How is your financial adviser taking advantage of you?

(This was originally submitted to and published on Dutch News. After realising I hadn't written an article on the website in 3 months I panicked and decided to plagerise my own work).

When I first came to International Financial, I was shocked to discover that much of what is illegal in UK Advisory was allowed and even encouraged. What didn't shock me was the number of victims of these practices who lost huge sums of money to the profit of unscrupulous advisers.

My ethos and the ethos of Staden FM is to advise clients fairly and honestly.  Although that should be the bare minimum, it's astonishing how low the bar is.  

Let's discuss some of the more despicable practices in the murky world of International Financial Advice. 

Hidden commissions 

When an adviser makes a recommendation to use a product or investment asset the adviser may have an undisclosed side agreement that allows him to receive payment for his 'free and impartial' advice to buy that product. often have relationships with those products to get commissions. Often these are undisclosed to the client, as they can be so high they're insulting. 

For example, in 2016 I saw many pension transfers where advisers would move a client’s pension into a pension that had an additional 1.5% annual cost added to it for 10 years. This was to allow advisers to take 15% of the value as a commission upfront, but as the 15% is taken over ten years as an ‘establishment charge’ levied by the product, it can often go be missed by the client. 

Then another nefarious practice is for an adviser to place the investments into assets that pay them up to 5% upfront commissions, or into trail-paying investments which pay them a portion of ongoing annual fees.  

At this point after a transfer the adviser can often take up to 20% of the pension value. That money comes straight out of the client's pocket.

But it gets worse because in Investment funds that need to pay an adviser to recommend them rarely perform well. Apart from the added costs of paying your adviser, they have less incentive to perform well than funds that compete in the light.

The best investments have a long list of investors willing to give them money, because they're the best investment and their performance entices investment. Funds which are too expensive or have failed to perform don’t have a lot of interest, it’s these funds which are willing to pay advisers to get their client’s funds, and they do so by paying the adviser with the client’s money. So, if advisers are picking high commission choices, they're ruling out most of the picks you actually want.  

The investments you want, and the only ones you'll see from us, compete on performance and low fees. These funds wouldn't dream of paying backhanders to intermediaries as it would cost them performance. The practice of paying undisclosed trails has been banned in the UK for over a decade. It is strange to see it continuing in the EU and elsewhere.

Discretionary fund managers 

A discretionary fund manager is an individual who buys and sells funds on your behalf without needing your approval to buy and sell. In theory there's nothing wrong with a DFM; a good DFM will be able to buy and sell funds in a timelier manner than an adviser who has to go to the client for approval for each trade. The problem is that every DFM I've come across will pay ongoing commission to the adviser, often are part of the advisers’ firm, and tend to be poor at choosing investments.

Recently I was speaking to someone whom I had offered to review their transaction statements for a policy sold to them previously.  What I noticed was that when the DFM was introduced, the adviser received a new annual DFM payment, kept their original fees (very sneaky), and then the DFM sank their performance by investing in funds the DFM earns fees from.

So, the adviser makes more money, the DFM makes more money, but the client loses out again.  twice over.

If approached to add a DFM to your portfolio remember to ask if this means your adviser's fees will be reduced to match the increase in cost to your portfolio and whether the DFM has ties to the adviser's company.

Property 

A financial adviser selling property is the biggest red flag of all in my opinion. Advisers love selling foreign property because you can make the numbers look amazing whilst maximising commission.  

Expat property companies will offer % based commissions on a property’s total value to an adviser who sells it. This means that if an adviser has a client with €100,000 that convincing them to buy a property with a mortgage of 80% loan to value, the adviser can be paid commission on €500,000. They are convincing you to take out a loan to multiply their commission.  

What's more is If the property is abroad, you're not going to visit, you don't know much about the company developing it or whether the full occupancy claims the adviser promises will come true. You just see the protections he's shown you that assume the best growth, quickest completion times and model tenants.  

There's a reason that these properties are sold to expats, they're overpriced, and expats don't know any better.  All you know is your adviser says it’s good and he knows what he's doing right? 

The problem is they know exactly what they are doing. 

Maximising commission is often the only thing they know as most international financial advisers don’t have an investment background. Typically recruited from sales roles and given a training course in how to sell financial products, they often receive minimal training on how to choose a portfolio or effectively manage risk. 

The sad truth is that very often advisers aren't looking out for you, only for themselves. 

But not all advisers. I have always refused to engage in such practices and there are others who share this ethic. The problem is that for many of the international IFA companies such practices are actually encouraged, sales tables are circulated around the office and every adviser is under tremendous pressure to generate as much profit as possible.

I have done those courses, sat in those offices and been roundly condemned by management for my principles. The only way to really rid oneself of the pervasive conflict of interest is to set up one's own company.

How to spot poor practice.  

Expenses are a great place to start.  Understand every expense, why it's there and to whom it’s going.

If you're told a fund has an entry fee, that fee will go to the adviser 99% of the time. If this isn't disclosed, find a new adviser. 

‘Loyalty bonuses’ in products are a red flag as they are almost always packaged with complicated charging structures. 

Surrender penalties are often an indication that commissions have been paid to the adviser who recommended the product. This is because the policy has to be around for a minimum amount of time before the company has recouped the initial commission paid to the adviser, if you try to close it early the surrender penalty represents the difference between what you’ve paid them and what they’ve paid the adviser.  

If you've held a policy for a considerable amount of time, compare the growth to the benchmark provided to you by your adviser at the start and also to the wider market conditions.  

Get a second opinion from someone not tied to your adviser. Better yet, get a second opinion from Staden Financial Management!

I started with one goal, to give financial advice competently and with integrity. We refuse to take any hidden commissions; all our fees are clear and transparent, and we earn fees only from our clients, so as to avoid conflict of interest in our portfolio selection process.