For many expats, working temporarily overseas or deciding to emigrate to a new country means having to make financial plans to help prepare for their future income.
While this is easy to do in a home country, it’s a more complex situation when living abroad and the expat is vulnerable to unscrupulous salesmen.
Indeed, one national British newspaper investigated the standard of financial advice being offered to expats and described the situation as a ‘financial Wild West’.The paper’s investigation revealed that expats are being offered high risk investment strategies which are often lightly regulated or not regulated at all, as salesmen will pick up huge commissions.
On top of this, changes to rules for Brits to access pension pots over the age of 55 means that even more people are now looking for financial advice with a view to retiring abroad.
In recent years, the British Foreign and Commonwealth Office has flagged up issues with expats seeking financial advice in countries such as Spain, where there’s a large population of UK expats, and many locations in the Middle East.
However, one problem that expats, particularly British citizens, will face is that there appears to be a global industry for financial advisers, with many claiming links to well-known British firms. However, these salesmen are often poorly trained and barely regulated.
One of the big issues facing expats is that they are not made aware of the risk to their investments, the commissions they are having to pay and any other charges.
Particular regions where expats may be at risk include Africa, Asia and some Eastern European countries, where there is little financial regulation which means that salesmen and investment providers can deduct huge upfront commissions legally, leaving the expat at risk of making a big loss.
The head of financial planning at FCA-regulated firm, Killik & Co, Sarah Lord, said: “In the main, the operation of offshore advisors is totally unscrupulous. With many offshore jurisdictions, such as the United Arab Emirates and Dubai, there’s little requirement for disclosure of remuneration.”
She added that expats could face hidden commissions, with up to 50% of their assets being taken.
Common financial traps
One particular financial trap expats overseas should be aware of is the practice of selling investments within ‘insurance bonds’ which, technically, are investment ‘wrappers’ or containers. They may be classed as insurance policies, which means that salesmen in many countries will need fewer qualifications for selling them.
It should be appreciated that all of these types of commissions are taken from a client’s investment, which is a system of remuneration which has largely been outlawed in Britain.
One major pension firm, Old Mutual International, says that commission is the preferred method in many markets for paying for financial advice, though they are promoting the benefits of having lower upfront fees to international advisers with an ongoing advice fee.
Expats should also be aware of being coerced into making a regular investment every month into a long-term savings product. These often carry commissions and charges which will reduce the amount being invested and also carry heavy penalties for accessing the cash before an agreed date. For example, sign up to some 20-year savings product and half of the first year’s premiums will disappear in commission payments.
The next big issue that expats may be talked into investing in is high-risk assets; many of these unregulated funds may include investing the expat’s cash in wine, property, timber or other ‘exotic’ assets.
These unregulated funds in the UK can only be marketed to ‘sophisticated’ investors who will appreciate the risks, the FCA believes. However, the FCA says that around 75% of all unregulated investment will lead to losses for a private investor.
What happens next
That’s not all – if an expat is duped into making such an investment the charges will make a big dent. For instance, transfer a pension worth £500,000 into an ‘alternative’ fund investing in land bank schemes or fine wines as part of an offshore ‘wrapper’, and the expat will face a 2% annual charge plus commission and set-up costs, which will deplete their investment to £425,000, according to investment experts.
On top of this, the expat may be paying £20,000 every year in charges, which means with a fund returning 1% annually it would take the investment 17 years to reach £500,000 again.
One of the big drawbacks for unregulated funds is that an expat will have little or no opportunity of redress if something goes wrong with the product they have been sold. And often, because of the investment’s nature, things do go wrong.
Currently there are billions of pounds of expats’ money sitting in unregulated funds which have been suspended, so their investments have been frozen until the funds are unwound and the assets sold.
It’s the situation of offering unregulated financial advice which led to a tightening of the UK’s financial services industry to overcome widespread mis-selling in the 1990s and 2000s.
Now, the retail financial advice being offered in the UK is generally considered to be the best regulated market in the world.
That’s because financial advisers in UK need to reach a minimum qualification of level 4, which is similar to the first year of a degree, though many firms insist that their representatives reach the level 6 qualification which is the equivalent of a certified or chartered financial planner. These qualifications are not easy to achieve and there’s also an obligation to continue professional development under a system that is tougher than the one for accountants and lawyers.
Fees for services
Since 2012, UK financial firms have been required to agree the fees for their services rather than receiving commission from providers and investment products, which means they need to be clear about their service provision and justify their value to the client.
