What most "Financial Advisors" DON'T want you to know
If you are an expat, you are bound to have received at least one cold call from a very friendly "financial advisor", offering you a free financial review or perhaps they can make you some great returns with their "exclusive" investments. Whether you have already used an advisor, or avoid them like the plague, we aim to highlight some points that you should look out for when contemplating whether to use a financial advisor to look after your investments and pensions.
Let's first have a look at what financial advisors should actually do.
The role of a Financial Advisor is to analyse your existing financial circumstances, find out your objectives and goals, then present a financial plan to put you on course to achieving your goals. Part of this financial plan is likely to involve the recommendation of a financial product to facilitate you achieving your goal. Financial advisors should always act in your best interests and recommend products or services that meet your objectives, goals and needs. For example, you meet with a financial advisor, discuss your current circumstances and your future goals and objectives. The advisor then goes away and does his research and recommends a savings product that will help you achieve your future retirement goal. You complete the paperwork for the savings product and commit to paying a certain amount each month until you retire.
Commission paid to Financial Advisors
The advisor will be paid a commission from the company that provides the savings product. However the commission is very rarely disclosed to the customer.
98% of financial advisors are remunerated by commission only. This means that they only make money if you buy a financial product through them. This also means that they only tend to recommend products that pay them commission, not always the one that is most suitable for you. This current structure therefore creates a conflict of interest. How can they provide impartial advice that is in your best interests, if they only make a living by selling you something? They are unlikely to recommend the best products for you if it does not pay them commission, or unlikely to tell you that you don't need any of the products that they sell.
Here is the typical commission paid for the most common financial products sold by advisors:
A regular savings plan
The typical commission paid to the advisor for this type of plan is 4.5% of the total premiums due over the term of the policy. For example, let's say you have committed to paying $1,000 per month into the savings plan over the next 25 years. $1,000 x 12 (months) x 25 (years) = $300,000 total premiums due over the term of the policy. The commission paid for this would be $13,500 (4.5% of £300,000)!
A lump sum savings plan (often held within your QROPS or SIPP)
The typical commission paid on this type of plan is 7% of the premium paid into the policy. For example, let's say you have transferred your pensions worth £150,000 into a SIPP, which is then paid into a lump sum savings policy (such as an offshore investment bond, which is totally unnecessary by the way). £150,000 x 7% = £10,500. The commission paid for this would be £10,500 (advisors can make 5% more commission from the investments within these policies, so that makes up a total commission of 12%!).
This commission is paid as soon as the first premium goes into your policy. Once it is paid, there is generally no obligation or incentive for the advisor to provide any ongoing service or advice, they have made the sale and they generally move on to their next customer. After all, they don't make any money unless they make a sale. Not all advisors will have this mindset however.
Do they hold any (meaningful) Qualifications
Financial Advisors in Europe and the UK have to hold a minimum financial planning qualification. There is currently no minimum qualification level for financial advisors in countries like Thailand, Vietnam, Taiwan, Indonesia etc. That means in practice, anyone can work as an offshore financial advisor without completing any proper training or qualifications.
So, if you do feel like you require advice from a financial advisor, you may want to follow these steps to ensure that you are receiving trustworthy and unbiased financial advice:
Before your first meeting you should discuss your requirements and agree a fee for the advice. You may initially only want to pay a fixed amount for a financial review. If you then subsequently feel you would like further advice, or even ongoing advice, you can agree a fee for this with the adviser. You could either pay them a fixed amount each month, or a percentage of the value of your investments. As a guide, most advisors in Europe and the UK will charge between 0.50% to 1% of your investments each year for ongoing advice and this usually covers all areas of financial planning such as Pensions, Life Insurance, Inheritance Tax Planning etc. If the financial advisor will only be providing ongoing advice on your pension, perhaps you will want to pay less for this. As part of this discussion, you should also agree on the ongoing service you will receive. Will it include monthly, quarterly or annual meetings for example?
Ask about details of the regulatory authority that they are part of and what compensation and dispute resolution schemes are in place. Dealing with a regulated advisor should provide you with protection in the event that something goes wrong and you need to make a complaint. Ask the advisor for proof of their industry qualifications. This should ensure they have the necessary knowledge and experience to be able to provide you with competent financial advice.
Your interests are our only starting point
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