Insider secrets: How financial advisers make money on your investments
You know the type. Smooth manner. Sharp suit. Roaring sports cars.
How can international financial advisers make so much money? Where does that money come from?
The short answer is: you.
And if you do not recall ever signing a cheque to your adviser, there is a simple explanation. Adviser payments are far from explicit. They’re cleverly masked as various types of account and investment charges and gradually deducted over the years. If you try and get out, more often than not you’ll find you’re locked in until the last cent has been paid.
So how does the adviser get your money?
Let’s look at what happens when you buy an offshore investment bond – by far the most popular product amongst international financial advisers.
When the adviser sells the bond, they receive in the region of 8% upfront from the bond provider.
To fund this, you pay an annual establishment charge, typically around 0.85% to 1.5% per year, for the as long as 8 or 10 years. If you leave the offshore bond before paying off all these charges, they will be clawed back from you, resulting in either horrible penalties or a staggering lack of flexibility.
In addition, when the adviser recommends the investments, they can receive a large proportion, if not the whole of, the investment initial charge.
This is typically 4-8% but on some investments, such as structured product and hedge funds, it could be much more.
This is either directly deducted from your original investment or ‘back-end loaded’ like the bond itself (thereby accentuating the lack of flexibility).
So, if you invest £100,000, your exceptionally friendly and attentive ‘adviser’ could receive £12,000 in initial commission. I say ‘could’ because in stark reality they could receive significantly more. Once all the smoke and mirrors have been deployed, it is not impossible for advisers to take upwards of £17,000 commission on a £100,000 bond.
That is a startling £17,000 or more on every £100,000 you invest!
Of course, the product provider and the investment company will need to be paid as well. So, once everything is added up, it’s not unusual for an investor to have to fork out in the region of £88,000 in charges over twenty years for a £100,000 original investment.
What do you get for your money?
Most people would agree it’s worth paying a little extra to get something better.
So do you get something a lot, or even just a little, better in exchange for those exorbitant charges?
The real problem with this type of adviser commission – besides its obvious cost – is the fact it can also result in you ending up with an unsuitable portfolio, which will only make money after years – if at all.
Different financial products and investments pay different levels of commission.
Given the choice between an investment potentially good for you but paying low commission and another which may not be as good but pays much higher commission, which are you most likely to be recommended?
There is abundant evidence the latter is most likely:
Governments across the world – including UK and Australia – have ensured that investors get full commission disclosure and in some cases have even banned it, because in many cases it could lead to worse outcomes for investors. Others, including the EU, are considering it.
Offshore investment bonds are hugely popular. Is this popularity due to the tax benefits they offer?
This is arguable, as those benefits are largely irrelevant to investors living in low or no-tax jurisdictions, as is the case for many expats.
What cannot be argued is that a bond allows the adviser to receive two or, in some cases, three sets of commission rather than one: from a pension (or QROP provider), from the bond provider and finally the investment company.
Many offshore investment bond portfolios are loaded with ‘alternative’, opaque and usually high-risk investments (such as hedge funds and structured products). Again, it’s arguable whether those products are the best option for the majority of investors.
What cannot be argued is that those investments tend to pay much more generous commission than mainstream ones.
This is like a boss paying a new employee the whole salary for the next 5-10 years in one go on their first day. What are the chances that employee will come back to work and work hard day after day?
Are you building someone else’s wealth – or your own?
If you have the slightest inkling your adviser is getting a better deal than you are, download our FREE report.
You may be one of the few investors whose portfolio has been responsibly set up and consequently is not crippled by exorbitant charges. If so, the FREE review available at the end of the report will confirm that and help you put any niggling concerns to one side.
If, however, your portfolio was set up less than responsibly, as is sadly all too often the case, the FREE report from a multi award-winning, highly regulated professional could be the beginning of a recovery. It could help you stop building someone else’s wealth and concentrate on building your own.
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