How To Pay For Expat Financial Advice
Paying for expat financial advice can vary greatly as regulation differs around the world. Financial advice comes in two forms, fee-based and commission-based, with the latter being where can opacity exist.
Have you ever made a purchase and been disappointed by the after-sales support? The same can apply to financial services. Commission-based advice can place restrictions on flexibility so if circumstances change, it's possible your investment may not be able to.
Commission-based Advice
The issue with commission-based advice is knowing if products benefit the customer more or the advisor. In most industries, paying for work when it's completed is standard, but commission-based advice can generate huge upfront commissions before any ongoing guidance is given. Sales are not correlated to results either, so you're at the mercy of a product's pedigree and the advisor's integrity. Commission is generated by higher fund charges or packaged products applying exit fees for early closure to recover the commission paid upfront to your advisor.
With many lump-sum products paying upfront commission of 7%-8% and some funds paying up to 5%, it's possible for an advisor to receive in excess of 13%, or $13,000 for an investment of just £100,000. As a result, there is little motivation to manage investments prudently, often leaving customers disappointed.
Fee-based Advice
Using fee-based advisors means you pay-as-you-go for their service and stay in control. If the service is not what was promised, you have the power to make changes.
The introduction of the retail distribution review (RDR) requires UK advisors to provide clarity on charges and abandon commission-based sales. Initial set-up and ongoing fees now apply ranging between 0.5% to 1.5% per annum. In less developed markets however, RDR type legislation is still years away and standards are not guaranteed.
Fee-based strategies are more flexible, client-focused and provide income for advisors correlated to asset value, increasing the likelihood of prudent advice because without it, customers go elsewhere taking the income they provide with them. Higher quality products produce better outcomes and improve client-advisor relationships as both interests are aligned.
What To Look Out For
Cold calls - If you receive an unsolicited call, ignore it. Many firms still find clients this way by offering a free financial review, but then sell commission-paying products, ultimately at the investor's expense.
Lock-in periods - If investments have fixed terms to complete or incur penalties for closure. avoid them. These products inhibit flexibility, so if the product charges are difficult to understand, don't commit.
Insurance-based products - The offshore market is awash with insurance-wrapped investments which are infamous for being expensive and inflexible. Low entry levels make them attractive, but high charges and lock-in periods erode the potential of good returns. Policy closure usually exposes their prohibitive nature but by then it's too late to reverse your decision. A fee-based advisor will ensure there are no investment restrictions which is also relevant for locally compliant bonds in Portugal, France and Spain.
Ask how your advisor gets paid - If the answer is 'by the financial institution' then you could be paying undisclosed commissions. Regardless of your experience or knowledge, remember that simplicity rules with investment charges.