I started this site as I believe that people can get a lot of great advice about money management from reading quality books. Reading good books about personal finance also avoids potentially being ‘ripped off’ by a bad personal financial advisor (wealth manager).
What is my issue with personal financial advisors?
I want to be clear that I’m sure not all financial advisors are bad. However, there are a lot of bad ones out there. They are incentivised to sell you products in order 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 always have your best interest at heart.
My personal experience with a personal financial advisor
I had read a lot about financial advisors but had for a long time not actually spoken with one. Then one day I got a call from a financial advisor when I was at work asking about my overseas pension. They said that they could save me a lot of money by transferring my pension to Hong Kong (where I was living at the time). I didn’t know a lot about different tax regimes for pensions in Hong Kong so thought I’d go and have a discussion with them – it was ‘free’ so no harm in going.
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. I thought that could be of interest if I decided to remain outside of the UK when I retire. However, I’m unfortunately not anywhere near my standard retirement age of 65 so didn’t feel moving my pension overseas was something to do now. That’s when the bad advice started to roll-in.
What did the advisor actually say?
He started telling me about the “benefits” of transferring my pension now. The benefits included:
- Having all my pensions on one platform
- 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 was the advisor ‘really’ saying?
Have all my pensions on one EXPENSIVE platform
First of all, to have all my pensions in one place would mean I have to pay to be on their investment platform which costs 1% pa – that’s 1% pa more than I’m paying at the moment as its covered by my existing scheme. So my investments need to return 1% pa more just to avoid me being worse-off. I would rather have my pensions in different places to avoid that cost (especially as I only have two pensions).
Access to a much wider set of COMPLEX, EXPENSIVE and INAPPROPRIATE investment funds
Secondly, I asked about the types of products they were referring to when they said “wider set of investment funds”. They started talking about these specially designed ‘structured products’. I work in the investment field and I know that structured products are complex and are usually designed to benefit the investment banks selling them. The one that he told me about was a product that returns 4% to 6% pa. There was a caveat that this return is only paid if the stock market does not fall in value. A 4% to 6% pa return sounds good in this market (2017 when interest rates in developed markets are less than 1%).
Over the last 5 years the product had actually paid out 6% pa. Sounds good right!?!
Actually, it’s not that good. The cost of the fund was 4% upfront and the stock markets had increased over 10% pa over the previous 5 years. This means you would have been much better off just investing in stocks. The response is that the stock market could fall and you would have lost a lot more. Correct, however, I’m young and can take that risk and don’t need to pay 4% in fees for the protection against stock markets falls. The topic of risk is fundamental when giving investment advice and he completely ignored that. He just wanted to ‘sell’ me this complex, expensive and inappropriate product!
What amused me was that the advisor I was speaking to said he had purchased this product himself. When I questioned him about the product in more detail, however, 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!
Flexibility to change my investment funds at any time TO INCREASE THE NUMBER OF TRANSACTIONS AND COMMISSIONS
Lastly, the point around being flexible is their way of getting you to buy and sell products over time. They get 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.
By not taking his ‘advice’ I benefit as:
- I’m not paying for a personal advisors investment platform – saving 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 therefore potentially losing a lot of money.
As I said at the start, not all financial advisors are bad. I hope. They do serve a purpose. They do encourage people to invest and insure their assets which is a good thing. It is just that they don’t always get their clients to invest and insure the right way. By reading good books on personal finance, like 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.
I hope you enjoyed this blog. Since I read Rich Dad Poor Dad, I have started taking some actions, see my journey in my blog ‘Becoming a Rich Dad‘.
Thank you for reading!