Are you one of the many expats who are regularly bombarded with phone calls from apparent Independent Financial Advisers (IFA’s) telling you about the opportunities which abound in the market today?
There are an abundance of such groups who are often found in areas like Moscow and other Eastern European countries where there are no regulations governing offshore financial advice. Their lack of integrity very often leads to a situation which is open to abuse by some of the more unethical firms who act unscrupulously and endeavour to separate you from your hard earned cash.
We know that boiler rooms exist here. A boiler room is an operation, set up to entice expats into making investments which are far from ethical. Sometimes they don’t even exist. They can take several forms but typically will eventually leave your investment valueless. If you make the recommended investment it will ultimately lose all its value just before it is due to mature and just when it was looking good according to the trickster who allured you in. Unfortunately for us all, such operations exist in Russia and cast their evil net far and wide regionally and to many western countries.
There are genuine operators here in Moscow who run legitimate consultancy businesses and who introduce expats to opportunities in the offshore markets which, when correctly managed, result in successful investing. There are no direct regulations in Russia, which strictly control offshore investing, although there are related enforceable rules concerning certain types of securities and how they are distributed. However, this remains a grey area, the rules being very different from places such as the UK, Hong Kong and Singapore, where strict regulatory regimes are imposed for the good of both the clients and advisers. These are designed to make sure the investor is protected even in an offshore environment.
The result of under-regulation leaves the situation open to abuse from unethical individuals. The financial services industry has thus created pockets of unwanted operators who rely heavily on the ability of persuasive salespersons. Such operators will employ individuals to cold call you and be extremely convincing that they are the biggest and best in the world of offshore investments. If you are approached by one of these how can you be sure they are not from the ghetto of ex plumbers, telephone and door to door gas salesmen from the western world who last week converted to become âprofessional financial advisersâ when they stepped off the plane at Domodedovo
Even if you do find an adviser who is half decent, how can you be sure he is actually managing your financial products in such a way that you will be the major beneficiary and not him? This is often the case. Advisers are able to work the system such that they make more money as time goes on by manipulating you and the products you are introduced to for their own benefit.
There are a number of different examples where this is common and if you look at it logically from your own laymanâs perspective it looks as though the adviser is actually doing you a favour.
If you are faced with this type of situation ask your adviser why he wants to make a change and then turn this on its head and try to imagine how he will benefit from this as well. If the answer is genuinely that he is doing this to assist you he will be able to address any question, explaining properly the reasons and what may happen further along in time. One key question is what will this cost you? If you are paying any kind of penalty to disengage from a current investment and this is not being fully rebated in some way then thereâs a good chance he has his own interests at heart and not yours.
For example John invested USD100,000 in 2007, his investment suffered in 2008 when the recession and market declines occurred. He was naturally frustrated at the apparent snailâs pace with which he was clawing back his losses. Another adviser came along and suggested he withdrew a large chunk of the money from this investment and invest it into a structured savings plan. John is told to ‘qualify’ for a ‘special bonus’ he needs to set the account up for a 20 year term and that he must maintain contributions for the first 18 months. In return he will receive a bonus from the savings plan company of 25% of the first 18 regular payments he puts into the plan. After the 18 month period the payments can cease and the bonus is still valid. The adviser concludes that John will make a guaranteed 25% on contributions he places in the new plan.
Wow, this sounds really great. The adviser is an experienced salesman, but new to the financial services industry, which John is unaware of. John is persuaded to go ahead. Many will say ‘this sounds too good to be true and therefore it is’. That is not the case but there are some things which John is unaware of.
First he will be paying charges on the amount of his original investment of USD100,000 and thus any withdrawal will not actually cost anything but continuing charges will be levied on the original USD100,000 even when it is depleted further by withdrawals to pay into the new plan. Thus he will withdraw funds from his USD100,000 and still be paying charges on them.
Second the savings plan, like all products of this type, should be taken to maturity to make full use of the investment. Thus if you cancel after the first 18 months or contractual fixed period, stopping payments, the charges for the ongoing period will still be levied on amounts already paid in. At the end of the 20 year term the investment value will be very low indeed. Any attempt to cancel the contract prior to the completion of 20 years will result in a very heavy penalty.
In summary, our so called adviser has managed to make income by changing John from one product to another and John will eventually be the loser, even though he thinks the adviser is great. This is just one example in isolation. There are many ways which advisers use to manipulate investors to their own gain.
So, how do you sort the genuine adviser from the unethical operator? This is not easy for the man on the street. Many expats who have a genuine desire for assistance with their affairs shy away from the industry as a whole because of the bad reputation it has developed.
We can see the intent of regulation introductions in some countries. These are designed primarily to protect the investor but also to protect the industry and allow genuine professionals to operate effectively, providing authentic expert services, to the exclusion of the cowboy operators.
There are some ways in which you will recognise an authentic adviser. We will continue our discussion on this point next month. Meanwhile your feedback and opinions about what you look for in a genuine professional adviser would be very much appreciated.
Questions to the author can be directed to PFS International on +7 495 9677648 or email to firstname.lastname@example.org