Be aware before you sign on the dotted line

Pointers we should bear in mind when considering investments and advisers.

Gary Clement for The National

I got an email this week from someone who described her 20- something year-old self as a diligent but naive investor. She did what most people don't do. She took out policies with four different providers - you know the like, so many of you have been emailing me with their names. She was the poster girl for responsible living, it seems. Except she was lied to and 10 years later is biding her time until the policies mature, in order to start afresh as she put it.
Her email included often asked questions, such as: do I know of a financial adviser who can be trusted, and what redress is there in the UAE for being missold, or in her case, deceived? It's one of many with identical queries.
Others who got in touch were in the throes of taking out policies, and were scared that they could be ruining their financial well-being instead of enhancing it.
The thing is, we don't know what questions to ask, do we? We also know that we can trust no one when it comes to these matters. You might have gathered by now that my opinion is that this kind of "investment" is a losers' game. And that we are the losers.
Still, today I am sharing pointers that I think we should bear in mind when considering investments and advisers.
Note: never underestimate the power of stating the obvious.
. Think:
1. What you pay for
2. How often
3. Risk
4. How you access your money
5. Penalties
6. What if something goes wrong?
. Don't pay to buy or sell your investments - unless they're exchange-traded funds.
. Don't get locked into any contractually binding investment period where you have exit penalties.
. Don't pay ongoing admin or "establishment" charges.
. Don't pay all/most fees up front.
. Do pay a performance-related fee - if your money manager makes you money, he or she makes money too.
. Do know what you are paying your financial adviser for? Is it the knowledge he or she has? Is it proprietary investment vehicles that only they can offer?
. Anyone who asks you to sign a non-disclosure agreement in order for them to part with information is out to scam you. I know of cases where this has happened.
. Make sure everything is documented - via email at least.
Here are a few other pointers from Julian Vydelingum at Killik & Co. Yes, I did reach out to others to share their thoughts, his was the most succinct and comprehensive feedback and I agree with each point below:
. What are the adviser's qualifications? Can they provide you with evidence of these? Some types of advice require specialist qualifications such as pension transfers, so make sure the adviser is actually qualified to advise on such complex work.
. Who are they regulated by? What recourse does a client have in the event of a complaint? What is detailed in their Terms of Business or T&Cs?
. Do they provide a thorough written analysis and suitability report or is it just a recommendation letter?
. How are they remunerated? If it is by commission, will they itemise the commission they will earn from the products they recommend and make this distinct from product charges? Working on a fee basis means there is full transparency on the costs of advice and ensures that the adviser can give truly independent advice with no conflict of interest.
. Will your adviser provide ongoing advice and what is the cost for doing so? Do they formalise this into an ongoing service agreement so a client can hold the adviser's feet to the fire if the adviser isn't fulfilling their obligations? What happens to your relationship with the firm if the adviser leaves?
This leads me on to the issue of who makes a good financial adviser. There is consensus not to deal with advisers who earn via commission - as stated above.
Having said that, I know of two who operated a fee plus splitting commission earning structure: they charged clients an annual fee for reviews and taking stock, and split the commission they earned from the providers of the products their clients decided to buy into - with their clients. They didn't pay out money, instead they created a token system where the clients' portion of the commission was put towards their fees for the next year.
But. They no longer operate here. Why? Because they were not good at their job. In simple terms their clients lost money.
It's more important that the adviser is good at their job. How they make money, for me, is a secondary issue. Having said that, and to Julian's last point: consider this market: transient, lack of legal redress and protection for us punters, and little in the way of what is moral vs what is legally permissible - which is why the firm the adviser works for is, for my money, more important than the adviser.
Key is knowing your stage of life, risk appetite and where you're headed. Why? Because if the product or the strategy is wrong for you on this front, and it goes pear-shaped, guess who suffers? Not the adviser.
The policy I shared with you two weeks ago was a high-risk one. I had a two-year-old at that point and worked for myself. I was high risk, and I wanted to mitigate by being "respon­sible" and taking on the policy. Instead it compounded my risk. I wish I'd had the following to guide me - again from Julian:
. How does your adviser construct investment portfolios? How do they factor in individual preferences, time scales, risk tolerance, capacity for loss, preferred currencies etc to determine suitability?
. Does their organisation have an investment committee or does the adviser have free rein over what to recommend? If so, are they qualified and regulated to advise on investments?
. What are the costs of investing, including dealing costs, custody fees, product charges, underlying fund charges etc. If being recommended mutual funds, ask the adviser to confirm what the ongoing charge figure or total expense ratio of the fund is, as this will factor in all of the fund operating costs. Ensure that you know if the product contains mirror funds or original fund strategies.
. How often does your adviser review or rebalance the investments within your portfolio?
Personally I would advocate passive investment over actively managed funds.
I would have benefited from pointers like these when I was a responsible saver and investor all those years ago. I hope it helps.
Nima Abu Wardeh describes herself using three words: Person. Parent. Pupil. Each day she works out which one gets priority, sharing her journey on finding-nima.com