Why Do Investors Insist On Making Bad Decisions?

5We are currently only close to the beginning of understanding behavioral economics, but it has always fascinated me as I am constantly observing irrational behavour.

I remember back in the last century speaking to a few clients who had invested in non-regulated or very expensive investments. At that time, it was beyond me as to how these sales people could convince normal thinking individuals that this was better than plain vanilla investing, despite the obvious scam or unnecessary expenses involved. Why would they go into a long-term savings plan or suffer big upfront commissions on insurance investments (it should be noted that many regulatory bodies such as the UAE do not consider 1% insurance as insurance) when any short-term returns are in many cases wiped out due to these fees and the risks involved far outweigh any long-term commitment. This is especially true as most clients will not invest for that initial intended period. Typical investment period on a savings account is about 7 years yet they are being signed up for 15, 20 or 25-year plans.

It was not until I read an article written by Richard Thaler, Professor of Behavioral Science and Economics, (he recently won the Nobel Prize), that I began to understand why we have this irrational behavior and why this is an issue for the investor and for the advice been given.

Economists tend to present logical projections on standard and complicated investment models.

Richard pointed out that while we have always assumed that investors make rational choices to suit their best interest, it is in effect not so, investors make irrational choices when it comes to investing.

If this premise that investors make rational judgements is wrong, then we have an issue. How do you turn a ship round when it is going in the wrong direction? Despite empirical evidence pointing to the fact that investors consistently make illogical decisions, then any change to the original supposition that they do make logical decisions would upset the models the economists are using. It would damage their own current business model. As such it is proving extremely difficult to turn this ship around.

Which brings me back to the irrational behavior of people buying into expensive products that fail to deliver or under deliver. In the social world we do not seek truth, we seek bonding and as such we will say things that will have us liked by our social group and peers (why would anyone go on the streets to protest against charges of corruption against their favorite politician). In fact, we are so keen to attack anyone who challenges our thinking, as someone once put it, “the reward is the pleasure of sharing an attitude one knows is socially approved”. We in fact substitute emotions for facts. I saw one statement that said, “95% of clients buy this product” Then as an individual that reads this, out goes the seeking truth and facts and switching to the need for social bonding.

This helps explain the reason why the average investor only makes half of what the market does.  Other empirical evidence shows that an advisor that uses strategies such as asset allocation, rebalancing and behavioral coaching can bring 3% or more p.a. in returns (Vanguard study).

To avoid being in the 50% of investors that make half of what the market does you have to avoid paying excessive fees on products and to achieve greater returns you should be using proper advice.

  1. Search for truth and facts
  2. Need to have Proper risk adjusted superior returns
  3. Annual rebalancing
  4. Behavioral coaching during the investment by your advisor to help you manage the emotional journey

Gordon Robertson MCSI

Me Group

T: +971 50 8459216

E: gr@me-group.ae

Living in the UAE – What’s the difference between having a luxury life style and being wealthy?

 Don’t get caught up in the romance.

We’re lucky to enjoy a lifestyle in the UAE that pales in comparison to other UK/US expatriate locations while we may have our daily challenges we also enjoy endless sunshine, no HMRC/IRS breathing down our necks, and a lifestyle that would cost much more were we living in London or New York City. Very heady, very seductive.

However, we must not forget that living the high life is not the same as being Wealthy. If you spend your income, you are not saving or building wealth — you are just spending.  You may feel “rich”, but you are just living the UAE lifestyle, it’s very easy to be seduced, no matter your background.

Wealth is what you build up over time.  It’s not what you earn and it isn’t measured by having a lovely lifestyle. We can brunch like the best of them, drive the best cars, go to the latest fashionable hangout.  We do not want to have a “boring” life, especially when we see all our friends partying as if it was 1999 (apologies, couldn’t resist that reference).

There are somethings we can control in life, somethings we have a modicum of control and somethings we can’t control.

We can control spending vs savings.  We have some control over earnings and how long we work.  We have no control over taxation and market returns.

But who wants to live like a hermit in the meantime?  Well, the future will most likely give us plenty of time in retirement, time to reflect on our past and this will either be a comfortable reflection or anxious regret.

Comfortable reflection in retirement means the folks that were being a bit frugal while they were earning the money. Regret covers the ones that enjoyed spending the income, but have not saved sufficiently to cover their retirement needs.

I am likely a lot older than most, if I suddenly had to leave Dubai I would by many standards enjoy a comfortable retirement. This came about by my upbringing. My parents never had debt, it was extremely difficult to borrow money way back then.

Although we never had a lot of money, I never had to worry about being fed or clothed. They never taught be about how to manage money, I just saw how we lived. When I went into the brave world at the age of 16, I ate basic food, economising to pay bills and putting off buying the new pair of shoes. If we had Starbucks latte at that time. I’m sure I would have skipped that as well.  So saving is actually pretty easy for me, it’s the way I’ve been brought up and the way I continue to live my life.

But it’s never to late to press the “reset” button or to start to change your attitude, even in small bits.  When you begin to live like this then it becomes much easier to save, you can either spend now or save and be much closer to that desired standard of life during retirement.