However, it appears that one problem that has arisen from the financial advisers who fail to make the grade, or those who could not be bothered to study, is that they moved abroad to work among expat communities where people are high earners and live in low tax environments.
Australia has followed the British regime, so the country’s Future of Financial Advice (FoFA) legislation means that Australian financial advisers are also closely regulated.
However the one million or so Australians who live and work abroad are not protected to the same degree and are vulnerable to receiving poor advice from expat financial advisers who do not appreciate, or understand, the country’s unique tax investment laws. They may also know little or nothing about Australia’s unique superannuation pension system, also known as a ‘super’.
One Australian financial expert says a big problem is that many people are earning high salaries but know little about investing, which leaves them open to receiving dishonest or bad advice.
Brett Evans, of Atlas Wealth Management, says: “About 70% of what we do is to educate while the other 30% is about execution.”
Financial advisers working in expat hotspots
His views are echoed by the head of investments at AES International, who says that under-trained financial advisers working in expat hotspots are offering poorly diverse and risky investment portfolios to expats.
David Norton says expats living and working in the Middle East, Spain and Asia in particular are threatened with having their investments jeopardised, though it does appear that regulatory change may come in 2016 to financial advice firms operating in the Gulf region.
He explained: “We often come across new clients who have been given advice that is to put their money into a toxic mix of poorly diverse portfolios and high-risk funds.”
Mr Norton said there were dozens of funds which are being sold to expats which had gone seriously wrong, with the advisers selling them picking up huge amounts of commission.
Investors are rarely told, he added, that once their investments begin to fall, they would find it hard to recover their losses.
As an example, AES International says expats need to appreciate that if their investment falls in value by 10%, it would need to obtain 11.1% to cover the shortfall. A drop of 40% would need a recovery of 66.7% to cover the loss.
However, an expat portfolio which fell in value by 70%, would need an extraordinary gain of 233% just to break even.
US expats wanting to invest
For US expats wanting to invest while living abroad there is a further problem, namely the Foreign Account Tax Compliance Act (FATCA). This has seen growing numbers of American brokerage firms contacting their overseas clients in recent months, telling them to close their accounts or informing them they can no longer change their investments. Under FATCA, many banks and firms around the world have decided they no longer want to deal with their non-US resident clients.
That’s because financial firms and banks overseas which do have US clients have to comply with FATCA, which can be costly and arduous. This means it is probably worthwhile for Americans living and working abroad to speak with a specialist investment advisor who is knowledgeable about the rules and regulations governing US citizens and their overseas earnings and investments.
However, US citizens who do invest while living in the States will benefit from new rules due to come into play, which will force American financial advisors to put their clients’ interests first.
All high-earning expats will appreciate that they will need to save and invest their income because they will not have their well-paid job forever, but high-earning expat communities are a magnet for unethical financial advisers and finance firms.
A solution for British expats is to make arrangements before leaving the UK and to find a UK-regulated financial services firm which offers a fees-only service. In return you will get a personal financial plan, quality advice and fairly priced financial products as well as the crucial regulatory protection. All of this will be conducted for an agreed fee that is fair and transparent.
For those expats who are non-UK citizens, they are best advised to find a financial adviser who can offer proof of developing a strategic financial plan for their clients and are prepared to work on a fee-only and commission-free basis. It’s important too that the financial adviser is properly regulated and has professional indemnity insurance.
For expats working anywhere in the European Union, the level of financial advice should be better because the independent financial advisor must have authorisation or approval from an EU country to give advice. Under a system known as ‘passporting’, the financial advisor will be regulated – but the level of regulation varies between countries, so expats need to be wary about which country is governing the advisor’s advice.
Other than having friends or fellow expats recommend a financial adviser, how would an expat recognise good financial advice?
Financial advisors Harrison Brook say expats should ensure their financial adviser is fully regulated and expats should carefully check the advisor’s expertise and experience.
No hidden financial surprises
Also, the adviser should be upfront and honest about the cost of their service so that there are no hidden financial surprises for the expat. The initial consultation should also be free and under no obligation.
If the financial adviser offers testimonials, then the expat should not be afraid to ask for them and to contact some of those who have given references. Good financial advisers will be pleased to show they have clients with whom they have been working for many years and who will be happy to recommend their services.
The bottom line when a new expat moves abroad and is desperately seeking quality financial advice is to be careful who they work with. They should also appreciate that they may just be well-advised to put their cash into a savings account. While you might not earn as much because of the low interest rate environment, you can be reassured that your hard-earned cash will not be decimated by rip-off commissions, speculative investments and extraordinary product charges.