The Advisor Shouldn't Be Compensated by Commissions

Advisors charging commissions contend with a conflict of interest. Instead of providing the best products for clients, they may climb into bed with firms that satisfy their own needs.

The Advisor Shouldn't Purchase Individual Stocks for Your Portfolio

Some advisors shun actively managed mutual funds, but claim they can pick individual stocks to beat the market. Don't fall for that. Most stock pickers underperform indexes over time. Remember, 70 percent of actively managed corporate pensions underperform the market.¹ I'm not talking about the offshore donkeys sold by firms like Generali and Friends Provident. Instead, I'm talking about stallions: corporate pensions unavailable to retail investors, charging razor‐thin costs to firms like General Electric. If they can't beat the market, how can your high‐cost retail broker?

Not only do stock‐picking brokers underperform, but most fail to adequately diversify. Larry Swedroe, CBS MoneyWatch columnist and coauthor of Think, Act, and Invest like Warren Buffett, suggests that investors require at least 50 individual large‐cap American stocks just to provide enough US large‐cap diversification.² That doesn't include mid‐size or small companies. According to Vanguard, its total US stock market index contains more than 3,600 stocks, including large, medium‐sized, and small company stocks (known as large‐cap, mid‐cap, and small‐cap).

Full diversification, of course, isn't just limited to stocks of different sizes. It also includes international exposure. Unless your broker is going to add hundreds of foreign stocks, you won't receive a broad representation of the global markets. And because your advisor can't predict the movements of hundreds of different stocks from multiple countries, you're better off with indexes.

The Advisor Should Charge No More than 1.25 Percent Each Year

Ensure that your prospective advisor charges 1.25 percent (or less) each year to manage your indexed portfolio. If an advisor charges as much as 1.25 percent, you should demand exceptional ongoing service. This would be a $1,250 annual charge on a $100,000 portfolio. As you've seen, costs add up. Paying 1.5 percent instead of 1.25 percent could cost tens of thousands of extra dollars over time when calculating the effects of compounding interest.

The Advisor Shouldn't Gamble

Speak to prospective advisors about their investment philosophy. Avoid advisors who alter portfolios based on economic predictions. They may sound sophisticated while referencing soothsaying economists, but don't fall for it. If forecasting (whether the advisor's or the firm's) is the order of operation, plug your ears and walk. Most economic predictions are wrong—making them very costly indeed.

The Advisor Shouldn't Buy High‐Cost Indexes

Advisors can choose from a variety of index fund providers from which to build your portfolio. But insist they do so from Vanguard, Fidelity, Schwab, Dimensional Fund Advisors (DFA), or T. Rowe Price only. If they're using exchange‐traded index funds (ETFs), insist on Vanguard, Schwab, iShares, Horizon, BetaShares, or PowerShares. A few other low‐cost providers exist, but if your advisor can't build a portfolio with the ones I've named, you're dealing with a charlatan.

Index Advisors for American Expats

• Company Name: Noto Financial Planning
• Minimum Account Size Requirement: US$750,000
• Contact E‐mail: [email protected]
• Tel. #: +1 (808) 638‐2475

Years ago, the Campbell Soup Company stuck a boy's face on each of its cans. He represented wholesome goodness, and even today I can't get his image out of my mind when tucking into a bowl of mushroom soup.

Spend 10 minutes with Tony Noto and you might think you've found the adult manifestation of Campbell's wholesome image (the Campbell soup kid now sometimes sports a beard).

Tony Noto is a Certified Financial Planner (CFP) and Chartered Financial Analyst (CFA). “When I began advising expats in Shanghai on their finances in 2008,” says Tony, “all of the companies were focused on selling offshore pensions. I started Noto Financial Planning to provide expatriates with an alternative: financial advice free from commission bias.”

After living in China for eight years, he relocated to Hawaii, where he continues to specialize in expatriate financial planning. He accepts clients with a minimum of US$750,000, charging 1 percent of assets under management, with lower rates for larger balances. He sometimes charges a retainer: a set annual fee. All portfolios utilize an index fund approach.

