Why expats are crying out for New Model Advisers

The arrival of wraps allows fee-based financial planners in the UK to offer a sound, client-focused service to expats, who up until recently have been easy prey to unscrupulous offshore IFAs, writes Carl Melvin of Affluent Financial Planning.

Life can be tough for expatriates using the services of offshore independent financial advisers. These are advisers based outside the UK and not subject to the strict compliance and professional standards imposed on IFAs by UK financial services rules.

I worked briefly for an offshore firm in the early 1990s, but I lasted less than six months. I left disgusted at the practises and behaviour of the firm and its ‘advisers’.

The alarm bells started to ring when I discovered that my employer did not have a work permit for me, only a tourist visa. As with the other advisers, I was expected to leave the country every six months and fly to Kuala Lumpur for a few days before flying back to resume my position. The sales practises employed by the company were truly shocking.

Unfortunately, 20 years later, little has changed in the way many offshore IFAs work or the protection afforded to expatriate investors.

Poor-quality plans

The offshore environment offers unethical ‘advisers’ a home where they can avoid regulation designed to protect investors and ensure professional behaviour.

The offshore IFA is assisted by the offshore insurance company. Many are the international divisions of well-known UK insurance companies, which trade on their brand awareness and trust with the public. All too often, the providers create poor-quality offshore plans that help the offshore IFA sell the scam to the expat investor.

Such plans exhibit the following features:

• Complex charging structures – with multiple charges such as establishment fees, percentage or flat administration fees and policy charges.
• Restrictive terms/lack of flexibility – the providers use obfuscation to hide the lack of flexibility, even though the offshore IFA sells the plan on the basis of flexibility. Enhanced allocation, establishment
  periods, surrender penalties for early termination or even reducing the level of contribution are commonplace. Such contracts are wholly unsuitable for expatriate clients.
• High charges – the total costs for such plans are huge but because they are layered between multiple charge types, such as those above, the investor does not fully understand how expensive the plan is.

In short, these plans are designed to make the product provider and the offshore IFA money, rather than serve the client. Their purpose is to hide big commissions for the salesperson and the massive penalties should the client stop the plan early.

One ploy that continues is the ‘extended term’ swindle. Here, the salesman sets up the offshore ‘regular savings plan’ with a term of, say, 20 years
or more, even though the expat investor may only have a work contract for three to five years in the country in question.

So why not set the plan term to three or five years? Because the longer the term, the bigger
the commission. Unfortunately, if the client stops the plan or reduces the contribution level, there are often very severe penalties or administration costs. It is not uncommon for the first two or three years’ contributions to be taken in charges, leaving the investor with nothing after saving for years – outrageous!

No redress

But then, how are you going to obtain redress? The provider will say the advice was given by the adviser firm, who in turn will blame the individual adviser who happens to have left the company or country. Nor is there any effective ombudsman service to enable the client to be compensated.

The offshore IFA sector demonstrates the following qualities:

• Lack of professional standards regarding commission disclosure and treating customers fairly rules.
• Low levels of professional qualification.
• A sales-led approach rather than a client-centric, service-based approach.
• Dubious integrity and honesty.

Expats often have high tax-free salaries but no UK pension scheme benefits, so there is a real need for them to engage in financial planning and invest for the future. They are vulnerable to offshore IFAs, many of whom do not behave ethically.

There is a real need for the New Model Adviser® to engage with the expat community. Such clients would benefit from the higher professional standards, transparency and lack of commission bias that is provided by a fee-only approach.

Technology now makes it possible for UK financial planners to service expat clients wherever they may be. Email and web conferencing have dissolved the barriers to service that existed before.

The emergence of wrap platforms will be the final nail in the coffin of the offshore products pedalled by offshore IFAs. Wraps offer a simple, transparent, flexible and comprehensive wealth management service for expat investors.

Offshore salesmen move aside – the new model expat adviser has arrived!

Carl Melvin (CFP) is managing director of Affluent Financial Planning