Personal financial advisors say one thing but mean another!
I feel that it’s a shame that there are so many people that don’t know how to manage their money and the people who they go to for help, personal financial advisors, ‘rip them off’.
Don’t get me wrong, I’m sure there are some good financial advisors out there which act in their clients best interest.
I have an issue with personal financial advisors
Personal financial advisors are incentivised to sell you products in order earn a commission to make their living. So whilst you are going to see them for advice, they are just seeing you as someone to sell products too, i.e. they don’t have your best interest at heart.
I was lucky to realise this but I feel others are not so lucky and lose a lot of money.
My personal experience with a personal financial advisor
One day I got a call from a financial advisor asking about my overseas pension arrangements. They said that they could save me a lot of money if I transferred my pension from the UK to Hong Kong (where I was living at the time). I didn’t know a lot about overseas tax regimes for pensions, so I agreed to have a discussion with them – I didn’t see any harm in going as it was free.
When I arrived, we got straight into it. They told me that I wouldn’t have to pay UK income tax on my pension if I moved my pension overseas. Unfortunately, I’m not anywhere near my retirement age of 65. Therefore I didn’t feel moving my pension now was something to do now. That’s when the bad advice started to roll-in. He started telling me about the other “benefits” of transferring my pension now rather than waiting until I got near my retirement age.
It was clear to me that there was a difference between what they were actually saying (which sounded good) and what they really meant (which was bad).
What they actually said?
The benefits of transferring my pension now include:
- Having all my pensions in one place
- Access to a much wider set of investment funds
- Flexibility to change my investments at any time
All of the above may sound appealing but each of them are likely to make me worse off once you understand what they were really saying.
What are they were ‘really’ saying?
1- Have all my pensions on one EXPENSIVE platform
To have all my pensions in one place would mean I have to pay to be on their investment platform which costs 1% per year. That’s 1% per year more than I’m paying at the moment. That’s means we would be paying thousands of extra dollars in fees over the next thirty years. I would rather have my pensions in different places to avoid that cost (especially as I only have two different pensions).
2- Access to a much wider set of COMPLEX, EXPENSIVE and INAPPROPRIATE investment funds
I asked about the types of products they were referring to when they say “wider set of investment funds”. They started talking about these specially designed ‘structured products’. I know from reading the book Unshakeable that structured products are complex and usually designed to benefit the investment banks selling them. The one that he told me about was a product that will pay you between 4% to 6% per year.
Over the last 5 years the product had actually paid out 6% pa. Sounds good right!?!
There were three things that they didn’t discuss at outset which meant this was a bad product for me:
A- There was a caveat. The product would only pay out if the stock market had increased from the day I took the product out. So if the stock market crashed, I would have got no return. So it is not a guaranteed return.
B- The fee was 4% pa upfront! That’s a massive fee.
C- They didn’t ask me about my tolerance to risk. Compared to just holding stocks, I miss out on the large upside if the stock market does well, as I can only get 6% per year, and have to pay a large fee to protect against markets falling. As I’m young, I have a lot of time for the stock market to recover if it does fall. I don’t actually lose money if the stock market falls unless I sell at that time (which I’m not planning on, read my blog Unshakeable investing for more on this). Whereas I do lose money when I pay 4% in fees.
What amused me was that the advisor I was speaking to said he had purchased this product himself. Although, when I questioned him about the product in more detail he was pretty clueless.
I’m not expecting everyone to understand the issues with these types products but if something has a high fee and sounds too good to be true … well, you know it is!
3- Flexibility to change my investment funds at any time TO INCREASE THE NUMBER OF TRANSACTIONS AND COMMISSIONS
The point around being flexible is their way of getting you to buy and sell different products over time. They earn a commission each time one of their clients makes a transaction. In most cases, people are going to be much better off having a fixed investment strategy and holding that rather than trying to time when markets will go up and down. A more static investment allocation reduces the risk that you time the markets poorly and also reduces the number of transactions you make. This is one of the main points raised in the book, ‘The long and short of it‘.
By not taking his ‘advice’ I benefit as:
- I’m not paying for a personal advisors investment platform – saying 1% pa
- My money is overseen by trustees who have access to high quality investment knowledge
- I’m not investing in very bespoke and expensive investment products.
The whole experience got me angry and I feel sorry for people who don’t realise what the financial advisors are really saying . They put trust in these financial advisors and the advisors essentially abuse this trust. People going to these financial advisors are not stupid people. Accountants, lawyers and senior managers all use personal financial advisors as they have limited knowledge about personal money management and are potentially losing a lot of money.
I hope that not all financial advisors are bad. I feel that they do serve a purpose. They do encourage people to invest and insure their assets which is a good thing. Unfortunately they encourage their clients to invest in inappropriate and expense manner so they earn more fees.
By reading good books on personal finance, like Rich Dad Poor Dad , I Will Teach You To Be Rich and The Richest Man in Babylon, people will have the foundations of good money management. With these foundations they can go to financial advisors with their eyes open and avoid getting taken advantage of. That’s why I created this site, MoneyBooks.blog, to help people find the right books to read about money.
Blogs to help you start to manage your money:
Thank you for reading!