Unlike most financial advisors, he keeps his client base small. Doing so allows him to provide the highest level of personal attention. He meets with clients in person or via teleconferencing two to six times each year. His annual fee covers all aspects of financial planning: insurance, investment needs, US tax planning, goal setting, and tuition for children's education.

Tony doesn't receive compensation from offshore pension firms, insurance companies, or mutual funds. With his expatriate experience, integrity, and credentials, he's a very sought‐after advisor.

• Company Name: Creveling & Creveling Private Wealth Advisory
• Servicing: All nationalities
• Suggested Minimum Household Investible Assets: US$750,000
• Website: www.crevelingandcreveling.com/
• Contact Tel. #: (66) 2661 2716

Creveling & Creveling's clients often refer to the firm as the Gold Standard for financial planning. Based in Bangkok, it's run by the husband‐and‐wife team of Chad and Peggy Creveling. Both carry the Certified Financial Planner designation. They're also Chartered Financial Analysts and previously worked as equity research analysts. They work with clients of all nationalities, including many mixed‐nationality couples.

Instead of building a large client base, Creveling & Creveling focus on a high level of continuing service.

Many expats also require advice in order to save enough money. Creveling & Creveling offers comprehensive planning. They help their clients monitor their income, expenditures, tax planning, and future retirement needs. Rather than selling financial products, they work with clients in an advisory capacity, much like a household CFP.

The firm charges for its services based on a declining fee structure applied to assets under advisement. A fee of 1.2 percent is applied to the first $1 million and the percentage fee declines above that threshold. C&C's services typically make sense for those clients with at least $750,000 in investible assets.

Creveling & Creveling has been a Registered Investment Advisor (RIA) with the US Securities and Exchange Commission (SEC), and a licensed Investment Advisor with the Thai SEC since the firm's inception in 2006. They also provide general expat financial advice in their monthly newsletter.

• Company Name: MASECO Private Wealth
• Minimum Account Size Requirement: US$1,000,000
• Website: www.masecoprivatewealth.com
• Contact Tel. #: (44) 207 043 0455
• Limitation: For American expats in Great Britain

Americans living in Europe sometimes languish in a tax vice. Those in the United Kingdom, for example, must pay British and US taxes on their American investments once they've lived abroad for seven years or longer. UK‐based Americans often marry spouses of different nationalities, complicating tax matters. MASECO specializes in such issues as it builds investment portfolios and provides full‐service financial planning for American expats in Great Britain.

It's a niche market, for sure, but one with massive followings. Cofounder Josh Matthews explains: “We started the business in 2008, figuring demand would be high. In six years we've accumulated $870 million under management.” Most of the firm's clients have between $1 million and $10 million invested.

The complicated tax structures involved when coupling the regulations of the United States and Great Britain have drawn a huge client following for the 30 employees and eight financial advisors at MASECO. Josh explains that many larger US‐based investment firms came to the United Kingdom to do much the same thing. But they soon abandoned that idea after recognizing the tax complexities. “It's a great marketplace, but very complicated. It's a disaster [for clients] if you don't get it right.”

MASECO charges a maximum 1.25 percent on assets for the first $500,000 invested, dropping its fees for subsequently larger sums. Those hoping to use the firm require a minimum $1 million investment.

• Company Name: Buckingham Strategic Wealth
• Minimum Account Size Requirement: None
• Contact E‐mail: [email protected]
• Tel. #: (1) 800‐711‐2027

Buckingham Strategic Wealth is a huge US‐based firm that builds portfolios of low‐cost index funds. Located in 15 US cities, they manage about $11.5 billion. To open an account, American expats would need to submit a US taxpayer's ID and a US address.

