During the recent coronavirus epidemic that spread across China and claimed thousands of victims, the government of Wuhan (a city the size of London) issued a decree that effectively shut down the city and curtailed movement of all people. It was a dramatic effort to contain the spread of the virus but it plunged the city into misery and desperation. Most were stuck, but who, ducking under the radar, were those lucky few who made a swift exodus and escaped the lockdown nightmare?
In the following weeks, with the virus spreading, the residents of Wuhan were cut off from the outside world and left to fend for themselves. With dwindling medical and food supplies, residents began turning on each other to compete for resources and the worst of humanity was sometimes on display.
But what many people are unaware of, is how literally in the last few hours before Wuhan was quarantined, thousands of its most wealthy residents booked the last remaining flights (or buses) out of the city and escaped. They were a diverse group of people that ranged from entrepreneurs to bankers and lawyers.
They acted quickly and decisively to flee at just the right time, following in the footsteps of smart and wealthy groups from bygone eras. People who, in the darkest moments of history, somehow managed to break free.
There is usually only a short window of time available to make the exodus. So to get the last plane out of there, you already need in your possession a foreign passport, (or residence permit) some foreign property and offshore wealth. Without these assets, you may find it impossible to restart life in another land.
What this shows is that having wealth (and a passport) outside of your country of origin/residence, in a safe haven jurisdiction (like Switzerland), is an effective insurance policy and it should form an essential part of wealth planning.
The problem, however, is that most people do not possess the specialist knowledge required for acquiring such sought-after assets. That’s where a financial advisor comes in.
What is a financial advisor?
A financial advisor is an individual who advises and counsels on the overall financial affairs of his/her clients. People often mix this up with wealth managers, whose responsibility only extends to the investment management side. Financial advisors oversee the holistic financial portfolio, ranging from cash flow and debt management, to insurance and tax advice. As well as estate planning and wealth management.
Why do you need a financial advisor?
There are many benefits in retaining the service of a financial advisor:
- Qualified financial advisors possess the technical knowledge to guide their clients towards their financial goals, using a combination of investment, savings, tax efficiency improvement, and insurance products;
- Experienced advisors can often act as a “sounding board” and offer an unbiased and unemotional second opinion on your financial decisions;
- They act as an “enforcer” of your financial plans to bring in discipline and prompt you to take various actions in order to reach your goals;
- Most importantly, they can carry out many tasks that you are simply too busy to do, thus saving you time.
The main benefit of hiring a financial advisor is the professional competence and experience of an individual to advise you on a range of financial affairs, including:
- Debt management: debt can seriously complicate your finances and keep you from making progress toward your long-term goals. Creating and executing a professional debt repayment plan can be invaluable for your long-term financial health.
- Budgeting: creating a realistic and feasible budget is often the first step towards financial solvency and your financial advisor should be more than capable to do this.
- Health and care planning: healthcare cost is rising at a much faster rate than before and having the right healthcare insurance in place not only saves you money but also allows you to recover quickly and get back to earning faster.
- Estate planning: most countries have inheritance taxes that can result in more than half of your loved one’s hard work being taken away by the state. Making the right plan can mitigate against such a situation.
- Retirement planning: even though retirement may seem to be decades away, starting to execute an actionable plan now will see you spending your twilight years in comfort rather than distress. A professional financial advisor will create a realistic saving plan in the most tax-advantageous manner and help you execute it.
- Tax planning: tax and the dislike of paying tax are two certainties in life. However, through appropriate planning, tax liability can be minimised and cash flow increased
- Investment planning: with the most appropriate plan, you should not only see your wealth expand through investment but also do so in the lowest risk way possible.
Who needs a financial advisor?
The short answer is that anyone and everyone.
As previously indicated, financial advisors can counsel on all aspects of your financial affairs and not just limited to investment decisions. So, if at some point you start feeling confused, stressed or overwhelmed about the state of your finances, you should consider having an unbiased fresh pair of eyes to review the situation for you.
When hiring an advisor, it is important to understand the trade-off between competence and cost. A cheap advisor may not cost a lot, but the quality of his advice may also not be very helpful for your problem. On the other hand, instead of squandering money on amateur advisors, you might save thousands long-term by going with a seasoned pro.
They don’t come cheap though, and typically you should expect to pay CHF 400+ per hour. But there’s a reason why they can charge premium rates. You are getting what you pay for, not less. Consequently, it is important that you understand why you need an advisor before approaching one. This will allow you to find the most appropriate and cost-effective solution.
