How to spot the hidden fees and charges of financial advice
Written by E4E Editor on 13 September 2018
Countries that have strict financial regulations, such as the UK and other EU countries, have specific rules that define exactly how financial advisory fees must be clearly explained before any decisions are made or contracts signed.
Regulatory bodies, such as the FCA, enforce measures to protect consumers from being mis-sold financial products that contain hidden fees or commissions that remove impartiality. This can include requiring firms to record all calls and ensure all communications are correctly archived enabling the FCA to investigate if required.
For expats living in jurisdictions where the FCA and other regulatory bodies have limited or no authority, the dangers are very real, and people have been conned out of significant chunks of their investments through hidden fees, charges and commissions.
Unfortunately, the very nature of hidden fees means that they are difficult to spot and unscrupulous financial advisers will go through great lengths to hide fees to encourage people to make financial decisions that are in the best interests of the adviser as opposed to the investor.
With the onus being on the investor to make the final decision, ensuring you have all the facts about the fees and commissions that will be due is essential, and spotting the signs that there may be hidden fees is a critical part of this.
Of course, not all financial advisers will hide fees, but it is important to understand how to spot them because once the contacts are signed, without the regulatory protection there is little to no escape from having to pay them when they are due.
Below we have identified common tricks that some “financial advisers” will use to hide fees and line their own pockets and how to spot them.
No upfront fee-disclosure
While nobody really wishes to discuss fees and charges at the beginning of any conversation, it is a requirement in regulated industries for the adviser to disclose their fee and charging structure during your first conversation, and normally in writing.
While it is very difficult for anybody to outline exactly what a service will cost, failure to disclose how any fees or charges are calculated can mean that the adviser is trying to hide. Without the protection of any regulations, expats can be particularly exposed by this lack of clarification at the early stage and can then be guilt tripped into making a decision once the fees and charging structures are disclosed further down the line.
If fees are not brought up by the adviser in your initial meeting, always ask the question yourself and be wary if the adviser is reticent to disclose their fee structure.
Verbal fee agreement only
Even if the fee structure is discussed openly in your first meeting, always insist that potential fees, charges and agreements are followed up in writing to provide you with evidence of any discussions.
As mobile recording becomes more mainstream and, in some jurisdictions such as the EU, a legal requirement for financial advice, getting all fees in writing is a certain way to avoid any verbal agreements being misrepresented or miscommunicated.
Advisory firms not hiding any fees will provide a letter of engagement that will disclose and declare any fee structures.
“Back-end loads”, “hidden loads” and exit fees
Traditionally applied to mutual funds, back-end loads are legitimately applied to investments when the investor wishes to sell or trade their investment. The “back-end load” is charged as a % of the final investment amount and received by the adviser.
Unfortunately, back-end loads are often misused with regards to expats making investments and a hidden deep in any contract and unlikely to be referred to by the adviser trying to sell the product. Normally, these hidden loads will only become apparent when it is too late, and the investor has changed their mind – but the fee then acts as a barrier to exiting the investment.
Fee-free investment advice
If an investment is being promoted by an adviser and there are no initial fees or ongoing management charges, it is likely that something is being hidden. No professional will ever truly work for free, so if you are planning an investment but the fees are either incredibly low or non-existent, it is vital that you understand how the adviser is making their money.
If there are no up-front fees, normally they will be earning commissions from the product (which may ultimately come from your investment) or from hidden exit fees.
If the adviser is earning commission it is vital you know how this will affect your investment and also question whether this investment is actually correct for you – if the adviser has been incentivised to sell a particular product, their advice is unlikely to be truly independent or in your best interest.
Similarly, if there are little to no up-front fees, the adviser may be hiding ongoing management charges – normally based on the total amount of funds that the adviser will have under management. Often these will be relatively small (between 0.5% and 1.5%) however, they may be higher if they have not been fully disclosed.
The firm may also mislead on the way that the ongoing fees change as the investment amount increases. Some research suggests that around half of firms will increase their fees as your investment grows but some firms are not making it immediately apparent.
Products that are often sold as “fee-free” include structured notes/products.
Don’t be embarrassed to ask tough questions
One of the biggest and most common mistakes that people can make when making financial decisions is simply to not ask questions about how much the advice costs or clarifying anything which is not clear.
The assumption is that the adviser is working in the best interests of the investor and therefore what they are saying must be true and it would be “awkward” to challenge their expertise in that way.
It is vital that when making any decision, including non-financial advice, you read any small print, ensure you fully understand the terms and conditions, tie in periods and exit penalty fees before signing anything. If the adviser asks you to trust them that this will be clarified later, be very suspicious and do not sign – instead seek alternative advice to ensure that nothing is being missed.
Simply asking “how much do you get paid from this, and where does that money come from” is a perfectly legitimate question that you should be asking and should not be embarrassed into not pursuing an answer.
Do you want clarity on the costs of financial advice?
If you are either seeking or already receive financial advice but you are unsure about how much it costs, or where the advisers fees are coming from, we can help.
We work with teams of independent financial advisers that are experienced in assisting expats and people living in the UK to help uncover the real cost of the financial advice they received.
Request a free consultation using the form on this page and we will ask one of the advisers in our network to arrange a free consultation with you, during which they will help you understand what you are actually paying and the impact this has on your investments.
During the consultation, the adviser will ask a series of questions designed to help them understand more about you and your financial profile. You will also be able to have your questions answered.
Sometimes additional services are requested following the consultation, but these may not be free and in such instances, the adviser will carefully explain their fee charging structure and you will be able to decide whether to proceed with their services.
Request a free consultation (click to show form)
If you would like clarification about the fees or charges of any financial advice that you have received, enter your details using the form and we will ask an independent adviser from our network to arrange a free consultation with you