Bermuda Financial Fundamentals Series — Investing: Mutual Funds and Portfolios. Part 2.

Bermuda is a sophisticated international finance centre. Originally an isolated island with no native inhabitants, Bermuda today has thousands of multinational residents who are intrinsically connected to multiple jurisdictions and have international family attachments.

Thus, it is a challenge for most individual Bermuda residents to understand the — literally — millions of types of global investments available today. Learning about investments is just the first step. Picking the appropriate investment takes numerous steps, particularly on the international tax-related side where investors (both domestic, US, UK and other countries connected) and their financial representatives seldom realise that investment choices have tax consequences. Specific investments triggering tax traps will be addressed later in this series.

If you are a beginning investor, brave enough to wade through investing information galore, then, your priority is devoting considerable precious time to negotiate the investing processes of review, decision tree choices, suitability for your personal financial situations, implementing an action plan, and consistent monitoring of the results in capital markets.

This group of investors could be categorised as independent do-it-yourselfers who are particularly interested in controlling their own decisions. They truly enjoy all aspects of the investment process.

Well now, most of us are not that determined. In fact, readers over the years have stated they find investing and investments intimidating, and way too complex for mind control. Instead, the entire personal investment structure remains a daunting process, with lots of negative connotations. Generally, they will just put off any decision for another time.

So, we need help. We look to financial and pension representatives to guide us, advise us, and work with us through, at least, basic understanding of investing for our future. We want to work with these individuals because whether we own many single investment securities (stocks and bonds, etc), have a small managed portfolio, want to purchase a mutual fund, or have our hopes and our salary allocations in pension funds, we assume that their knowledge and experience is far greater than ours.

But, is it?

Your first task is to ascertain whether your representative can do a good job for you.

Possibly the most frequently asked questions by small investors:

1. How do I find a good financial representative (FR) or Investment Provider (IP) as described in the Bermuda Investment Business Act 2003? This is followed by:

2. Who can I trust?

3. How will I know if the FR will take care of my interests ahead of his / her own compensation?

4. What should I be looking for relative to this person and the investment provider firm? Disclosure, disclosure, disclosures.

Finding a trusted financial representative in Bermuda can be difficult to quantify. There is no mandatory minimum financial planning exam in order to practice, or tiered adviser categories as authorised by the Financial Services Authority in the UK. There is no mandatory minimum securities exam / licence such as Series 6, or Series 7 as mandated by US Securities and Exchange Commission. Generally, Bermuda investment industry work permit holders tend to carry some security designation from employment in a foreign securities market.

Some will represent the Big Four (CFA, CPA/CA CFP, ChFC) of qualified licensed credentialed investment professionals, duty bound to adhering to fiduciary standards. However, over the many years here, I have seen the exact reverse — individuals with no investment knowledge or training placed in a financial representative role — complete with the financial institution’s proprietary funds and a selling script.

There are no securities licence designations or requirements specifically mandated or supported in Bermuda. Instead, the local investment universe of financial representatives and their investment provider employers are directed by the Bermuda Investment Business Act 2003 (and Amendments 2012) General Business Conduct and Practice Code of Conduct relative to investment firms and their practices.

Bermuda banks, investment, pension firms and trustee investment advisers are required to conduct business with the public — here referencing just a very few of the general conduct parameters of the Act. More discussion to this Act in later articles regarding disclosures of fees, conflicts of interest, fiduciary standards:

• Act with due skill, care and diligence in conduct of business;

• Know your client — know their financial circumstances and investment objectives;

• Ensure as far as one can that the product (purchase or sale) is positively suitable for the client;

• Investment provider shall not recommend a transaction, if client does not understand the risk involved;

• Must have appropriate records maintained relating to the training, experience and qualifications of staff and clearly showing the categories of transactions, which the person is competent to conduct.

A Universal investor complaint. Readers over the years have commented that they have not always been happy with some financial representatives because “they felt that the person had his/her own best interests at heart, not the interest and needs of the client”. Unfortunately, across the capital market spectrum, this appears is a common complaint that has in turn led to a diminished respect for the description “financial adviser”.

The continued acceleration in individual online trading (TD Ameritrade just announced one of their best quarters ever) stems partly from this same client disenchantment with advisers of one form or another pushing unsuitable, expensive, commission products at them.

“Client feelings turn to thoughts such as, what exactly is it that they do, that I can’t do for myself!”

Comments have been made to me such as “I gave them my money and they seemed to lose interest in me” and “I invested with them about three years ago, and no one has contacted me since”.

I think we can all agree that these are not exactly optimum investment provider-client working relationships. And don’t blame me. These are true statements from the disenchanted.

Next, qualifications and the alphabet soup of financial salesmanship. Bermuda Investment Act sets policy for local investment personnel. Who polices the suitcase salespersons bringing their securities products into Bermuda and taking cash out? Is it possible to be successful investing on your own?

The author does not buy or sell investment products, nor pay or receive referrals regarding the same. The information in this column is general in nature and does not represent a recommendation to buy or sell stocks or any other investments. Readers needing specific assistance should seek help from qualified licensed professional investment advisers.

Martha Harris Myron CPA CFP JSM Masters of Law: International Tax and Financial Services. Appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland. President: The Pondstraddler Life Consultancy: international financial planning, publications, presentations for the challenging lifestyles of multinational individuals and their families residing, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle. Specific focus for residents of Bermuda, the premier international finance centre. Contact: martha@pondstraddler.com