The firm accepts investment accounts of any size, but there's a $1,000 minimum annual charge. As such, investors would pay 2 percent in fees with a $50,000 account. They would pay 1.25 percent in annual fees with a $100,000 account. With a $1 million account, they would pay annual fees of 1.09 percent. They would pay 0.89 percent per year with a $2 million account; 0.76 percent for a $3 million account; 0.67 percent for a $4 million account and 0.62 percent for a $5 million account. Fees, as a percentage, continue to drop from there. For example, investors with $10 million would pay 0.48 percent per year.

• Company: Index Fund Advisors, Inc. (IFA)
• Minimum Account Size Requirement: US$100,000
• Website: www.ifa.com
• Contact E‐mail: [email protected]
• Contact Tel. #: (1) 949‐502‐0050
• US Toll Free: 888‐643‐3133

Index Fund Advisors (IFA) has been advising clients and building index portfolios since 1999. The company, which can service American expats, had $3.24 billion in assets under management as of March 31, 2017. Mark Hebner is the firm's founder and president. He says, “Investors should always seek fiduciaries that avoid conflicts of interest. As such, we recommend that members of your financial team should be independent of each other: a registered investment advisor (like IFA), an independent estate planning attorney, an independent CPA, and an independent insurance advisor.”

The firm's philosophy makes sense. Plenty of investment advisors also act as insurance salespeople. Mark says such advisors “can be tempted to sell various financial products that pay them the most—while their clients get the shaft.”

Mark Hebner and the 40 employees at IFA service their clients and provide unique and robust investor education. They have created a documentary film (Index Funds), 375 videos, 1,550 articles, 2,800 charts and an online financial book library. IFA says they have designed a series of portfolios providing 89 years of simulated returns, which the firm demonstrates with calculators, tables, and dynamic charts.

IFA's investment strategy is based on academic research, including the work of Eugene Fama (2013 Nobel Prize in economics), Harry Markowitz (1990 Nobel Prize in economics), and highly respected academic Kenneth French. Its advisory fee starts at 0.9 percent annually for the first $500,000, with lower fees charged for larger accounts.

Index Advisors for Canadian Expats

• Company Name: WealthBar
• Servicing: Canadians only
• Minimum Account Size Requirement: C$25,000
• Contact: [email protected]
• Tel. #: 1 (604) 670 6048

Unofficially, WealthBar is called a Robo‐Advisor. No, the firm isn't run by robots. That's a media‐created name that rings well with science fiction. I prefer to call it an Intelligent Investment Firm. Such firms are growing in popularity and it's easy to see why. These firms have said, “People are getting smarter. Let's offer something better!”

Unlike most Canadian‐based investment companies, WealthBar offers services to expat Canadians. Such investors would be registered as nonresident account holders. That should keep them free and clear of Canadian capital gains taxes.

WealthBar offers five portfolio options for investors. They help clients determine their risk tolerance before they select a ready‐made, diversified portfolio of ETFs. WealthBar does all the lifting. They offer full financial planning for those whose financial circumstances aren't too complicated. They also build and rebalance client portfolios. All investors need to do is add money to their accounts.

The firm charges between 0.35 percent and 0.60 percent per year, depending on each account's size. That's WealthBar's take. Investors pay a further 0.20 percent (approximately) to the separate ETF provider. Investors with accounts valued below $150,000 pay total fees of about 0.80 percent per year. Investors with account sizes between $150,000 and $500,000 pay 0.60 percent in total fees. Those with more than $500,000 pay just 0.40 percent.

To get started, new clients create a login password at wealthbar.com. As soon as they do so, a message appears.

Hi Andrew, I'm David, a financial advisor at WealthBar. I'm here if you have any questions about investing with WealthBar.

I'm generally available to chat between 9AM‐5PM PST M‐F. You can schedule a call to discuss anything you like or contact me online through your WealthBar dashboard.

David, the financial advisor, isn't WealthBar's Siri. He's a real person. Neville Joanes is WealthBar's portfolio manager and chief compliance officer. As he explains, “Everyone who logs in to WealthBar gets assigned a financial advisor.”

