Independent Financial Advisers for Expats – The good and the bad !


You get the calls most day from IFAs – or Independent Financial Advisers in Shanghai and other big business centers in Asia. Sometimes they seem like an unwelcome intrusion, but the irony is that some of these guys really do know what they’re talking about and can really help you get a handle on your long-term financial planning. But some don’t. How do you tell the difference?

Begin your due diligence with a few basic questions. Start from the perspective that there are two ways for an advisor or planner to ruin your life. Some are simply dishonest – and these bastards are evil and toxic. But even more dangerous is the well-meaning incompetent who really, truly believes that highly leveraged forex contracts are appropriate for middle-aged managers trying to send their kids to university and retire comfortably. These are the guys who slip under your radar and get past your defenses because they are honest and sound credible. In time, they’ll learn their trade – or find their dream-job in investment banking – but you don’t want to be the horror-story that helps them find their way.

The single most important question to ask is “where is my money going”? Good planners will never take possession of your funds – they are representing BIG, STABLE institutions that will be around come hell or high-water. When the world ends, the only thing left will be cockroaches and insurance companies – and cockroaches don’t offer fund management services. (insert your own insurance/MBA banker/lawyer joke here)

5 burns that China-based financial planning clients need to beware of.

1) The Big Promise. If it sounds too good to be true, it probably is. If the phrase ‘guaranteed’ is in the same sentence as ‘above-average returns’, you have a potential problem. There are instruments out there that do offer certain guarantees, but these are usually linked to bonds – and pay out in the neighborhood of 4 – 6% per year over 5 – 10 year terms. No one can guarantee that they can double your money in one year. This is more of a local issue than an ex-pat one, but those of you with wives, girlfriends and associates who day-trade may find yourselves tempted. Don’t go there.

2) Churn & Burn. Some brokers and companies get paid by the transaction—not the performance. Switching from one fund to another can be expensive – in some cases VERY expensive. It doesn’t matter how blue your blue-chip instrument may be – when those chips get tossed around too much you can expect to lose a few – or a lot. Good planners will make sure that your account is not getting traded unnecessarily often – or that you are not paying for the trades.

3) Selling proprietary products.Different instruments and services can have wildly different commissions for the seller – regardless of performance. Big fund management companies like Merrill Lynch and HSBC don’t really care that much about individual front-line sales organizations (like your financial planner), and offer similar deals across the board. Property developers, commodities traders, structured products, gold mines and other special situations should be analyzed on a case-by-case basis. Some may be fine. Others could be far riskier for you than for the guy offering you the inside track. (The big banks and institutions have been offered EVERYTHING first. If you are getting in on the ground floor, it’s because Wall Street and Exchange Square have already passed on it.)

4) Opaque fee structures. This is a tricky one, because the best insurance companies tend to have the most maddening contracts and fee structures. A good planner will take the time to attempt to explain things as clearly as possible. It’s normal (but not necessary) to see entry fees, exit fees, administration fees, management fees and set-up fees. The underlying mutual funds that will ultimately grow your investments have their OWN sets of fees.

You are looking for 2 things from a good planner, and the first is an illustration or projection that is NET of fees. (For instance, the firm I work with uses internal projections of 12% returns, but shows clients samples based on a 9% return – net of fees, and then some.) The second thing to ask about is official documentation covering the significant fees and charges. Your contract (and yes, you not only need to receive a contract – but you really have to read it) will include everything – but is very hard to figure out.

If you are investing in mutual funds through a large insurance company, you can expect to pay something in the neighborhood of 2 – 3% per year OVER THE LIFE OF YOUR INVESTMENT CONTRACT. Don’t be afraid of high charges at the beginning – or fooled by seemingly inexpensive products that have big exit-fees or administration charges. Your planner should be able to give you a life-of-contract fee breakdown (or at least an estimate), in addition to itemizing each individual charge or fee.

5) Good intentions. Who is making the ultimate decision about where your funds end up? Some front line salesman who is minding your portfolio while reading the financial headlines (or football match scores) – or a professional fund manager who does this for a living. Selling and managing are two completely different jobs. Balancing your portfolio shouldn’t be a hobby and it shouldn’t be a sideline. No matter how much you may trust or respect the person selling you the funds, you need to know that he is supported by an organization with a systematic approach to investing that will remain in place after your man is back home with the lads at the local.

This is list is just the beginning –and it may be more appropriate in China than it would be back home. You should be skeptical, but not cynical. The best way to protect yourself against financial planning trouble is to be proactive about educating yourself and checking out your prospective advisers thoroughly.