Let us count the ways
Long-term readers will know that I despise a certain type of financial ‘advisor’ operating in Japan and elsewhere. In fact, that visceral hatred is what made me start RetireJapan in the first place.
A recent coaching session reminded me of this, and gave me the idea to write this public service announcement describing things to watch out for when choosing or choosing to keep a financial advisor.
Show me the money
The most important thing to be aware of when considering a financial advisor is what incentives they are working under.
This is quite apart from the question of whether they know what they are talking about.
Some financial ‘advisors’ work for free, helping you choose funds out of the goodness of their hearts. Or so they might like you to believe. In fact, they are working on commission, and are thus incentivised to help you choose investments with high fees that pay large commissions. This type of advisor should be avoided or at least treated with extreme suspicion.
Other advisors work for a third party like a bank or insurance company. Their goal is to maximise their employer’s profits, not help you get a good deal or find appropriate products. Scepticism is recommended.
Finally, some advisors work for you, paid by the hour or (for larger accounts) by taking a percentage of the investments they manage for you. This is the best option, but you still run the risk of the advisor not being well-informed or, with the assets under management model, being incentivised to try to increase the amount you invest with them rather than truly focusing on your needs.
For the rest of the article we’ll be discussing things the first category of ‘advisor’ might do.
The tricks of the trade
Terrible financial advisors unfortunately seem common in Japan. here are some of the things that might help you recognise them:
- Talk at you using lots of jargon. If you ask questions they will be answered in a similar way. The goal is to make you feel intimidated by the advisors’ alledged expertise (often they barely know more than you do, and are working off a script). In reality a decent advisor would make sure you understood before proceeding and would be able to explain things in a simple way.
- Recommend you buy something off-shore, wrapped up in an insurance policy. This serves to make the details of what you are buying obscure, as well as to disguise the costs and make it difficult for you to compare it to other investments.
- Not explain the fees in full. This kind of advisor works on commission, and often those commisions are the equivalent of several years’ worth of your payments (this is why this kind of product has such severe early redemption penalties). There are also often layers of fees, so you’ll be paying annual fees on your funds, plus a management fee to the advisor.
- Put you into overpriced funds like this one. 5% initial purchase fee? 2.47% ongoing fee? This kind of product should be illegal.
- Call you up once a year to try to talk you into changing your portfolio. The advisor will have some kind of justification based on spurious political or economic analysis, but the real reason is that they want you to incur those initial purchase fees again (so they can get a new commission).
- Not be qualified in any way. In Japan, in order to give people financial advice you are supposed to have a financial planner qualification. If you want to sell people financial products, you need to have a financial sales representative qualification. Most ‘advisors’ have neither of these. They are more sales people than investment professionals. After all, if they were any good at investment, would they be dredging around trying to trick English teachers and working stiffs out of their savings?
For a long time, it seemed that investing through one of these predatory advisors that target expats was the only option in Japan. And indeed, even investing in the terrible products they push on people was probably better than doing nothing.
But fortunately that is no longer the case and more and more people are becoming aware of the decent investing options most people have in Japan (US citizens being the large exception, but they have decent options in the US instead).
RetireJapan has information in English, a thriving forum where people are patient and helpful, and paid guides and coaching for those who want a bit more help. There is no reason to get ripped off any more.
How about you? Do you have any experience with predatory advisors? Did I miss any of their tricks of the trade? Or am I wrong about the industry?
Hi Ben
As a former stockbroker and now a tax professional who see the ongoing sad faces of investors being burned or not able to explain what they put their money in, agree with you 100%.
On the other hand, it is the responsibility of investors to do a bit of financial education rather than trusting the “pros.”
In my town of 60,000 I searched hard for a financial advisor who wasn’t attached to an insurance company. I found two offices; one never answered their phone. I went to the other one to start a conversation. It was a young woman who had just gotten her certification. She made two crazy leaps of logic in her proposed solutions, and at least one pretty huge mistake in her first attempt at a plan. I never went back.
I had a pretty good experience, but not good enough to go beyond the free trial: https://www.retirejapan.com/blog/talking-to-a-financial-planner-in-japan/
Although it wasn’t in Japan, the advisor that my dad hired to manage his retirement portfolio decreased its value quite a bit. They make it sound like investing is difficult and risky without their help.
That sounds like a parasitic advisor. Their business model depends on them persuading you that they are necessary.
The opposite, an enabling advisor, works to help you learn and eventually can help you transition to managing your own investments. If they stay on it is because you find it convenient or reassuring to have them involved, not necessary.
I think it’s not only predatory financial advisors but the whole industry is trying to make as much money as they can off the small investor. Take a look at what Schwab is doing https://finance.yahoo.com/m/14e2f86b-07ff-35b0-ae80-4583b7c31f90/charles-schwab-is-now-a-huge.html?.tsrc=applewf .
That doesn’t seem too bad. Similar to the insurance company float model? And investors get reduced fees. If they are savvy they don’t park their money in those accounts so it’s a win-not lose situation.