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5 simple questions to ask your expat financial adviser

The rules and regulations covering expat financial advice differ significantly around the world and you are not always entitled to the regulatory protection you would be in locations such as the UK, Europe, US or Australia.

With so many options for expat financial advice available, it can be difficult to know where to start. Once you have made your choice, the structure of many expat investments make it difficult to reverse your decision. It can be years before issues arise when you eventually need access to funds, and it's then you discover there are restrictions on liquidity or exit fees.

With commission-based business models still commonplace, closing investments, switching platforms or changing adviser can be fraught with costly complications. Advisers should provide a breakdown of fees before taking you on as a client but there are ways to gloss over the inhibitive nature of some investments.

So it's time to sharpen up and ask relevant questions that a good prospective adviser would welcome, and a bad one not so much. Being confident and having an understanding of some technical aspects of investing will help you avoid making expensive errors and quickly weed out unsuitable expat advisers.

We've created a list of simple questions that should always be asked and a couple that aren't but should be, to help measure the integrity of the firm you are talking to. You can then invest with peace of mind and enjoy building a long-lasting, trusted relationship with your new advisor.

1. Are you commission or performance fee-based?

The difference between the two options is stark. A performance fee-based adviser will only receive income which is directly linked to the performance of your investment. Getting paid for real performance and not by the product provider means that by making the best investment choices for you, your investment potential will be optimised and your adviser's objectives are aligned with yours.

A commission-based model means that your adviser receives payment at the outset and often 'by the institution'. This usually indicates that commission will be derived from charges amassed over a defined period and early exit fees applied if the period is not completed. Lock-in periods are also a red flag.

2. Where are you regulated?

If your adviser has your best interest in mind it should become evident quite quickly. If so, the pedigree of the investment provider and underlying funds they recommend should minimise the need for any regulatory intervention later. However, it's always best to understand your position just in case there are unforeseen complications. Doing your due-diligence first can prevent a lengthy and stressful complaints process that may not produce the result you were hoping for.

3. Can you provide 'aggregated costs'?

The smoke and mirrors of many offshore products make the charges difficult to understand. If your adviser can't explain product and advice fees easily, clearly and quickly, don't invest! There should be a clear distinction between product and advice fees and ultimately, your adviser should provide an investment report why they believe their recommendations represent the best solution for you.

However, if maths is not your strong point, prior to committing to a report you could ask for an actual monetary value of fees in addition to percentages based on the amount you want to invest. Even those with minimal mathematical knowledge should be able to understand product fees and make comparisons if explained correctly. 'Aggregated disclosure' is the total cost of the investment process and how those fees affect your investment, but asking for a simplified version before committing should be simple for your advisor to provide.

4. What are the fund OCF's / TER's?

The ongoing charge figure or total expense ratio is the underlying costs of running a fund. Inexperienced investors often only focus on overall returns, but the effect of the OCF or TER can be significant and they are effectively deducted from your returns.. Whilst low fund costs don't guarantee quality, it does send a clear message of whether your offshore adviser is using funds that are paying hidden commissions, either by taking a portion of the OCF that incur with an exit fee reducing from 5% to 0 over 5 years. Fund OCF's start as low as 0.1% pa so anything above 1.75% - 2% is worth querying.

5. Can you evidence your CPD?

Qualifications are obviously important as you'll want to work with a qualified adviser. In our opinion, demonstrating integrity is equally as important as the qualifications as we often see that exams don't always guarantee you'll be recommended the best options. The potential rewards are sometimes just too big for some advisers to refuse.

It could be many years since your adviser took their last exams which is fine, but they should also be keeping up-to-date with their Continuing Professional Development. This will ensure that knowledge of any recent industry changes is maintained and more importantly, the organisation or network they represent is enforcing high standards. CPD logs should be updated at least annually, so why not ask for recent evidence?

Request a Free Consultation

If you would like to speak to an expat financial adviser with the answers to all of the questions here, contact us: hello@expatwealthatwork.com

Offshore Bonds - Are The Costs Worth it?

Offshore bonds have been marketed overseas for years. Thousands of expats have been attracted by promises of tax-free investing in offshore locations such as the Isle of Man, Jersey, Guernsey, Bermuda, Cayman Islands etc. often with very mixed results.

With prudent expat financial advice, offshore bonds can offer significant advantages, but with cheaper and more flexible expat investment platforms now available, if an adviser recommends an offshore bond you should be asking, why?

