Investing wisely in an independent adviser

Do you invest as wisely in your financial adviser as you do in your portfolio? In the complex world of investments today there are many potholes that can catch you out. The business of living life for the expatriate gets more complex as time goes by. So, what should we do to protect ourselves from likely potential pitfalls? How do we accurately predict what those challenges will be?

Using a professional adviser is in your best interest because he or she is deals with these issues all the time. "But wait," you might say, "many advisers are actually not all they claim to be." I agree and so an immediate concern arises before you even begin.

There are more than 40 advisory firms in Thailand. Far smaller is the number of firms that are honest, fair and ethical. However, there are some professionals around and you will be wise to choose one carefully (see Net Worth, June 5, 2012, "Choosing the right IFA").

Among the credible advisers there are some who will simply help you to manage your investment portfolio. If you only require this limited service, that is fine. Other readers may also appreciate assistance with the entire business of living life, which includes any aspect of expat life you can think of.

So, let's assume that you have an adviser you are happy with. He has been working for you for some time and has assisted you not only with wealth creation but also with taxation, pension consolidation, will writing, succession planning, medical, life and income protection insurance, structuring your assets into a trust to ensure that they are not in view of prying eyes and making sure that your beneficiaries are protected. He may even have helped you find a place to live, assisting with a mortgage, structuring a local business, business tax planning and the use of offshore companies. He has been very useful indeed.

After some time your investment portfolio hits a brick wall and one of the holdings is suspended from trading. This could be a substantial holding and the projection is that it will be liquidated over time, allowing lawyers and liquidators to grab a fair chunk of the cash, leaving almost nothing for the shareholders.

The circumstances surrounding this apparent failure may be that the fund was actually quite sound but had liquidity problems. The assets could not be quickly converted into cash which forced the manager to suspend the fund as redemption requests exceeded the cash available. Once this news emerges there is usually a stampede to cash out. To be fair to all concerned, the investment manager cannot pay any redemption because these would be classified as preferential payments, leaving other shareholders in the lurch.

Typically these types of investments are known as non-correlated assets. This means that they are not linked in any way to other types of investment and certainly not to the equity markets. They tend to be unique and often the single disadvantage is that they have very little liquidity because the assets are tied up for the longer term, leaving only a small portion of the investment fund available for redemptions. As long as there is no redemption stampede things look rosy. Regular subscriptions and redemptions are adequately catered for.

The dilemma for the investor is that a typical non-correlated asset will usually provide good, steady growth over a protracted period of time. Compared with, say, more volatile equities or commodities, the growth is attractive as a safer holding. The advantage of equities and commodities is that you can cash out at any time, but with volatility the way it is _ markets can move 10% in a week _ do you cash out and take a loss or do you hold in anticipation of recovery?

Many advisers therefore structure diversified portfolios with exposure to both types of assets. They will usually conduct some due diligence on the proposed holding to ensure that it is not a Ponzi scheme and that the assets look well managed and safe. Regulators in the country in which the plan is domiciled will also have conducted their own extensive due diligence. It will then have to be subjected to further due diligence by the investment platform providers. However, if your adviser is worth his salt, he will also have conducted his own investigation.

If the fund performance still fails after these checks, then it is likely to be due to circumstances beyond anyone's control or a very negative statement by some regulating authority which may be irresponsible and unfair. These things do happen and all parties concerned are then left feeling a great deal of frustration and pain.

It is also possible that there has been some fraudulent behaviour on the part of the fund manager and its counterparties. If this is the case, then he or she will surely arrange information for those parties conducting due diligence to see a sound investment opportunity. Once the fund has started and collected sufficient subscriptions, it is often too late to take corrective action and the con man will have fled with his spoils.

The adviser then gets the blame even though he has acted in good faith. Of course, advisers need to stand and be counted for any negligence on their part. However, if your adviser really did act in good faith, why should he be specifically held accountable?

One question you could ask yourself is: If your adviser had recommended the purchase of BP shares prior to the Deepwater Horizon incident, should he be held responsible for the losses from the share price plunge that followed the accident? If you think about this carefully, it was something no adviser could have foreseen.

Of course, an adviser is responsible to ensure that he offers the best advice to his client. Asset holdings must suit the client's risk appetite. Hindsight creates opportunities for anyone to criticise what was recommended in advance.

One of the obvious messages here is whether you actually use your adviser properly. If you just ignore what he does and assume he is going to create the result you want, you may well be disappointed. On the other hand, if you are a control freak and want to watch over his shoulder at all times, he may be restricted in carrying out his duties properly. Some call this "damned if you do and damned if you don't". Surely the secret lies in the right balance of working with your adviser together as partners.

Andrew Wood has been an expat in Asia for 33 years and is executive director of PFS International. His articles, which cover the complete A-Z of financial planning, are available through the PFS library to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or emailed to

About the author

Writer: Andrew Wood
Position: Writer