How to help an expat client correct poor advice

Over the years, I have been advising globally mobile people and their families and I am sorry to say that I have seen some terrible cases.

Clients have suffered losses due to unregulated investment funds failing and asset allocation that follows no process or no relation to a client’s tolerance toward investment risk.

One of the worst cases I have seen is where an elderly father who lived in Spain gifted £1,000,000 to his daughter, with them both being advised by a financial adviser who worked for a global company that purely markets to British expats.

Key Points

• Many clients have been the subject of bad advice in relation to offshore bonds
• The starting point with a client is education
• The best thing is to invest the money in line with their risk profile and objectives

In 2011, the adviser created two offshore bonds and allocated 100 per cent of the money to structured products. Sadly, the daughter passed away, and her daughter inherited the money.

I was referred by the lawyer dealing with probate to help track down where the money had gone as the current value of the bonds was £450,000. Many of the structured products based their returns on various indices, with a common theme of oil and high-end fashion houses.

While most invested portfolios that you or I may use had participated in the long bull run, the key themes within the inherited portfolio had performed poorly.

It was really difficult for me to explain to my client that the money her mother had left her was worth nowhere near what was invested; especially hard when the markets as a whole had enjoyed strong returns up to the end of 2019.

The reality of the situation was that the financial adviser who sold the two offshore investment bonds probably received up to 7 per cent initial commission from the bond provider and then a further 3 per cent commission from the structured product providers.

This was potentially £100,000 in one-day earnings from the undisclosed commission.

I spoke with the grandfather of my client and he said that if he knew that the adviser was earning that much money, he would have not proceeded with the advice.

In many of the cases I have seen, the client has not been able to find any recourse and they have had to try and make the best out of a bad situation.

Many countries have no Financial Ombudsman Service or regulatory framework for advice companies to operate in; however it is always worth asking the client to complain if they feel they have been treated unfairly.

Next steps

So, what do you do when a client like the above turns to you for help?

When I speak with a client that has been through this type of scenario, the first thing I consider is education.

The client is unlikely to have a good understanding of the tax wrapper, what the money is invested in, or the total cost of ownership. Helping them understand what they have in basic terms will be the first step in correcting the poor advice.

I would then take them through a typical financial planning exercise; no different to what I would do with my existing clients.

Once I have a good understanding of what their objectives are, I can then discuss with them what can be achieved through the existing wrapper.

The offshore bonds that are used by overseas advisers are not identical to the versions used by most UK-based advisers. They tend to have fewer options when it comes to modern investment management.

Typically, you will not be able to access model portfolios and access to good discretionary management is restricted. You may want to consider another tax wrapper that may be more appropriate. 

However there is likely to be a redemption penalty depending on how long the bond has been running.

It is not unusual to see redemption penalties that run to eight years from inception, and the penalty itself may understandably be so unpalatable for the client to pay, especially if they have lost money.

It is common to see redemption penalty values being based on the higher of the original investment or current value.

The bond will usually have an annual charge of between 1 per cent and 1.5 per cent loaded onto the running costs, which ultimately repays the initial commission.

At some point in the future the redemption penalties will expire, but these running costs do not always expire with the redemption penalty.

This can be a very good reason to exit the bond after the penalty has dropped off and use a more modern, cost-effective, fee-based tax wrapper going forward.

Once you have all the charging information you can easily explain the total annual costs of keeping the bond compared with a fee-based solution. 

Should the client wish to retain the bond, the challenge is to ensure it is appropriately invested.

As I mentioned, investment options can be limited and take you away from the types of investment strategies normally available to UK-based clients.

Whatever the options are, it is likely that the main challenge will be trying to keep the annual costs low given the loaded charges.

The client will have been through a rough time.

Should they wish to invest their funds, one of the most basic things you can offer them is market participation.

Investing their money in line with their objectives and risk profile in an appropriate and transparent fee-based manner will be something that they have not previously received.

They might be scarred from their experience, but you can show them through your professionalism how good financial planning can help them meet their objectives.

Philip Teague is the co-founder of Cross Border Financial Planning