How is your international adviser paid, and why does it matter?

Ask an international adviser how they get paid and watch what happens. A firm answers in one sentence. A commission firm says "the provider pays us, so the advice is free to you". Advice is never free. Someone pays for it, and the only question is whether you can see the bill.

What does the hidden price look like?

The typical expat product is a regular-premium with a fixed term, often 20 or 25 years. Regular premium just means you promise to pay in a set amount every month. The adviser gets an up-front payment called indemnity commission. It's worked out on everything you've promised to pay over the whole term, not on what you've actually paid so far.

On a $2,000-a-month, 25-year plan, that commission is funded by roughly the first 18 to 24 months of your contributions. Put another way, your first two years of saving mostly pay the adviser.

Three things follow, and none of them is an accident:

  • Early-exit penalties. They can exceed 50% of value in the first years, because the provider has to claw back the commission it advanced.
  • Layered charges. There's an establishment charge, a policy fee, a mirror-fund charge and an underlying fund charge. (A mirror fund is a fund inside the bond that copies another fund.) Together they routinely total 3.5%-4.5% a year.
  • Product bias. A 25-year lock-in does nothing to improve your circumstances. It does improve the commission.
Where your first two years of payments go · 2 routes
You
$2,000 a month, 25-year plan
your regular premiums
Provider
offshore bond
indemnity commission paid up front, funded by roughly your first 18 to 24 months of contributions
Adviser
You
$2,000 a month, 25-year plan
your regular premiums
Provider
offshore bond
early-exit penalties, which can exceed 50% of value in the first years, so the provider can claw the commission back
You

How much do the charges cost over time?

Compounded over 20 years, a 3% total cost against a 0.6% alternative consumes roughly a third to two-fifths of the terminal value. Terminal value is simply what the pot is worth at the end.

That's not a rounding error. It's the difference between retiring at 58 and retiring at 65.

Is the regulation the same everywhere?

No, and that is a big part of the problem. The UK banned commission on investment advice in 2013, and on pension advice after that. The EU tightened disclosure under MiFID II, its rulebook for investment advice.

The offshore market that serves people who move around a lot never got an equivalent reform. That covers parts of the Gulf, Asia and the Caribbean. The same products that vanished from the UK high street are still sold, energetically, to expats.

Which kind of adviser are you talking to?
Likely to suit you if
  • A fee-only firm answers "how are you paid?" in one sentence
  • You're told the total annual cost in pounds or dollars
  • You can leave without a penalty
Probably not for you if
  • "The provider pays us, so it's free to you"
  • A 20 or 25-year lock-in recommended whatever your circumstances
  • Early-exit penalties that can exceed 50% of value in the first years

What does fee-only actually mean?

It means the only person paying us is you. Our wealth work is charged one of two ways. You pay a written fee, with no hourly billing, for a defined piece of advice. Or you pay a transparent percentage of assets under advice for ongoing management. We receive nothing from any platform, fund manager, insurer or scheme trustee. If a product pays a rebate, it's credited to your account, not ours.

That has three practical effects.

We can recommend doing nothing. A large share of our recommendations are "keep the existing arrangement and stop paying for a review". A commission firm can't afford to give that answer.

You get far more choice of investments. Without a commission to earn, the sensible core of most portfolios is index funds and ETFs. These are cheap funds that simply track a market, costing single-digit basis points. A basis point is one hundredth of a percent, so that's tiny. They sit on an open-architecture platform, meaning one that isn't tied to a single provider, which you can leave at any time.

You can always get out. Every arrangement we recommend can be transferred or terminated without penalty. Being able to move your money is a design requirement for us, not an optional extra.

What should you ask any adviser?

Five questions do most of the work:

  • What is my total annual cost, in pounds or dollars, on my portfolio size?
  • Do you or your firm receive anything from the provider, including trail, override or "marketing support"? (These are the polite names for ongoing payments.)
  • What is the exit penalty in year three?
  • Who is the regulator, and can I verify the licence?
  • If your recommendation is unchanged from last year, what am I paying for?

A good adviser answers all five without hesitating. Slow answers tell you something too.