Most in the offshore financial advisory industry would agree that the actual number of advisory operations that meet that spank shop definition is tiny. And whether such entities are more common in Spain than some other jurisdictions is also subject to debate.
Nevertheless, it is widely acknowledged that the reason any spank shops are able to exist at all, anywhere, is because investors who find themselves posted to unfamiliar foreign cities, or who have retired to countries they do not know very well, often struggle to find a good and trustworthy financial adviser. The result, as we noted yesterday, is that a growing number of expatriates are being forced to seek legal help in obtaining redress from the financial services professionals to whom they entrusted their savings, typically before the global financial crisis in 2008.
Because they typically rely on a combination of personal recommendations, internet searching or sheer chance in their search for an adviser, newbie offshore investors can sometimes end up being taken in by people who may not be particularly good at dispensing financial advice, and who also may be unregulated, those familiar with the situation say.
Such inexperienced investors can also be easy prey for unscrupulous advisers, who know just how, and where, to look for them, it is said.
Another problem, say many in the industry, including advisers who adhere to the highest possible standards of probity and transparency, is that those recommending certain investments, such as funds or insurance products, in many jurisdictions are simply not required to reveal whether, or by how much, they stand to benefit personally if they succeed in winning over a a prospective client.
Thomas Wright, the Kenya-based owner of the VFS International advisory group, summarises the guiding philosophy all clients are hoping that their advisers live by as “What I would do for me, if I were in your shoes”.
The trick to ensuring that all advisers adopt this philosophy, Wright adds, is to find the best and most cost-effective way of ensuring their interests are most perfectly aligned with those of their client’s financial well-being.
Over the last few weeks, International Adviser has been asking a number of experts in the offshore advisory industry to suggest ways of making it easier for expats in offshore jurisdictions to find good quality financial advice, at a fair price. Herewith are some of their suggestions.
- Form self-regulating associations of like-minded advisory firms, backed by minimum qualifications requirements and Codes of Conduct
The idea of advisers who are passionate about offering good-quality advice getting together with like-minded rivals is a popular one, but as a rule, not an easy one to take very far beyond the planning stage. This is because there is rarely a compelling incentive for people who normally are bitter rivals to spend time and money working together on something that might just, in the end, benefit their competitors more.
As a result, trade associations have traditionally existed in most industries mainly to benefit their member firms – by giving them a united voice in terms of marketing and regulatory matters – rather than to benefit these member firms’ clients.
That said, raising the standards of advice on offer across Europe is what Paul Stanfield and Michael Lodhi say they had in mind three years ago when they launched the Federation of European Independent Financial Advisers. No firm is allowed to join FEIFA unless it is relevantly licensed, and its advisers are also required to hold all the necessary and relevant qualifications for their type of advising.
Earlier this year, FEIFA introduced a Code of Conduct, as part of its effort, Stanfield says, of ensuring that its members aim to follow a similar process to that created by the UK Financial Services Authority’s Treating Customers Fairly mandate.
The next step, later this year, is the introduction of a website aimed at the estimated 800,000-plus UK expatriates currently living throughout Europe, which is seen as helping to educate while also providing a forum for discussion – and, not least, a one-stop shop for finding FEIFA-member firms.
Similar organisations exist in many other jurisdictions outside of Europe. Many are local representative offices of international bodies, such as the Denver, Colorado-based Financial Planning Standards Board (FSPB), which is behind the Certified Financial Planner certification; the UK-based Chartered Insurance Institute; and Chartered Institute for Securities & Investment, also based in the UK.
- Encourage the creation of a global standard for adviser qualifications, and websites that list accredited advisers by jurisdiction
Some say that the UK’s adoption of a new minimum qualification for advisers, effective on 1 Jan 2013 as part of the Retail Distribution Review, is beginning to set an unofficial new standard for advisers in other jurisdictions.
Under RDR, UK advisers must hold QCF Level 4 qualifications, and ensure that they demonstrate they receive a minimum of 35 hours of “continuous professional development” annually.
This qualification standard, many advisers in the offshore financial services space say, could provide a platform on which a global database of qualified advisers might one day be built, although allowances would always have to be made for compliance with local standards and regulations.
Meantime, various accreditation organisations have been vying for years to become the global accreditation body of record, and to reach out to consumers with websites aimed at helping them understand the business of looking after their finances better, and to help them to find trained and experienced advisers.
On its website, the FPSB (www.fpsb.org), for example, has a "Find a Planner" page, where consumers may click on the name of one of 23 countries around the world, which takes them to the website of the FSPB body in that country. (The problem for expatriates, though, is that the websites tend to be in the local language.)
