8 questions to ask your financial adviser

Watch out for red flags when brokers try to promote expensive products with high fees and long lock-in periods, experts say

It’s best to avoid a financial adviser if they ask you for referrals prior to having done any business with you. Getty Images

Choosing a financial adviser to manage your life savings, retirement fund and other investments can be a huge leap of faith for many people.

This has been a difficult task for some in the UAE, where many financial advisers are actually brokers who receive commissions for selling high-fee financial products with long lock-in periods to unsuspecting customers.

There's no doubt that the mis-selling of expensive savings, investment and life insurance products has dented consumer confidence in the industry. But the UAE Insurance Authority's recent regulatory changes on life and family takaful insurance are expected to put an end to the mis-selling of financial products and increase confidence in the market.

Under the regulatory changes, the IA has capped the commission payable on a policy over its entire course, while financial advisers must include a mandatory 30-day “free-look” period that allows customers to cancel it for free within the first month of the policy’s inception. They are also now required to provide a benefit illustration to customers before the policy commences and a policy statement every six months.

Here are eight questions you should be asking to prevent you from making crucial mistakes when appointing a financial adviser.

What are their qualifications?

Make sure the financial adviser is qualified. Ideally, they should have at least a Level 4 qualification from the Chartered Insurance Institute or Chartered Institute for Securities & Investment, which provide professional qualifications in insurance and financial planning, says Steve Cronin, founder of DeadSimpleSaving.com.

“There are many advisers out there advertising they have qualifications but don’t actually have them or they are not in date or valid,” says James Spence, the Abu Dhabi-based vice president of financial advisory company Globaleye. “For example, some advisers would put ‘CII’ after the name. CII is not a full designation of a qualification, it’s just an acronym of the institute. An example of a real qualification would be ‘Cert CII’ or ‘CII Award’”.

Customers can ask for a copy of the certificates to check the qualifications or visit the institute’s official website and search for the adviser’s name, Mr Spence adds.

What is the lock-in period?

Before the Insurance Authority’s recent changes, consumers would often get locked into long-term savings plans that are riddled with high fees.

“If a policy has lock-in periods, it is due to fees being charged over a longer period of time,” says Lewis Delaney, senior associate at wealth management firm Finsbury Associates. “Cheaper solutions without lock-in periods are available, so always ask your adviser for an alternative if they mention lock-in charges.”

How much are the product fees?

Product fees can eat into your savings and make a massive difference to the amount of money you get in the end. Understanding all the fees involved with any advice you receive is crucial.

“Percentage of assets under management – this is an ongoing fee, which is a percentage of your portfolio’s value," says Elie Irani, a board member of SimplyFI, a non-profit community of UAE investment enthusiasts.

"The fees normally include your adviser’s fees plus those of the underlying funds. Your total fees [advisory plus underlying fund fees] should ideally be less than 1 per cent.”

To put this into perspective, if the expected rate of return on your investment is 7 per cent and you’re paying around 2 per cent in fees, you’re giving away about 25 per cent of your gains, year after year, Mr Irani says, adding that the compounding effect of fees can be detrimental to your portfolio’s performance.

“There will also be a one-time fixed fee that the financial adviser charges for setting up your portfolio, or a recurring fixed fee for managing your portfolio, that is independent of your portfolio’s value. Note that you would still get charged for the fund fees, so make sure you factor those in anyway,” Mr Irani adds.

An adviser must provide you with each fund’s total expense ratio and the total annual ongoing cost of the investment platform and its funds, Mr Delaney says. He adds that a customer’s investments will need to outperform the total expense ratio of their portfolio.

“When you have an adviser that says, 'Don’t worry, I am not going to charge you and all the fees are paid by the other side', run a mile," Mr Spence says. "If they say that all the fees are ‘built into the product’, then I would recommend to avoid this product. If an adviser won’t put in writing exactly what they are earning from looking after your money, then they could be hiding some fees and charges.”

It’s also best to avoid working with a financial adviser who is paid commission by the funds or platforms that they recommend, according to Mr Cronin.

What is the investment strategy?

You need to ask the adviser about the investment strategy they use. “Ask your adviser how they will keep rebalancing your holdings and which sectors they will see as growth areas," Mr Delaney says. "Your adviser should be able to give you an understanding of when to take more risks and how to take risk off the portfolio when it’s required.”

Academic research has shown that over the long term, index funds beat actively managed funds by a considerable margin. For instance, index funds outperformed 70 per cent of all US actively managed stock mutual funds in 2019, according to the S&P Indices Versus Active report.

Mr Irani says he favours advisers who build a portfolio of low-cost passive index tracking funds or exchange-traded funds.

“It’s almost never a good idea to mix investment with insurance. Hence, I would avoid advisers promoting plans which combine both insurance and investment in a single package,” he adds.

How many times a year will we meet?

There have been numerous complaints from customers about never seeing their financial advisers again after being sold an investment policy. It is important to agree at the outset about how often you would like to meet them and also to convey your expectations about timely replies to messages and emails.

“Being a client should entitle you to regular communication and meetings with your adviser. If your adviser isn’t communicating, then perhaps they don’t value you as a client and it’s time for a change,” Mr Delaney says.

Who has custody of your money?

Clients must make sure that their money is in their name with a trusted custodian, such as a big-name brokerage house or investment bank, Mr Irani says. Make sure that the adviser is not able to make withdrawals from the account under any circumstance, he adds.

Which benchmark are they using?

It is imperative to ask your adviser which benchmark they are trying to outperform and their reasons for choosing it, Mr Delaney says. Common benchmarks include the S&P 500 or the FTSE 100. This will help you determine how you can achieve your investment targets.

What solutions can you offer?

Most advisers tend to promote products from the same company as it may pay them higher commissions.

“Ask the adviser to show you cost comparisons and details about what other solutions they had sourced for you. If they can’t do this, they probably don’t have your best interests at heart,” Mr Delaney adds.

Other factors to keep in mind before your first consultation with a financial adviser include asking for client testimonials and doing an online search for reviews of the company and adviser. It’s recommended to have an adviser who has been in the region for some time and is well established.

It’s best to avoid an adviser if they ask you for referrals prior to having done any business with you, Mr Spence says. “You should only refer people to your adviser once you have seen some good results and see benefit in the advice given.”

It would also help to establish a rapport with a financial adviser you intend to work with. “You want to work with someone you are comfortable with, who will motivate you into improving your situation, who will help develop your financial goals and support you with knowledge along the way,” Mr Spence adds.