New scheme could protect savings

Managed funds can benefit the person selling them more than the investor

You need to be careful before you sign on the dotted line.

Everybody wants to get ahead in life, and whether we like it our not, our future happiness and well-being is linked to our finances. We work to live, and to put something aside for the proverbial rainy day and a comfortable retirement. And working in the UAE gives many expatriates an opportunity to both enjoy a higher standard of living than at home and to save. Sadly, though, where there is money to be invested, there are people who are willing to take it off our hands without necessarily having our best interests at heart.

As The National has reported on many occasions – most recently last week – many expatriates are signing up to long-term investment plans that create more benefits for the people who sell them, and the companies who offer the product, than for the investor. Targeted principally towards expatriates, many of these schemes are "front-loaded", meaning that the immediate beneficiaries are the fund managers and financial planners who receive very large commissions.

Some investors have locked themselves into payments of $1,000 or $2,000 a month for up to 25 years. If they want, or need, to bail out early, they can end up with little, or none, of their money back. Given the global economic situation and the fact that many expatriates will only be on large salaries for a short time, these products are not fit for purpose in most cases. However, financial planners are highly incentivised to sell this form of product because it gives them an immediate bonus and ongoing payments. The potential for this to skew their judgments and recommend these products over more suitable investments is therefore high. Clearly, financial planners should be more accountable, but investors need to be on their guard about who is really benefiting from any scheme they may join.

One solution to the investment dilemma would be the creation of a new product similar to the mandatory provident fund in Hong Kong and compulsory superannuation in Australia. This could replace the current system of end-of-service gratuity. Employers would make monthly payments into an authorised investment fund on the employee’s behalf, and employees would have the option to make their own top-up contributions. Such a system would benefit wage earners, whose investments would be more secure, and employers, who would no longer have to deal with the uncertainty of how much to put aside in their budgets to pay end-of-service gratuities.