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The Buck Stops at You

There is meant to be a certain level of duty of care in the world of financial advice, and most honest advisors will take this very seriously. Unfortunately there is a big difference among advisors as to what this duty of care actually means in reality, and also clients have a tendency to take a total hands-off approach and put excessive trust in their advisor. Unfortunately many don’t realise until it is too late that in the end the ultimate responsibility will always fall onto the client.

You have all surely read the standard disclaimers that accompany every fund fact sheet, offering memorandum, or paperwork required to open just about any investment account on the planet. Even on products offering principal protection of some sort there is still the disclaimer that you may in the end lose money.

Unfortunately the financial world is like a food chain, with the central banks at the top lending money at interest to the governments of the world, guaranteed by their ability to raise tax revenue. They have a pretty sweet deal. The big investment banks and other large institutions come next, and if you follow the chain to the end you see the end consumers or clients essentially pay for the whole thing. Only one step above of the end client is the advisor. What this basically means is that when it comes down to understanding your own investments, the buck will in fact stop at you whether you like it or not.

A good advisor will generally invest his own money into the same kinds of things as he recommends to his clients and will follow a similar overall strategy, adjusting for differences in ability and appetite for taking risks. Unfortunately this is not always the case.

What this means to you is that contrary to the way many people would like to have their relationship with their financial advisor to go, blind trust is simply never a smart option. The “pain in the rear end” client who makes sure he understands as much as possible, asking endless rounds of questions before proceeding, usually weathers the rough patches inherent in any investment strategy with much more discipline and reaps the rewards in the end. I am always much more comfortable with this kind of client even if it means a lot more of my time in the early days.

Remember that it is your hard earned money – and the reason I am writing this article now is because the Fed has finally begun the tapering process many in the industry have long anticipated. The US has never had such a long period of super low interest rates, and in the coming years some very unexpected things may happen as they first withdraw from quantitative easing (QE) and then allow the yield curve to return to a more normal place.

While economists rarely agree on much, most of the ones I read seem to all agree that they don’t believe even the Fed knows what the ramifications of its recent policies will be. We are basically in the midst of a very high risk experiment with no precedents to follow.

If the very top of the food chain isn’t quite sure what is going to be the end result, you can bet there is a good chance your advisor just may get it wrong. Make sure you very thoroughly understand your needs for liquidity and your ability to take risk because if you misjudge this it will be you who suffers for it. I am not saying to dump your advisor, simply make him educate you and take the time to make sure you understand. You need to take responsibility for your own financial health and especially make sure you are diversified properly. If you don’t it won’t be your advisor who loses money if things go wrong, unless of course he loses it right alongside you, but it will still be your retirement that turns into a nightmare if that happens.

David Mayes MBA provides wealth management services to expatriates throughout Southeast Asia, focusing on UK Pension Transfers. He can be reached at david.m@faramond.com. Faramond UK is regulated by the FCA and provides advice on pensions and taxation.

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