The advisors look at each client's long‐term financial needs, based on their goals, savings rates, investment time horizons, and insurance needs, as well as different tax‐deferred account opportunities.

Investors can request a plan to be reviewed at any time, either online or over the phone. Before doing so, investors fill in some easy‐to‐follow online questionnaires. They ask for information such as current savings rates, investment assets, types of accounts owned (if any), risk tolerances, and salary. Based on client‐entered responses, they show a model of a suitable portfolio. Investors with questions can speak to an advisor.

Plenty of expat Canadians rave about WealthBar. Such online investment firms, I believe, are the way of the future. It won't be long before other online firms take the expat market by storm, much as they have for Americans and Canadians who live in North America.

• Company Name: Objective Financial Partners Inc.
• Certified Financial Planner: Jason Heath
• Website: www.objectivefinancialpartners.com
• Contact E‐mail: [email protected]
• Tel. #: 1 (416) 691‐8471

Jason Heath is in a tough business. He provides objective financial planning but doesn't receive a dime in commissions. The Markham, Ontario–based CFP and income tax specialist doesn't earn annual fees based on his client account sizes, either. So how does the guy make money?

Jason charges consultation fees for broad financial planning: everything from estate planning to budgeting to retirement goals and investment allocation. Because he doesn't benefit from investment purchases or client account sizes, he advises with no strings attached. His firm has an in‐house accountant and an estate lawyer. And Jason isn't too proud to use external resources when it makes sense to do so.

“I was disillusioned by the mainstream financial industry,” he says, “so I wanted to do something different.” Few investment advisors could survive such a lean, transparent compensation structure. But Heath builds a client base through heaps of credibility. He writes a column devoted to financial planning for the National Post, one of Canada's two national papers. Such a platform gives him plenty of exposure.

“I have clients in Canada, Brazil, Europe, the United States, and Africa,” he says. Jason's services are perfect for Canadian expats building portfolios of low‐cost index funds. “If they open accounts with an offshore discount brokerage [like TD Direct International (Internaxx), Saxo Capital Markets, DBS Vickers] or a nonresident account with TD Waterhouse, I can assist them with portfolio allocation after providing comprehensive short‐term and long‐term retirement, children's education, and asset allocation strategies.”

Heath spends plenty of time constructing financial planning goals with clients. He charges anywhere from $1,500 to $4,500 for a plan. “Some of my clients have relatively simple goals and asset distributions,” he says. “But other individuals might have assets all over the place: a home in London, investment accounts in Asia, RRSPs [registered retirement savings plans] in Canada, college funds in an RESP [registered education savings plan]. My job is to negotiate strategies to best utilize these resources with tax efficiency, while aligning with the clients' goals. And as they invest each month, they can call me up and I'll ensure they stick to a logical investment allocation.”

Jason's services might be worth the money. Consider someone with a $100,000 portfolio paying 2.5 percent in Canadian actively managed mutual fund fees. That person would pay $2,500 each year ($2,500 is 2.5 percent of $100,000). Those with $500,000 portfolios would pay $10,000 a year in hidden expenses. Advisors stuffing client accounts with such products aren't objective. Canadian actively managed mutual funds are the world's most expensive. Those selling them benefit nicely. With Jason, however, investors could pay as little as $1,500 once, before getting on track with their plan and their ultra‐low‐cost portfolio of index funds.

Index Advisors for British Expats

• Company Name: Satis Asset Management
• Minimum Account Size Requirement: £500,000
• Contact E‐mail: [email protected]
• Tel. #: 44 (0) 20 3272 0120

Many expatriates feel betrayed by those selling them expensive offshore pension schemes. They may wonder whether there truly are firms that shun commissions, embrace low‐cost index funds, and provide high levels of personal financial planning. Fortunately, a few exist, such as Satis Asset Management.