From the country page, the would-be client enters the name of the city in which they live (or one closest to them), and are taken straight to a page that lists all the CFP-accredited individuals nearby.
Clicking on the individual advisers’ names provides more information about them, including contact details, the year they received their CFP certification, and quite a lot of other background, including how they are compensated for their work. (To see how this works in New York, for example, click here. )
Elsewhere on the FPSB website, there are other useful pages for inexperienced investors, including “Questions to ask when interviewing a financial planner”.
- Get product providers to ensure their products are sold only by accredited advisers and brokers
This idea has been much discussed over the years, and there is considerable support for it among advisers – but thus far, it seems, rather less appetite among product providers to take on the role of global industry policeman.
Bob Parker, chief executive of Holborn Assets and a long-time campaigner for such a system, believes that merely being able to offer investment products under the respected brand names of major life and investment companies, which are based out of highly-regulated jurisdictions, can give an otherwise disreputable adviser the credibility he needs to get clients to part with their savings.
Adds Parker: “All the product providers have to do is refuse business not signed off by a QCF Level 4 IFA. I am convinced that a person who spends three years gaining Level 4 qualifications, and who is a member of an organisation like the Chartered Institute of Insurers, will not want to risk losing that status.”
- Introduce a ‘fiduciary pledge’/‘partnership code’
In the UK, “suitability reports” (formerly known as “suitability letters”), which detail the reasons any advice has been given and otherwise document the advisory process that has taken place, have for some time been a feature of the FSA’s package of regulations governing financial advisers.
Outside the UK, however, the use of such documents is often left to the adviser’s discretion, unless his or her company mandates their use, or they belong to a trade organisation that insists on it.
London-based advisory firm AES International has developed what it calls its “Partnership Code”, a page-long document that “every client and every adviser” of the firm is required to sign, according to AES chief executive Sam Instone, who notes that it is part of the company’s nine-page-long terms of business.
A similar idea is something called a “fiduciary pledge”, which was given a boost in 2010, when a New York Times journalist spotlighted the idea in an article (“Will you be my fiduciary?”).
The journalist, Tara Siegel Bernard, attributed the pledge to a crusading certified financial planner in the US state of Colorado named Craig Evans Carnick, although he says the pledge is in fact an idea that has “circulated in the fee-only financial planning community here in the States” for years.
Importantly, a legal expert whom Bernard consulted in researching her article said that such a fiduciary pledge of the kind Carnick uses would, on the face of it, hold up in court, “to the extent that it was viewed as a contractual commitment”, and also, because “it would provide the basis for a regulatory action, on the ground that it was materially misleading to make this promise and then violate it”.
“Keep a copy of the pledge in your iPhone, BlackBerry, datebook or whatever,” Bernard told her readers.
“And the next time you’re shopping – whether it’s for a broker, a mortgage, an annuity or a full-fledged financial plan – ask your provider to sign it.”
One possible problem to this, Carnick notes, is that the word “fiduciary” has certain legal implications in the US, which means that some advisers, such as brokers, may avoid using it, to avoid becoming bound by its legal implications.
The pledge:
I, the undersigned, pledge to exercise my best efforts to always act in good faith and in the best interests of my client, _________, and will act as a fiduciary. I will provide written disclosure, in advance, of any conflicts of interest, which could reasonably compromise the impartiality of my advice. Moreover, in advance, I will disclose any and all fees I will receive as a result of this transaction and I will disclose any and all fees I pay to others for referring this client transaction to me. This pledge covers all services provided.
X________________________________
Date______________________________
- Produce an online ‘investor’s handbook’ with basic, uncontroversial information aimed at educating and protecting consumers in the international/multi-jurisdictional space who know little or nothing about personal finance or investing
Ideally, this online handbook would be no more than four pages long, and consist of bullet-pointed do’s and don’ts about what to look for in an investment; an explanation of diversification, and why it is important; the idea that investments can go down as well as up (and may be more likely to fall if they have had an unusually fast rise recently); the idea of risk, and the maximum amount of risk people of different ages should take on; and the key questions an individual should ask an adviser, before agreeing to take him or her on.
The handbook would be written in simple, clear English, that could be understood by someone with relatively little education, to ensure maximum comprehension.
Responsible advisory organisations would be encouraged to include this handbook on their websites in identical pdf form (to preclude the possibility of it being interwoven with corporate advertising), and thus, it might be hoped, to help to educate the world’s financial services consumers.
And more knowledgeable investors, pretty much everyone agrees, are the least likely to fall victim to spank shops.
If you have other ideas that could help to make life easier for expatriates looking for high-quality advice in the international space, or which could help to raise the industry’s standards, please add them, in the form of a comment, below.
To read Part One of this story, Out-of-pocket expats seek redress, click here.
