How to avoid being ripped off by a financial salesman
One of the best pieces of advice that we received growing up was that whenever you receive advice from someone, first ask yourself "Does that person have something to gain from giving me that advice?".
Asking ourselves this one question has helped us avoid dozens of mistakes over the years such as taking on too big of a mortgage, buying the wrong house, and many others. Maybe for you as an expatriate you asked yourself this one question when picking the wrong financial advisor of was it a financial salesman?
One of the most financially catastrophic decisions you can make, is not asking yourself this question when it comes to choosing your financial advisor. The reason for this is especially true in Asia, China and the Middle East, where you have some of the highest commissions paid financial salesmen in the world. Making the wrong decision here can literally cost you hundreds of thousands over your lifetime (and no, we are not exaggerating). So it's definitely worth your time to be sceptical and not automatically trusting when deciding which advisor you pick, and whether you buy the investments they recommend. There are only a few great financial advisors, but certainly many more sharks. This is why it goes without saying that you shouldn't invest in whatever these sharks tell you to invest in without first giving it some serious thought and analysis. Whether you live a comfortable retirement or one at the poverty level can easily be impacted by this one decision so choose carefully, and don't base this decision on "convenience".
The sad reality in Asia, China and the Middle East is that many people who call themselves "Financial Advisors" are actually commissioned sales men. "Financial Advisor" sounds like a type of consultant. Someone that is there to advise you and has your best interests at heart (just like if you were to hire a consultant to help you with something in your job). However when someone is paid a commission or bonus when they get you to invest in something, then they now automatically have a financial incentive to recommend investments to you that will make them the most money. This is like going to a car dealership and asking the salesperson whether you should get the deluxe model with the heated seats. We would be willing to bet that if they get a higher commission to sell you the more expensive car, then 99% of them will say "Yes, you should get the more expensive model". We have nothing against people who receive commission but just realise that it is human nature for us to recommend things when we have a financial incentive to do so. Also realise that such a financial incentive is VERY hard for a lot of people to resist, as ultimately who doesn't want to earn more money? There is also the fear or getting fired, or missing out on a promotion since if their job is to get you to buy the investments that are the most profitable for their company, and they instead end up recommending something that is perfect for you but makes the company less money, then now they might be questioned by their boss as to why they didn't push the more profitable product. In other words, why did they made the company less money than they could have? Now granted, there are honest people who are compensated in this way and that will say "no" to more money because they genuinely do have your best interests at heart (some also realise that by giving you the correct advice you are more likely to become a satisfied repeat client). The problem though is that it is hard, if not impossible to know whether the "expert" you just met is one of those people. You are essentially rolling the dice hoping that you got a good one and personally, we are not willing to take that bet. There is simply too much at stake (i.e. You being able to actually retire vs having to work as a security guard when you're in your 60s). This is why we would much rather speak to someone that doesn't have any financial incentive to recommend you one investment over another. If you get one thing out of this blog post, it is to question advice that you get by asking yourself:
"Does the person giving me the advice have something to gain from giving me that advice?"
(i.e. a bonus, commission, promotion at work, etc.)
Apply this to everything in your life, and especially investing and saving for retirement as it can literally profoundly affect the wellbeing of you and your family throughout your life.
So when it comes to financial advice who do we recommend?
Performance Fee Paid Financial Advisors
The answer is performance fee paid financial advisors. The reason that we recommend this group, is because they don't actually sell investments to you. They therefore don't have a financial incentive to recommend you an offshore portfolio bond or savings plan because they get a bonus or commissions from selling it to you. In other words, this is the best chance you have of receiving impartial advice where there is no conflict of interest. So, watch out for all these financial sales companies where you can just walk in and get a "free" financial advisor to "help you". Free sounds a lot better than paying a performance fee for advice. The reality though is that the advice is really just disguised as "free". Think about it, is a person highly educated in personal finance and investing willing to work for free? Are all financial sales companies in Asia, China and the Middle East that offer this "free" service non-profit charities? Of course not. Just as is typical when it comes to marketing, the word "free" is used to lure you in and money is made from you by the business in other ways (such as hidden commissions and fees). Specifically in Asia, China and the Middle East, this often results in expatriates paying some of the highest fees in the world.
Why would you pay such high fees when you have no guarantee that your investment will actually perform well? Do you think it's fair that you pay thousands of dollars in commissions and fees regardless of whether your investment did well or not?
Are the Fees Really That Bad?
Another trick of the industry is that the fees you're paying look very small as a percentage compared to others fees you might have seen for other products. For instance, a 2.50% annual fee seems tiny when you're comparing it to a credit card that charges you 18% interest. However think of it this way: If you have a portfolio of $100,000, that means that you are paying about $2,500 per year in fees! Regardless of how much money you make in your job, $2,500 is nothing to scoff at. That's the cost of an entire vacation for some people. How does this compare to a low cost investment platform with a 0.5% yearly fee? On that same $100,000, you are paying $500 in fees. In other words, you are saving $2,000 a year. What makes all this even worse, is that fees get taken off your investments automatically whether your investments do well or not. Also, they get charged every year which also means that all that money spent on fees is no longer being invested to help grow your portfolio even faster. This is why studies have shown that over your lifetime you can literally have paid hundreds of thousands of dollars in such fees without even knowing about it (since they are being taken off automatically).
What if You Already Have a Decent Size Portfolio with a financial salesman?
Let's say you are a bit older and have a portfolio of $500,000. With a financial salesman charging the 2.5%, you would be paying around $12,500 in fees per year. Ouch! How does that compare to a low cost investment platform? Your cost would be $2,500. That's a savings of $10,000 in just one year. You can do a lot with that kind of money, and imagine if instead of paying that fee you are investing that $10,000. Just imagine how much earlier you would be able to retire if every year you're literally investing that much more because you're not paying that amount in fees.
If you are an expatriate working overseas and the above has resonated with you then please get in touch for an informal and confidential chat: firstname.lastname@example.org If you are already working with a 'financial salesman' then we will happily give you a second opinion to highlight whether or not your current plans are suitable for your needs.