impression of a highly professional, competent and client-focussed financial planning firm.
The sales training side of the organisation was nothing short of genius, but when it came to finding colleagues that:
a) had good financial planning and investment knowledge;
b) actually gave a shit about whether or not the clients were looked after, let’s say there was a lot left to be desired.
I am a naturally curious person and I hate having to talk about things if I don’t know anything about the subject. Some people are natural blaggers.
Me? Not so much.
So I started learning about financial planning on my own and found myself on a path that I never thought I would be walking down again at my age – studying to get appropriate qualifications that would provide me with at least a basic level of competence.
That way, I could actually sit in front of a prospective client, knowing that I wasn’t just reciting a sales pitch, that there was some substance there and that I could genuinely provide some meaningful advice. The limitation I faced was the products at my disposal.
I also started looking more deeply into what we were allowed to sell.
And it was concerning.
When I had questions about the products, my first port of call was to the more experienced advisers.
But I always got evasive, sales-type responses and it was clear that they either did not fully understand the products themselves, or maybe worse, they did understand them, but did not want to admit the faults with them.
Either way, not good.
Anyway, more on this another time, but suffice to say, I am confident that most of the financial product salespeople you will sit in front of will fall into one of two categories:
Either they do not fully understand the products they are selling and the limitations they have that may affect your financial planning strategy.
Or, they do understand how they work, but choose to overlook the limitations or remain economical with the truth when selling them to you, because they only care about closing the deal, so that they can earn their commission.
I’m not sure which is worse.
There’s nothing wrong with earning a living from commissions in almost any industry.
Nothing at all.
But if, as an Independent Financial Adviser, you claim to offer impartial advice and the only products you can or do recommend are those that pay your salary, then the needs of the client are never going to be above your own.
How would you feel if your doctor prescribed a medicine based on whether or not he gets paid for it, rather than on what is the right medicine for your condition?
Sure, there may be situations when the medicine he gets paid to prescribe is also the right one for you, but if you remove the commission from the equation, there is no conflict of interest and you then see a decision that is more impartial.
And, as far as I’m concerned, it should be no different for Financial Advisers.
#3 Do due what?
They almost never do any sort of due diligence.
Due diligence is an audit of a potential investment to verify all the facts, such as reviewing financial records and anything else that is deemed appropriate before making a decision to invest.
It can apply to any area of investments, but here I want to address ‘alternative’ investments.
There are many alternative investments sold to expats.
Waaaaay too many, in fact.
The reason for this is quite simple: firstly, regulations are generally a lot more lax or even non-existent in many of the countries with large expat populations, so dodgy products escape any form of stringent due diligence by qualified authorities or regulatory bodies.
Secondly, they pay financial product salespeople bloody high commissions, which makes them tempting to place in a client’s portfolio for another payday.
They could be selling you shares in any number of exotic-sounding funds with promises of low risk and high returns.
I’ve encountered all sorts: from rubber plantations and teak oil to South American factoring funds and litigation funding. However, most firms make little effort to do proper due diligence, if the firm even has anyone capable of knowing how to do due diligence in the first place.
And so firms push these products onto their advisers, who are blindly recommending that you put your hard-earned money into something on little more than a wing and a prayer.
Worse still, the risks are often downplayed, or not understood, so the investor accepts the recommendation, thinking they are getting some low-risk diversification to their portfolio.
But in reality, they are there because they pay big, fat commissions to the adviser.
That’s why they are in your portfolio.
End of story.
#4 All the world’s a stage . . .
They won’t tell you that a lot of what they do is all theatre.
Regulated financial planning recognises six steps in the financial planning process, one of which is known as ‘Discovery‘ or ‘Fact Finding’. This step is about gathering the relevant information and goals of the client.
If done correctly, this part of the process should reveal the client’s needs, wants and shortfalls and from that, the adviser should be able to prioritise the requirements and then recommend appropriate solutions.
However, along with the pin-striped, three-piece suits, the Windsor knots and the shiny shoes, this is often just theatre.
What the financial product salesperson is really focusing on is your monthly disposable income or current savings and how much of that he can get you to commit to.
I remember when I was receiving my ‘training’ in my first job as an adviser (or rather, financial product salesman), one of the reasons listed on the crib sheet for why we do a fact find was “to look interested in the prospect’s situation!”
The bottom line is, whilst the true purpose of the fact-finding part of the initial consultation is to establish and prioritise your needs, unfortunately, this important element often gets warped into a sales process, designed purely to funnel the prospect into the primary and preferred offering – a long-term contractual monthly savings plan.
Whilst this kind of plan might work for you, for most people, there are better alternatives these days. So, to avoid falling into this trap, I recommend following these two rules:
Rule #1: do not let a local expat financial adviser talk you into a long-term contractual regular savings plan.
Rule #2: Apply Rule #1.
#5 Ooh! Suit you, Sir!*
The adviser’s fund recommendations will usually suit him, not you.
Product recommendations from commission-based advisers are rarely based on what is best for you. It might be based on what is best for you from the limited selection of commission-paying products they have to offer, but that usually means shoe-horning the product to fit your needs, rather than recommending more suitable and cost-effective options, because the latter offers no way of remuneration for the adviser.
They will probably spin the old “you-get-what-you-pay-for” line, but there is no evidence in the investment world that paying higher fees results in better results.
In fact, it is more usual for the opposite to be true.
So, they sell you a product and get their nice up-front commission.
Then they select your portfolio . . .
Now, if it’s a lump sum type of investment – sometimes called an ‘open architecture’ platform – they can choose from pretty much any type of fund they like.
And they usually do.
As long as those funds charge an up-front fee, which they can take as commission!
The thing is, for almost all funds that charge an entry fee and/or an exit fee, there will be an equivalent fund that charges lower or no entry/exit fees at all.
There are a few specialist funds that may be exceptions, but they are few and far between. For the majority of us, the low-cost, no commission options (e.g. ETFs) get the job done.
The question then is: does the adviser select funds based on your needs or on his?
I am sure you can answer that one yourself!
* I realize that I do make some cultural references in my blog that may not be understood if you’re not from the UK. So, if you’re not British, the “Ooh! Suit you, Sir!” title of this section is a reference to the catchphrase of the “Suit You Tailors” from a well-known comedy sketch show called the Fast Show. You can check it out here, if you’re interested!)
There are actually many more things that Offshore Independent Financial Advisers won’t tell you, but I will leave it at that for now!
Hopefully, this will give you some food for thought if you are considering to meet with an adviser for the first time. Ask the right questions and don’t get suckered by the theatrics and the emotional sell.
If you are already working with an IFA and you suspect you may have missed some of these things, you might want to think about investigating further. You could well be in good hands, but it never hurts to check, just for peace of mind.
If you have any questions, feel free to get in touch.