It was back in 2016 that I tentatively wrote my first ‘exposé’ of certain questionable practises that were being used within the financial advice industry, particularly focussed at Brits living in Spain. I have gone on to write many hundreds of these articles, and they have been read by many Brits across Spain over the years. In both 2018 and 2019 our campaigns, which were designed to help educate British Investors in Spain, won major international awards.
When you first arrive in Spain it is all too easy to be confused by all the information, and indeed ‘misinformation’ out there, and often the seemingly easiest solution is to find a local ‘British’ company to help you with important matters such as tax, investing and pensions.
In the UK, on the whole, the population are well-protected by rigorous financial services regulation, and the vast majority receive decent, transparent advice. In Spain, however, financial services regulation is far less robust, and despite what many people assume, even a company based in Spain that cites FCA regulation on their website or paperwork, is not required to follow FCA rules for clients who are resident in Spain.
But what this really mean? One significant difference is that in the UK, your financial adviser has to act on what is called a ‘fee’ basis. This means they must clearly confirm any fees from their recommendation that they receive and differentiate them from product or provider costs. This leaves you knowing exactly what you are paying your adviser, in pounds, shillings and pence… or possibly euros and cents!
In Spain, however, this has not currently been an enforced requirement for advisers, and this means your financial adviser could be making a recommendation that is more beneficial for them, than you. One example we see prolifically here in Spain is when an advisor sells a client what is known as an ‘investment bond’. Bonds can be Spanish compliant or held within a pension, and we see companies such as Quilter International, Lombard International, Prudential International etc offering their bonds to residents in Spain.
These products can offer a practical and tax-efficient solution for you so can be very beneficial (for more information visit https://www.chorusfinancial.es/how-are-spanish-compliant-investment-bonds-taxed/). The issues arise, however, when the financial adviser is not working in your best interests. Special deals can be struck with a bond provider to grossly inflate your annual bond fees and tie you into an investment for as long as 10 years. As one example, a bond with a fee over 1% per year on 10-year tie-in can pay up to 8% in undisclosed commissions to your adviser on the first day of your investment. You may be paying as much as 4 times more than you could be in a transparent arrangement and if you knew how much your adviser was getting paid, you would have never agreed to it!
Beyond the bond commissions, we then see the underlying investment portfolio being heavily influenced by further commissions. This is where the adviser recommends a particular fund because that fund company will pay an additional fee to the adviser. I have seen examples commonly here in Spain where a fund fee has been inflated to over 4% a year to cover further commissions your adviser. Evidence of this is can be that you are placed into just one or two funds rather than a diverse portfolio, or where the same fund house is used for the majority of the funds you hold.
Sadly, funds that pay commissions are often low quality, as well as being over-priced. A good financial adviser will research rigorously to build you a portfolio of the best funds they can find globally, at a fair fund management cost. Poor quality funds will have to find other ways to entice investment, and this is often through incentivising the financial adviser, and passing this cost onto the client.
It’s not always easy to identify if you are already a victim of such practises, or indeed if the financial adviser you are currently meeting for a new recommendation intends to make you one. One big clue is any kind of tie-in, but beyond that it’s likely a professional opinion from a transparent and ethical firm will help identify any problems.
If you are concerned about an existing investment or have doubts about a new recommendation, please do contact us today. Chorus Financial guarantee transparent fees and fully independent portfolio recommendations. We will review any existing plan or new recommendation for free, and without obligation, helping to identify potential problems before they affect your financial future.