Investment Traps for Expats to Avoid

Investment Traps for Expats

Those working/living abroad are a promising target for promoters of packaged investments. They usually have large savings to invest, lack the expertise and information flow to invest wisely, and need good advice on tax planning for their home countries… yet they’re far from their usual sources of personal advice.
Unfortunately they easily become victims of financial advisers who, while promoting products that are usually perfectly legal, channel them into investments that deliver poor returns, lock up their capital for years, and are burdened with high expenses… while generating good commissions for the advisers.

In Thailand, where I live, I was recently given two examples of expats being lured into such poor investments.

In one case the investor has discovered, too late, that his money is locked in for seven years, with huge penalties if he tries to withdraw his money to avoid high ongoing fees. In another case an American was talked into placing a million dollars with a high-profile British insurance company before discovering that fees totalling 4 or 5 per cent a year are being levied – he is also effectively locked in for years to come.

Don Freeman, one of the handful of US-registered investment advisers living in Thailand, argues that the problem is that most of his competitors earn their living from commissions paid by insurance companies and other financial firms for promoting their products or services.

Typically the investor finds himself locked in for years to pay for the adviser’s sales commission, and facing large redemption fees – typically 5 to 9 per cent – if he wants to move the money elsewhere before the contract completes its term.

Freeman doesn’t say so as bluntly as I can — but such advisers have an obvious incentive to channel clients’ money into investments that are more remunerative for them, even if they know they are a poor choice in terms of probable investment return, safety and flexibility.

In my experience, not all such commission-earning advisers allow such bias to influence their advice. But most of them do.

In the US and the UK the commission-based model is being banned or at least heavily penalized. In many countries where expats live, however, such advisers continue to operate, free of such home-base regulation.

Freeman argues that the structure of compensation that advisers receive for their investment counsel can be “a good gauge” of their soundness. “A fee-only compensation model guarantees the highest degree of impartiality regarding the enforcement of the adviser’s fiduciary duty.”

Compensation derived from fees paid by the client “provides an obvious built-in incentive for advisers to act in the investor’s best interest”:

• If they fail to do so, “they will lose you as a customer” and lose income derived from you;
• “When fees are assessed as a percentage of assets under management, managers have an incentive to grow your assets.”

However, as some advisers who “tout themselves as ‘fee-based’… also accept other payments that could influence their recommendations,” before anyone makes an investment, he/she should first insist on full disclosure by the adviser of how he/she is compensated.