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People who seek out investment “advisors” generally believe the advisor has a conflict-free fiduciary responsibility to help them find an appropriate investment strategy. Why people believe this, I have not a clue. Certainly there is enough recent evidence to prove otherwise, but time and again, people suspend logic and tolerate more exploitation from the financial services industry than any other industry on the face of the earth.
A contact, who is a lawyer, documented every lie and deflection told to her when investigating her poorly managed portfolio. The portfolio was held in an insurance wrapper - contracts I refer to in my book as Investor's Prison - where you are locked in and heavily penalized for encashment. These contracts make liquid funds illiquid and primarily benefit advisors and issuers with little or no benefit to the investor. This newsletter recaps eight consistently misleading statements as told by the investment community to earn commission and/or secure your assets under management in contracts like this.
1. “I only make money, when you make money.”
This is absolute b̶u̶l̶l̶s̶h̶i̶t̶ nonsense. Nearly all advisors are using insurance wrappers aka "bonds" aka Investors Prison as their platform to invest in funds that are actively managed and front loaded. Kick-backs can come from both the insurance platform and the funds they recommend (trailing fees). This is in addition to their “1% annual portfolio management fee”. These fees are cancerous to investment returns. This link shows the impact of how only 2% in total fees (your expense ratio) over time severely impacts your return.
2. “We do not take commissions.”
Reread #1. Apparently certain "secret" commissions which are illegal in the UK and the US are allowed in Asia. So they can say they are not earning commissions, but get kickbacks on the sly. The money will be bled out of your portfolio over time to disguise the nature of the commission. The good news: the best advisors in this region work on a flat annual fee and credit all commissions back into the portfolios they manage.
3. “This actively managed (and front loaded) fund outperforms the index.”
Some funds outperform the indices, but most don't over the long run. In fact it is posited that only in inefficient markets (think: Africa) would an actively managed equity fund beat an index fund over ten years. The most egregious advisors will funnel clients’ money to “pet funds” which pay the advisor the largest commissions. Logic Pop Quiz: if an index fund returns 7% with a .5% fee, and an actively managed fund returns 8% with a 3% loading fee and a 1.5% management fee, which one gives you a better return? The first three correct answer sent to aristotle@wiserwealth.net will receive a copy of*, "Own Your Financial Freedom."
4.“We do financial plans for free.”
You may well get some projections “for free”, but what you are not getting is a proper financial plan for free. What you will end of paying is a “set up” fee where you will be charged 1-1.5% to “set up” your account and then maybe you will get a plan. Remember 1% of $250,000 is $2500 or the cost of just getting a proper conflict-free financial plan by a Certified Financial Planner.
5. “This insurance wrapper gives you tax benefits.”
Non-domiciled Brits get zero tax benefits using these 'wrappers'. In fact I can't find an iota of written proof by HMRC that says "insurance wrappers provide a permanent tax shield on capital gains and income to domiciled British investors". Some of my clients when they persist in asking about this issue have been met with stonewalling.
6. “This will give you a 7% return (implied guarantee)”
First these returns are nominal (before inflation). You need real returns which factor in inflation and then of course there are all the fees. Second, if you want guarantees, stick to time deposits. Historic returns are exactly that, HISTORY. Also true for investments where you are told you have a “guarantee" as we saw in 2008 with all kinds of credit-linked investments. Math Pop Quiz: If your return is 7% and inflation is 2% and your total expense ratio is 3%, what is your return after fees and inflation?
7. “I’ve been doing this for 20 years.”
Well, what have they been doing for 20 years? Are they portfolio managers or are they sales people? What is their track record with investing money and running portfolios over 20 years? How do they invest their personal wealth? What did their investments look like during the 2008 crash? What value do you get from that annual 1% payment? Ask questions when someone thrusts their experience into the sales pitch. Untold numbers of advisors only need to pass just 2-3 tests to become “advisors” and may well be neophytes when it comes to investing regardless of how long they have been selling.
8. “We need your authorized signature to execute trades more swiftly.”
Believe it or not, the legal onus is on you to look at every single trade to make sure it is executed properly - email confirmation doesn't hold up with regulatory bodies or in the courts. So if you give them your signature and they screw up your order, generally you are out of luck in claiming redress.
When you should take action
In Singapore, MAS regulates advisors and FIDREC allows compensation up to S$50,000 (or you can take it to court for amounts over S$50K). These are some of the problems you may face with your account.
- If you authorized a buy or sell order that was not executed in a timely manner and caused you significant losses or triggered an overdraft.
- When you are completely misled about the recommended funds such as your portfolio being misaligned with your risk profile ie you are Conservative Investor who has been piled into a lot of high risk or illiquid investments.
- Double down twice as hard on #2 if these are “pet funds” of the advisor and he/she is milking major commissions off them.
- If you have been blatantly lied to and have some record of it.
Be very careful about what you sign as you will likely absolve the advisor of all ‘spoken’ promises when you agree to their contract.
When you need a reality check
Your investment advisor is not a prophet. They do not control the markets and they do not have special powers, even if they pretend to do so. There's a very good chance that they may be just sales people with little or no experience investing money, because you need to only pass 2-3 tests to become a licensed advisor. Therefore, understand your needs and find someone who can provide a viable investing strategy. If they are annoyed by your questions, find someone else – there are more “wealth advisors” than car salesmen in Asia these days.
Bottom Line – Own your decisions
Financial services are a profit-driven industry, and there is no free lunch. Many providers have zero interest in fiduciary responsibility. You can be a highly educated individual but you are also human. The best protection against buying into contracts that you do not need is to first recognize your own weakness and how that may be taken advantage of:
Do you think it’s glamorous to have a financial advisor? If so, then it’s likely that a posh accent, a cushy office or a firm named after a dead Etonian might bedazzle you. Expect to be sold schemes that benefit the advisor first and you second.
Are you a climber who wants to mingle with “your kind”? You likely are seeking a sense of “belonging” to a community of the newly wealthy, and there's nothing wrong with that. However, like sharks, advisors can smell newly minted and financially anxious expatriates from miles away, preying on them through informal social networks. Expect to be plied with alcohol for the privilege of possibly having your assets pillaged under management.
You want a few “tips to play the market.” Tips scream "short term" to fiduciary-oriented financial planners. It's probably more fun to lose your money in real casinos if you must gamble: Marina Bay Sands and Resorts World Sentosa.
You want everything for free. Even in this magical kingdom, people do not work for free. Where it seems like there's "no real cost" for all that advice, expect fees and commissions to fly out the backdoor of your portfolio.
You need someone to project long term returns and show you how to put your money into the markets? If so, read a book - any good book - on investing. Open an account at Interactive Brokers, Fundsupermart or a bank, and/or get guidance through someone who actually wants to act as a fiduciary. Buy some term life insurance to cover the risk of death and disability, and call it a day. Or find an advisor who will sign my Wiser Wealth Charter of Promises. Remember, they are asking you to sign on the dotted line, so why not require a signed commitment from them as well?
December 2015: Who is the Monkey Now? Part II: How two teens continue to crush hedge fund and professional advisor returns.
*retail investors only qualify for these prizes.