‘Financial Advisor’ can mean many different things. Advisors can, superficially, seem alike. Ask someone to describe them and you’ll hear things like ‘Wear suits, read the Financial Times, know about investments and are always worried that people don’t save enough’. Despite that, the service on offer may be completely different!
So before you go out and choose a financial advisor, or if you are considering whether you are satisfied with your current advice, it’s essential to understand the different types of advice that are available, and what your options are.
Retail banks are the high-street banks that cater to both individuals and businesses. Usually, they are very big. Examples: EG, HSBC, Hang Seng and Standard Chartered.
In these banks, either your relationship manager plays the role of advisor, or they may have specialised advisors in addition to your manager. Either way, these banks have many thousands of customers, and your manager or advisor will have sometimes have 400+ clients.
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The level of service you get depends on how ‘important’ the bank’s CRM (‘customer relationship management’) rules and software determine you be. Usually, that’s based on how much you have invested. As you ‘move up’ in that scale, you tend to get more attentive service and access to funds with more competitive fees. A typical minimum investment for a retail fund that entitles you to some degree of advice is US$10,000.
But whether you are standing in line at your local branch or invited to a nice modern designed office and offered a coffee, there is one point you must remember always:
Bank staff is salespeople, whatever their title.
Don’t be fooled just because you don’t feel like you are being sold to. Whatever you are being offered – a fund, an annuity, an insurance policy, a mortgage – is a product, and the bank makes a profit from it, just like an auto dealership does on its cars. And just like car salesmen, bank staff are encouraged to sell you as much as possible, whenever possible, and preferably with the highest margins for the bank.
Of course, that doesn’t necessarily mean they will try to rip you off – after all, some car salesmen do prefer to offer ‘fair-and-square’ deals to keep you as a customer for life rather than make a killing on a single deal. And they do compete among themselves. But still, be aware of the incentives – no matter how honest a manager, they can hardly tell you “In truth, we’re very good at mortgages but all our funds are rather mediocre – if I were you I’d walk around the corner to our competitor for that”.
Also, notice what we mentioned a bank sells. Not services – products. Large banks need to be standardised to survive. They can have hundreds of options to choose from, but they can’t really customise anything for you. So if you are an expat, you’ll have a hard time getting the right advice from your local manager, especially when it comes to issues like taxes, or investment back home. Even in terms of their general outlook, they are more likely to be focused on local trends and issues. Ask your Hong Kong manager what opportunities they see in European property and they’ll probably be baffled.
Then there is the issue of turnover. Because bank staff is salaried salespeople, almost all banks, no matter how good, suffer from high turnover. My HSBC advisor changes every 9-18 months. Apart from the length of that period, the abruptness with which they change is also annoying – sometimes you discover they have left only when you call the branch and hear “Carmen? Oh, she doesn’t work here anymore. How can I help you, sir?”. A good financial plan covers decades, and involves quite sensitive issues – not just how much you make and where you invest, but your lifestyle, goals and fears, and personal moments such as marriage, divorce, and death. That’s hard to address in such short-term relationships.
Private Banks offer higher-end, personalised services to wealthy individuals and companies. Examples: Credit Suisse, UBS, Julius Baer. In summary, they try to improve on some of the limitations of retail banks, but, to justify that, require higher minimum investments – typically US$2 to 3 million. Service will be more customised, turnover will be lower, your advisor will be more sophisticated, they will offer you a variety of global investment options (including from other banks and fund managers), and they may be able to advise you on some tax issues.
However, apart from the high minimum investment, the main drawback is that part of the conflict of interest outlined above remains – what your manager is encouraged to sell you is not necessarily what is best for you. Despite regulation designed to prevent this, horror stories abound about high-end banks offloading their own sourcing investments, or ‘iffy’ equity offerings they are underwriting, to their clients.
Independent Financial Advisors (IFAs)
IFAs are individuals or companies (such as Globaleye) that only offer financial advice.
Each one will have something like 50-150 clients – less than both retail and private banks. This allows for a greater deal of customization in what they offer you, and a higher level of service, despite a minimum investment that is lower than that of most private banks. US$100,000 to $200,000 is typically a good starting point to work with a Hong Kong IFA.
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They are also ‘independent’. That means that IFAs don’t work for any specific bank or fund manager. That reduces the conflict of interest – they don’t have to offer the products of any given provider, so they can be transparent and say, for example, ‘Manager X has good bond funds, but they are lousy when it comes to equity, while Manager Y is the opposite’.
In practice, being independent of banks also means they are more flexible. So, for example, when it comes to sensitive issues like tax, where bank advisors might shy away from the issue completely because of restrictive compliance policies, they can point out the main tax rules you should be aware of and put you in touch with an accountant or lawyer. Or say you are considering buying a physical property or investing in a business venture. That would be outside the scope of the purely financial investments a bank usually advises on, but your IFA can advise on how that fits in with your overall plan.
‘Independent’ also means that your advisor is separate from your investments. So if you are not satisfied with your, you can just ‘sack’ them and find a new one, as opposed to a bank, where you may have to request that your investments be transferred, or even in some cases withdraw your funds and reinvest, which could cost you in terms of taxes and fees.
IFAs also have their disadvantages. First of all, because they are individuals or small to medium sized companies, competence and quality of service can vary dramatically from one to the next. Their level of commitment can also vary – while a bank usually only closes if it goes bankrupt, an advisor can decide to leave the country or change profession. Finally, be aware that working with IFAs reduces, but does not necessarily eliminate, all conflicts of interest. IFAs typically earn their money through commissions or management fees on your investment funds and insurance policies, so they do have an incentive to promote those products. Many people feel that is an acceptable fee structure, but if you want to remove even that incentive, you may be able to negotiate a fixed annual fee with your advisor.
As compared to banks, IFAs offer flexible and customized service as compared to banks, without the same conflicts of interest. However, competence and quality vary, so it is essential that you find an advisor that you like and trust. If you have any doubts about your current advisor, or if you feel you aren’t getting enough attention, consider getting a second opinion!