What are the downsides of having a financial advisor?
Whilst the advantage of having an advisor can be substantial, investors need to beware of the potential downfalls.
- Achievement - the conundrum is that if a financial advisor is so capable then why is he still working in the industry? Surely he would have amassed sufficient wealth and retired into the sunset. After all, if you wanted to learn how to drive, then you would want an instructor who is an expert driver. The same logic applies here.
- Incentive - it is very important to understand how the advisor is incentivised. Is he paid by you for the time spent or will he receive a commission from investment products he recommends to you? In the former case, you can be assured that he would almost always have your interest at the forefront of his mind. Whereas in the latter case, it is possible that he always thinks of his commission before anything else.
- Style - most advisors tend to have conservative investment styles in order to protect their reputations. This is great if your goal is wealth preservation. However, if you are the more adventurous type who seeks wealth enhancement, then this may not be suitable.
- Cost - advisors are not cheap. After all, you are paying for the time and knowledge of an expert. Their hourly run is north of CHF 300 and therefore unless your portfolio is above a certain size (usually starting $1 million), it is simply not economical to retain one. Generally, you should keep the advisory fee to be less than 1% of your total portfolio value every year, as the high expense can seriously erode long-term returns.
A 5-step guide to choosing the right advisor
Given the various pitfalls and complications when it comes to financial advisors, we’ve compiled a handy guide to assist you in the process.
- Identify your problem
Are you drowning in debt? Do you need a portfolio review? Are you looking for ways to minimise your tax liability? Understanding the root of your problem is the first step as it allows you to enlist the right help. Hiring a top quality tax advisor for your debt problem will do nothing to alleviate it except for leading you to lose more money.
- Compile a list of advisors that fit your requirements
You can find a shortlist of Swiss financial advisors below
- Perform due diligence and ask a series of control questions
Here’s a list of questions you might wish to ask in your first meeting with them. The key is to ascertain how they are incentivised and whether any conflict of interest is present.
- Are you a registered financial advisor?
- What qualifications do you hold?
- Are you or your firm affiliated with a broker?
- Does your firm offer proprietary funds or separately managed accounts?
- Do you or your firm receive any 3rd party compensation for recommending investment products?
- What is your philosophy when it comes to financial advisory?
- What services do you offer beyond investment and portfolio management?
- What is your fee structure?
- Ask him to advise you on the specific problem you are facing
Once you are satisfied with the answers to the above question, you can commence your relationship with them by asking for advice. Hopefully, at the end of the session, you would have gained more clarity on the solution to your problem.
- Evaluate his approach and performance
It’s time to implement the advice and test out its effectiveness. You should perform a small review every 6 months and a holistic review every year.
Alternatives to financial advisors
In addition to the traditional financial advisory services, there are alternative players who are actively challenging the market share of the more traditional providers. You can find more about them and their characteristics below:
1. Traditional Advisory
Providing personal (often face-to-face) financial advisory services.
Fee policy: Usually based on an hourly fee (CHF 100 to 400 per hour)
Good for: Individuals requiring in-depth service or have complex financial needs.
Bad for: Customers whose needs are simple or already have a medium to high level of knowledge.
Digital investment service offered through online risk questionnaire and goal/risk-orientated algorithmic portfolio construction.
Fee policy: Total expense ratio less than 1%
Good for: Individuals require a quick, functional and low-cost way to manage their investments and satisfied with average market performance.
Bad for: Individuals with complex financial needs.
3. Online financial planning platforms
Automated investment service provider (like robo-advisor) but coupled with virtual human advisors to plan, execute and manage your financial goals.
Fee policy: Between 1-3% of the portfolio value
Good for: Individuals with slightly more sophisticated financial needs than the average; or customers who are not comfortable making their own financial decisions.
Bad for: Customers whose needs are simple or already have a medium to high level of knowledge.
Advisors can be a great asset for investors who are unfamiliar or unwilling to directly participate in the market. With their expertise, knowledge, and experience, financial advisors can yield many benefits. However it is important to remember their limitations and most important of all, their role is purely to advise. Individual investors hold the ultimate decision making power in the process.
It is also worth noting that in most cases, the advice provided by the financial advisor is often common sense and chances are, you know them already (or can access it easily). Thus it is important to decide whether you truly need an advisor as their degree of responsibility will be lower than yours (they do not ultimately risk their own capital). Most investors can effectively manage their capital through their own knowledge and network, as well as various online resources.