Insider secrets: How financial advisers make money on your investments (updated!)
Fully updated January 2018
[Estimated reading time: 4 minutes 34 seconds - read while your cup of tea brews to perfection]
We've all seen them, haven't we?
Those sharp-suited-sports-car-driving-so-called international financial advisers...
Wondering where their endless wads of cash come from?
I'm sorry, you won't like the answer...
...because their cash comes from you.
No, you're wrong Sam, I never signed a cheque to my 'adviser'
Can't recall signing a cheque to your 'adviser' - that's because you didn't...
The way these 'advisers' - - read salespeople - - are paid is far from explicit.
Their payments are often masked as various types of account and investment charges.
These are often gradually deducted from you over many years.
If you try and get out of any affected investment you've been sold, you’ll find you’re locked in until your adviser has eked out their last penny in commission.
Here's how financial salespeople take your money...
The first bite
One of the most popular products these salespeople favour is the good old offshore investment bond.
Here are independent reviews of these types of bond, from providers including Old Mutual International, Friends Provident International, Generali Worldwide and RL360 Insurance Company.
You'll see that in most cases the bonds are fine...it's the way they are sold that's the problem.
When the salesperson sells you the bond, they can receive 8% in commission - upfront - from the bond provider.
You pay this 8%...because you pay an annual establishment charge, typically around 0.85% to 1.5% per year, for up to 10 years!
If you try and escape the shackles of your offshore bond before paying off all these charges, they're clawed back from you, resulting in horrible penalties, a staggering lack of flexibility or both.
The second bite
If your salesperson also recommended the investments wrapped up in your bond, (they probably did), they can also take a great big bite out of your wealth in the form of the investments' initial charges.
These are typically 4 to 8%.
On some investments, such as structured product and hedge funds, they can be even higher.
This is either directly deducted from your original investment...
Or ‘back-end loaded’...
That's jargon that means it's taken as a percentage each year for a period of years, just like the bond itself (thereby accentuating your structure's lack of flexibility).
The story so far:
- You invest £100,000
- Your exceptionally attentive ‘adviser’ receives at least £12,000 of that
- I say 'at least', because in stark reality they could receive significantly more
- Once all the smoke and mirrors have been deployed, it's not impossible for them to take upwards of £17,000 commission on your £100,000 bond
- That's a devastating £17,000 or more of every £100,000 you invest
The third bite
That's not the whole story...
The product provider and the investment company need to be paid as well.
So, once everything's added up, it’s not unusual for an expat investor like you to lose £88,000 in charges over twenty years on a £100,000 original investment.
Want to know more?
We've written a digestible guide to the indigestible facts.
What do you get for the fees you pay?
Paying a little extra to get something of quality can make sense...a well-built car, an well-made suit...
So, do you get something of quality for the exorbitant charges you pay your salesperson for an offshore investment bond?
No you do not!
Not only do you lose so much money in fees, charges, costs and commission, you're likely to end up with an entirely unsuitable portfolio, which won't make any real gains for years – if ever.
A final point to consider...
Different financial products and investments pay different levels of commission to financial salespeople.
Given the choice between a good investment that pays them low commission and a bad investment that pays much higher commission, which will a salesperson recommend?
The answer is not only obvious, but backed by an abundance of evidence:
Many well-regulated countries ensure investors get full commission disclosure. And some countries have banned commission because it can lead to worse outcomes for investors.
Offshore investment bonds are hugely popular with expats. Allegedly, their popularity is due to the tax benefits they offer. Arguably however, those benefits are usually irrelevant for investors living in low or no-tax jurisdictions - like the UAE.
What cannot be argued is that a bond allows an adviser to receive two or, in some cases, three sets of commission. One from the bond provider, perhaps one from a pension wrapped in the bond, and finally one from the investment company.
Many offshore investment bonds are stuffed full of ‘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 commissions than mainstream ones.
Ask yourself this one question - are you building someone else’s wealth – or your own?
If you have even the slightest suspicion that your 'adviser' got a better deal than you, we'd be more than happy to help you uncover the truth.
Just the facts you need to make a well-informed decision for the benefit of your financial well-being.