Viewpoint: Offshore financial advice in the post-ROPS, super-transparent era: Part 2
As we noted yesterday, it’s emerged that UK Chancellor Philip Hammond’s unexpected 25% tax on most overseas transfers, taking effect the day after his 8 March announcement, has already had a major effect on many offshore advisory firms, some of which had been relying more on their pension transfer business as a source of income than had been generally realised.
Meanwhile, data is emerging that reveals how sales of unit-linked savings and investment life policies in Hong Kong and Singapore have collapsed over the past two years, in response to the introduction of new regulations similar to those brought into the UK market under the Retail Distribution Review in 2013. This is taking place even as similar rules are about to come into force in other markets around the world, as regulators respond to consumer complaints, and as global moves towards greater transparency begin to bite.
Below, in the second of our three-part exploration of these critical issues now affecting the global advisory community, Paul Gambles, managing partner of Bangkok-based MBMG Investment Advisory, explains how diversifying – and simply paying attention – can make all the difference to a company that looks after its clients properly, and thus doesn’t have money to burn.
Chancellor Philip Hammond’s QROPS industry “chop”, on 8 March, certainly created a shockwave that has reverberated across the international/cross border financial advice sector. The effects have, though, varied widely from firm to firm.
And the repercussions will continue to be determined not only by the type of advisory business in question, but also by its location, and the nature of its clients. The consequences will be neither uniform nor symmetrical.
But it has to be said that the management of any international advisory business that is likely to be seriously affected by the new, admittedly-un-announced 25% tax on pension transfers has not been paying attention.
Because as this and other publications have been reporting for months, the UK authorities have been openly announcing their alarm at the scale of investment scamming that has been taking place, including but not only in the international pension transfer sector.
They’ve removed a number of countries from the official list of those to which UK pensions may be transferred – and these aren’t the wink-wink-nudge-nudge types of jurisdictions tax authorities typically like to refer to as “tax havens”, but the likes of Canada, France, Italy and the US. (Okay, whether the US is a tax haven or not is perhaps a subject for another day…)
At the same time, a growing number of countries around the world are following the lead of the UK and Australia in forcing the sale of investment products to be a more transparent business.
As mentioned above, this has resulted in an 89% plunge in the new business sales of unit linked insurance products in Hong Kong between 2012 and 2016. This is good news for clients, of course, and certainly many of them have suffered over the years, at the hands of unethical or simply inept advisers, but it will mean hard times as the new regime is bedded in.
Here in Thailand, where there has been no shortage of bad press about unregulated advisers, there’s a distinct perception that times have changed. In fact, Thailand’s strictly fee-only regime for advisers (with brokers restricted exclusively to approved products), has quietly made the Thai SEC something of a poster child ‘new model regulator’.
That said, there is undoubtedly a danger in expat markets – as there was in the UK when the Retail Distribution Review (RDR) was brought in – that many individuals will be dissuaded from seeking advice by the idea of having to pay for it, the idea of “free” advice being, by now, so generally accepted.
This in turn could mean more people unprepared for major illness, injuries, unemployment, retirement or the death of a partner.
But all of this also points to the way forward for any advisory firms wary of the the new, tougher regulatory climate.
While the “drugs” of commissions, hidden fees and pension transfer fees and related costs may now be all-but-banned in many jurisdictions, advisers looking to kick the habit may wish to do what we, at MBMG Group, did, years ago: diversify.
We might not still be here if we hadn’t. A broader range of services and income streams certainly helped provide a buffer for us during the more difficult times, particularly during the Asian financial crisis in 1997, SARS and various Asian flu epidemics and the regular coups d’état.
As I often point out, advisers always preach about diversification being the only free lunch in investment, but they too rarely follow this shrewd observation in their own businesses.
Certainly if we hadn’t diversified at MBMG years ago, I don’t think we’d have been able to reach the point we’re at today.
We started out in 1995 as a basic advisory business for expats, in Bangkok, but then moved into accounting, audit services, legal, tax and property/mortgages for expats, as well as for foreign-owned or operated businesses in Thailand, and then, gradually after that, further afield.
Some foreign institutional work followed, and we then set up a family office operation, for clients who needed those specialists services (whether they realised it or not).
Most recently we’ve been increasingly helping Thai individuals, businesses, family offices and institutions with their wealth structuring needs, whether through our investment advisory practice (which is ring-fenced for regulatory reasons) or our broader range of professional services.
This latter now enjoys a genuinely global reach, thanks to our membership of Geneva Group International, the sixth largest global professional services network.
Pensions, retirement ‘still important’
That’s not to say that pensions and retirement advisory services are unimportant to us. In fact, they have contributed a little more than 20% of our fee income, on average, the last few years.
Only a small component of that amount, though, is attributable to advising on UK pension transfers (QROPS/ROPS, SIPPs, etc) – and the way we see it, that amount might actually increase rather than decline as a result of the UK’s recent crack-down on the pension transfer regime.
By far the greater proportion of our pension-related income comes from ongoing asset allocation advice – primarily in respect of QROPS, but also SIPPs as well as other retirement planning such as American 401ks and IRAs, Australian Superannuation accounts and, here in Thailand, the RMF and Provident Fund. We expect the eagerly-anticipated MPF accounts to be added to this list.
Sadly, too great a proportion of what we do in this area involves ‘fixing’ allocations within QROPS that were poorly conceived, typically by the “door-to-door salesmen” types who have given offshore financial advisers a bad name in certain quarters.
While we plan to keep MBMG’s fee-based doors wide open, as ever, to helping as many of these victims as we can, we wouldn’t be sorry to see the growth of this portion of our business dry up completely.
This story originally appeared in the May, 2017 edition of International Investment magazine. It may be viewed by clicking here.