July 12: Is Your Offshore Financial Advisor Ripping You Off

by David Jenyns on July 12, 2007

Do you know what your offshore financial advisor is doing with your money? Don’t consider that’s a rhetorical inquiry: a little over a year ago, an aged couple came to see me. They had $100,000, which they had entrusted to their offshore financial advisor over the past three years. When asked how their money had made out, the couple laughingly told me that they still had the original amount

After examining the advisor’s paperwork, I noticed that he had actually achieved a return of $2,000 per year – all eaten up by his fees. That alone seems wrong but then I showed this couple an investment vehicle that offered 24% per annum with a capital guarantee – meaning the unique investment couldn’t be lost. Applying the 24% per annum over the three years, we came to a total of 72% which, when we factored in the compound interest, amounted to a 100% return. In short, the offshore financial advisor cost the couple $100,000 – or $33,000 per year.

So, I asked that question again: Do you know what your offshore financial advisor is doing with your money? This piece will tell you what you need to know to make sure you’re not being done out of your savings by the very individual you trust to help you.

In theory, offshore financial advisors, also known as financial planners, take all of your investment needs and goals into concern. In practice, however, this is not always what happens. The problem with offshore financial advisors is twofold: the first often occurs when the investor puts total trust and faith into their offshore financial advisor without knowing the latter’s success as an investor. The second problem is that the offshore financial advisor will profit regardless of the quality of investments recommended for the client, as many offshore financial advisors work on either an up-front commission or fee – neither of which is dependent on performance. Some unscrupulous offshore financial advisors have even been known to recommend investments for a good commission or a little extra cash, rather than trying to decide the client’s best interest.

So how does one become an offshore financial advisor? The channels vary from jurisdiction to jurisdiction, but have many similarities. We’ll use the United States for the purposes of this article.

Government regulations attempt to define the differences between the people who provide investment-related services. For example, money managers who handle money for, or sell fee-based investment advice to more than 15 people must register with the SEC as an investment advisor – regardless of whether or not they are actually brokers. This requirement was established by the Federal Investment Advisors Act of 1940, which officially defines an investment advisor as any person who, for compensation, engages in the business of advising others, either directly or through publications or writings.

An investment advisor that registers with the SEC is not required to have any particular educational or professional achievements. The legislators are apparently of the belief that no amount of education or professional experience can prove the competence or incompetence of anyone who claims to have the ability to manage money or give investment advice. Only a nominal fee is required to be officially recognized by the US government as a registered investment advisor. However, all registered advisors must disclose any conflicts of interest, as well as details about their background. The registration form is a public document available to anyone for review.

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