The world of financial advice in the UAE has been plagued by cold-calling salesmen for some time.
Out to make a quick buck, they often sell the unsuspecting long-term investment funds to secure big commissions and massive upfront fees by dangling visions of early retirement and prestigious education for their children.
These investment plans, offered by well-known names in the business, can end in tears for those sweet-talked into signing on the dotted line without reading the terms carefully. Later when they want to get out of the agreement, which can last up to 25 years, they discover they must pay a hefty fine for exiting the plan early, sometimes wiping out half of their savings.
As more people wise up to the pitfalls of investment plans sold by fly-by-night salesmen, a new breed of financial adviser has stepped in to meet demand for fee-based financial services, rather than commission-based.
Fee-based financial advisory companies, will either take money for a particular service rendered or an annual fee that is calculated as a percentage of assets under management, typically 1 per cent. This reduces the risk of the unwitting being caught out.
“In my career I have come across hundreds of clients invested in unsuitable and expensive investments,” says Sam Instone, the chief executive of AES International, a London-based firm that offers fee-based advice.
“Even worse, many have no idea until they decide to cash in their investment and find it is worth far less than expected, sometimes much less than they invested in the first place.”
Since opening up shop in Dubai 18 months ago, Mr Instone, 37, has signed many clients in this predicament including Dubai-based Louiza May, a British teacher.
Ms May says when she came to the UAE two years ago, a financial adviser that specialises in helping teachers invest their earnings was recommended to her. Ms May says she put complete faith in the charming and eloquent adviser, only to find later that the numbers on her periodic statement of investments didn’t add up. It transpired the adviser had taken the total fees for the duration of the decade-long plan – £18,000 (Dh101,570) – up front, leaving her feeling cheated.
“I am a teacher,” she says. “I care and look after other people. And I thought that’s what people do in the world. You know that you are going to pay for something; fine no problem. And then you think, hang on a minute, where’s that gone?”
Ms May turned to AES, which tried to recoup some of her losses by putting her in funds that do not take management fees up front and do not levy heavy penalties for redemptions.
Because Ms May’s experience is a common scenario in the UAE, AES has found an innovative way of hoisting competitors by their own petards. To attract clients, the firm offers them a free review of their existing investment portfolios to gauge whether they are being robbed.
At the heart of the problem, says Mr Instone, a former army officer, many UAE advisory companies do not have their clients’ best interests at heart because the bigger the commitment that they get from the client and the riskier the funds they put them into, the bigger the payout.
He says he has come across more people than he can remember who at the end of their careers have lost their entire life savings to unlicensed financial advisory firms. While such operators were common in developed markets like the UK and Australia 20 years ago, they still exist in many emerging markets where regulation is not as advanced.
Even so, ensuring that consumers are not ripped off is a problem that is not only limited to emerging economies such as the UAE but also in developed countries. In the US, the president, Barack Obama, is working on a law forcing financial advisers to act on a fiduciary basis rather than commission because thousands of pensioners lose their nest egg each year at the hand of unscrupulous operators.
The US labour department says about $17 billion a year is lost by investors because brokers do not fully disclose fees and give advice that isn’t in the best interests of clients.
For some, like 29-year old Jonathan, who only wanted to reveal his first name, cutting his losses early was the most rational course of action. Jonathan says he was ensnared by a salesman soon after arriving in the UAE from London two years ago but then realised, after an evaluation by Mr Instone, that the fees he was paying made the likelihood of ever making any money slim. He says the terms and conditions of the investment and the full extent of the fees, as well as the penalties he would incur if he broke off his long-term plan early, were never made clear to him. He says he lost £9,000 after terminating his contract.
“You naively expect these guys here to be authorised and qualified and do the right thing,” says Jonathan, who is employed in real estate in Dubai.
In a report published by AES last month, the firm sought to demonstrate the effects of fees and commissions that come with some long-term investment schemes – often offered by insurance companies – dubbed “offshore bonds”.
The report attempted to highlight, generally, how corrosive the effects fees levied on customers can be to portfolios, with charges often totalling 6 per cent a year. These include a 0.5 per cent to 1.5 per cent annual charge to the pension or bond provider, a £400 fixed annual fee to the bond provider, a 1.5 per cent a year establishment charge for the first five to 10 years, a 3 to 8 per cent initial commission on the investments held as well as an annual charge of between 1 and 3 per cent on the actual funds.
As an example, the financial firm shows how a £100,000 investment, assuming a growth rate of 5 per cent a year, would fare after the multitude of charges. In the example used, the value of a £100,000 lump sum invested over 20 years through a long-term investment plan, with charges similar to those outlined above, would only start to make money after year 15 and after 20 years would only be worth £107,768, representing a gain of just 0.08 per cent a year.
For many who have signed up to these plans, the realisation that something is amiss comes too late, with some minimising monthly payments to the scheme or cutting short their losses.
David Marshall, the senior executive officer of the asset management division at Emirates NBD, says a fee-based approach is better because commissions and annual charges tend to be more onerous to investors with small amounts of money.
While Mr Marshall acknowledges there are problems in the way financial investment products are sold, there have been improvements for the better, especially at bigger banks which ensure financial advisers are properly trained.
“There is a movement away from up-front commissions and I am hearing there may be moves to outlaw indemnified commissions, which means the providers are going to move towards annuity-based models that much more closely align interests of the clients with that of the provider,” he says. “There is no problem with charging a fee, it just needs to be disclosed.”
UAE authorities, he says, have also stepped up their game to ensure unsavoury practices are stopped. To that end, the insurance authority last year raised the bar for financial advisory firms, stipulating that if they wanted to stay in business they must raise their capital basis, and ensure employees pass rigorous examinations, among other things.
As laudable as the efforts of fee-based firms like AES might be, they too may find their business model threatened in the longer run because giants of global asset management such as Vanguard and Charles Schwab are starting to offer wafer-thin annual management fees, sometimes as low as 0.25 per cent. Companies such as these may cannibalise much of the world of independent financial advisers.
Mr Instone acknowledges that competition will intensify.
“The financial industry is changing and professionalising, which should be good for consumers,” he says.
mkassem@thenational.ae