Old Mutual International (Quilter), Friends Provident International, RL 360 and Utmost (Generali), Custodian Life and Investors Trust are familiar names among offshore bond providers, which can provide many tax benefits in the right circumstances. However, some providers still structure charges that facilitate the payment of large upfront commissions to advisers which in turn, reduces motivation to manage portfolios prudently, lock you into the investment and erode returns as a result.

Crucially, the fixed charges of offshore bonds can be removed completely, with the exception of the quarterly administration charges equating to around $500 pa. Instead, your adviser can agree a flexible structure giving you penalty-free access to capital, leaving only custody and adviser fees to pay which can be revoked if you are dissatisfied with the service you receive.

Taking Benefits

British expats in particular can benefit from bonds when repatriating. Before returning, you'll be required to 'endorse' your bond with the provider and thereafter, you'll be entitled to an annual 5% tax-deferred income in addition to a lump sum equal to 5% for every year the bond has been open.

The 5% income is taken from the 'initial invested capital' until it is exhausted over 20 years - ie. 5% x 20 years = 100%. Thereafter you'll be deemed to withdrawing gains and taxed at your marginal rate.

Withdrawals greater than 5% of the initial investment will also be taxed.

However, in addition to the benefit of gross roll-up on a bond, with strategic planning it may also be possible to assign segments of your bond to others. This allows you to make use of both yours and others individual tax allowances to reduce your liabilities.

Offshore Bond or Investment Platform?

The UK FCA issued a warning to expat investors regarding the high costs of offshore bonds, and feedback from the enquiries we receive suggests that historically, thousands of offshore bonds have been sold more for the benefit of advisers than clients.

The FCA's warning is aimed at offshore bonds being used for pension transfers which, as pensions are already structured within tax wrappers, are rendered unnecessary and with additional costs that could be avoided.

If you plan to repatriate to the UK and can tolerate limits on access, a bond may be worthwhile as a tax-deferred income is possible with careful planning. If not, with lower custody and trading costs, zero quarterly admin fees, online functionality and ease of administration, platforms can offer a better solution at a lower cost. The likelihood of a regulated expat investment platform allowing purchases of expensive offshore funds is also much lower.

Offshore Bond Commissions

How advisers can be paid to sell bonds is a contentious issue, making it crucial to establish with your adviser how you'll be paying to ensure you get the best results. The following three charging options are typical of offshore bonds, ranging from 5 to 10 years and in addition to administration charges of over $100 per quarter:

• 5 years - 1.9% per annum (total 9.5%) plus quarterly administration charges

• 8 years - 1.25% per annum (total 10%) plus quarterly administration charges

• 10 years - 1% per annum (total 10%) plus quarterly administration charges

The total charges range between 9.5% and 10%. However, the actual cost of bonds can be as low as 0.25% per annum equating to between just 1.25% and 2.5% over the same term. The remaining 7% to 8% is paid upfront to the advisory firm, so for each $100,000 invested, you could be paying up to $8,000 to your advisor on day one.

These high commissions are made possible as investors are obliged to pay the charges of the complete term, regardless of how long they remain invested. Not completing the term means unpaid charges become payable as an exit fee, so closure after 5 years of the 10 year option results in a 5% penalty (5 years x 1%).

Large adviser payments at the start of the contract can have a detrimental effect on investments longer term. Advisers may take less interest in future results, leaving investors unsure if the product was recommended in their best interests at all. In 2012, this method of adviser remuneration was banned in the UK and later in EUROPE, and while some jurisdictions are implementing commission limits, much of the world is still far behind.

Locally Compliant Bonds

While bonds have often been sold for commission, there are of course exceptions and jurisdictions where bonds are more of a necessity. Countries such as France, Italy, Spain and Portugal offer tax breaks for locally compliant products which can provide a tax-deferred income and protect your beneficiaries from taxation on death. It is still vital to clarify how you pay for the bond however, as you could be paying hidden commissions, so always check with your adviser so you can be assured the bond is being used for the right reasons and in your best interests, not theirs.

Request a Free Consultation

To learn more about using offshore bonds effectively, understanding if you actually need one and the other options available to you, contact us today - hello@expatwealthatwork.com - and you'll get the expert advice you need.

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For expatriates, wealth management and estate planning is not only important, but essential. Without a well-thought-out financial plan, it can be all too easy to become overwhelmed by the complexities of managing one's finances in a foreign country. A good wealth manager will help expatriates to understand and navigate the financial landscape, providing guidance on everything from investing to tax planning. estate planning is also important for expatriates, as it can help to ensure that their assets are properly protected in the event of their death or incapacitation. By working with a qualified fiduciary financial advisor, expatriates can take steps to secure their financial future and protect their hard-earned assets.