Based in London, the firm was established by the chartered accountant and tax advisory firm Hillier Hopkins LLP in 2012. Today, Satis Asset Management provides investment and taxation advice to a modest number of wealthy families. As director Ben Sherwood explains, “We have a number of expatriate British clients. Although it's early days for our firm, business growth has exceeded our expectations. We are also one of only a handful of firms that have experience and competence to advise Americans residing in the UK.”

Sherwood is a Certified Financial Planner and Chartered Financial Analyst. He also coauthored the book The 7 Secrets of Money: The Insider's Guide to Personal Investment Success (2nd ed., SRA Books, 2013). In it, he emphasizes the importance of low‐cost investing and diversifying investments across a variety of asset classes. One of the key messages of the book is that investors should concentrate on factors within their control, such as taxes and fees.

For bond allocations, Satis Asset Management usually buys a combination of gilts (individual bonds) and bond funds for clients. For client equity allocations, the firm currently uses Vanguard and Dimensional Fund Advisors' indexes.

Clients wishing to open accounts with Satis must do so with a minimum £500,000.

Investment consultancy and wealth management charges are 0.9 percent per year for the first million pounds, dropping to 0.75 percent for the next £4 million, down to 0.6 percent for the next £5 million.

• Company Name: AES International
• Servicing: All nationalities (except Americans)
• Minimum Account Size Requirement: US$10,000
• Contact Page: www.aesinternational.com/about/about‐us
• Tel. #: 971 (0) 4559 4900

Sam Instone is the CEO of AES International. In 2016, his firm won International Adviser's “Best Adviser Firm in the Middle East” award.⁴ The firm's regional competitors sell offshore investment schemes (which I outlined in Chapter 4). So I liken this award to beating a thousand donkeys in an IQ Test. Fortunately, AES International also won the Global Adviser Firm of the Year award.

Far more interesting, the Queen of England once gave Sam Instone an award. Somebody had thrown an egg at the queen. Fortunately, he didn't play for the New York Yankees, so he missed by a mile and hit Sam in the head. The Queen gave her thanks and a token certificate.

Based in Dubai, AES International can service any non‐American expat. The firm appears to operate as the lone light in a cesspool of expensive offshore investment sharks. The firm's advisors are all Chartered Financial Planners. They also build portfolios based on an index fund approach.

The firm offers two levels of service. Clients with accounts valued between $10,000 and $250,000 qualify for AES International's iShares index fund portfolio. Expats of any nationality (excluding Americans) can automatically wire money to AES International. The proceeds get placed in one of iShares' diversified portfolios of index funds. Clients are placed in a portfolio that reflects their age and/or tolerance for risk.

Investors pay an annual expense ratio of 0.50 percent per year to iShares. Investors then pay 1.25 percent per year to AES International. Total costs are 1.75 percent per year. That isn't cheap, by index fund standards. But it's far cheaper than anything else in the Middle East. Investors can also sell anytime, without paying a penalty. And by investing in a ready‐made diversified portfolio, it gets rebalanced once a year without speculation.

Investors in such portfolios often outperform the funds themselves. Such is the case with Vanguard's Target Retirement funds in the United States.

During the 10‐year period ending May 31, 2017, the average Target Retirement fund earned 5.0 percent per year (this 10‐year period included the market's collapse in 2008–2009). But the average investor in these funds, during the same time period, averaged a compound annual return of 7.13 percent per year.⁵

In other words, the investors outperformed their funds by 2.13 percent per year. This was a result of dollar‐cost averaging. They invested equal sums every month. This allowed them to pay a lower‐than‐average price over time.

AES International's clients don't qualify for comprehensive financial planning (i.e., estate planning, goal setting, tax efficient asset transfers) until their portfolio exceeds $250,000. That's when AES International also reduces fees. Portfolios of individual ETFs cost about 0.20 percent per year. Those are the fund expense ratio charges. AES International would charge an additional 1.25 percent for money management and comprehensive financial planning. This places total fees in line with Creveling & Creveling's for a similar level of service.