If you want to have this comfortable life style or even being able to retire early, then the solution is to not only earn as much as possible, but more importantly, to save as much as possible.

And once you change this mindset, the rest is easy.

Here is what you need to make that comfortable retirement: “the magic power of compound interest”.  In simple terms, it’s when the earnings or interest is added to your original investment.  This in turn generates even greater earnings or interest, and as it grows the growth gets faster.

For example, say you decide at the age of 21 to save for only 14 years £12,000 p.a. at 7% p.a. You then stopped saving and enjoyed life, not saving a dime from age 33.  By the time you are 65 and assuming you have a compound annual growth of 7% , you would have saved £168,000 and your investment would have grown to £2,380,000 .

Say instead you start saving at 35 and save for 30 years at £ 12,000 p.a. at 7% per year. You will have saved £360,000 and your investment would have grown to £1,176,000.  Despite saving £360,000 vs £168,000 in the earlier example, you would still have less than half compared to the person who saved for less and for half the time you saved.  The key is early (and often).

That is the power of compounding and time.

Basically, my advice is to spend frugally and invest the rest. We may not be able to control the stock market, but we can make the decision between spending and saving. This is what will make a significant impact on your net worth. Trust me on this one, savings is a lot safer than trying something dramatic with investments later in life.

I do remember my very first apartment in 1983, I had just separated from my first wife, I could either buy the apartment or drive a car, I could not do both. The car would go to zero value while the investment would grow, I ditched the car, took the bus, and started with my first investment. I wish I had started when I was 21.

Oh….and I almost forgot. Insurance backed investments are very difficult for making money due to excessive fees, which eat into returns. Watch your cost when investing. (this tip came from Jamal)

5Gordon Robertson MCSI

Email: gr@me-group.ae
Phone: +971 50 8459216

Concerned About Your UK Company Pension Scheme’s Health?

5Not to worry, we have the UK’s Pension Protection Fund. But know the fine print.

In the UK, a company can’t default on its pension obligations unless it goes into liquidation.  And the UK Pensions Protection Fund (“PPF”) picks up the bill – within limits — for any UK company being dissolved without having adequate funding for its current and future pensioners.  We usually hear the short sound-bite that PPF guarantees 100% of benefits if you’re already retired and 90% if you’re below your scheme’s retirement age.

It’s the “within limits” bit that’s important to understand, and it’s a bit more complicated than it looks.

PPF’s current yearly maximum is limited to a cap of £38,505 at age 65.  If you retired at your scheme’s normal retirement and are getting a pension of £38,505 or less, you get 100% of your pension.  If you have a pension of £20,000 great, you get £20,000 if it’s £50,000 you’ll lose anything over £38,505.

But note the 100% only applies if you are older that your plan’s usual retirement age when the scheme goes into the PPF.  If you took early retirement, and you are older than the plan’s usual age, that’s fine – but if you took early retirement and are still under the plan’s age, your payments are subject to a 90% cap.

Also, if you retired early and are younger than the plan’s usual age the cap itself is reduced. While it’s £38,505 assuming a retirement age of 65, the cap falls to £32,770 if you are 60, and this is subject to the 90%, i.e. £ 29,493.

There’s a bit of the upside.  If you have more than 20 years service, the cap increases by 3% for each full year of service beyond 20 years.  There’s a downside for long service as well — for the portion of your payment related to pensionable service prior to 1997, there is no increase for inflation.  So if you have a number of years service prior to that, that portion of your payment will not increase each year.

PPF may cover less than you’d expect once PPF caps and adjustments are applied.  Increases for inflation are in line with PPF rules (like CPI inflation capped at 2.5% max), which may be different from your original scheme.

If you are an active or deferred member pre-retirement age, the amount of the pension you would have been entitled to when your employer went under is determined and gets inflation adjusted during the period until you reach your scheme’s retirement age.  At that time, you’d receive 90% of that calculated value (plus inflation) subject to the cap – and this assumes that PPF hasn’t changed the rules or calculations in the meantime.

If you decide to transfer your pension out of your company scheme because you are concerned about its ability to keep on, you do “lose” the benefits of PPF that would protect you and guarantee all or part of your pension income.  But it’s important to know the limitations of the PPF as well.







Pamela Morgan CPA
UK Liaison and Guest Blogger
Investme Financial Services LLC

What’s your most valuable asset? Most common answer – My Home

jamal-investme2Or not.  Many people don’t naturally first think of the value of their retirement plan.

If you are in the fortunate position of having a defined benefit (also known as a “DB” or “final salary”) pension, perhaps you have read in the press about the high  “transfer values” being offered to folks who choose to transfer out of their existing DB plans. This transfer value is the amount that your pension provider is willing to pay you to transfer out of its plan – forever – to set up a new pension yourself, with help from advisors.   The value is a multiple of the pension you’d receive times a certain number – and with numbers quoted ranging from 20 to 40, the amount can be an eye-opener.

You may be concerned about headlines regarding high levels of underfunded plans, or schemes that although fully funded, are closing plans to new accruals, i.e. not adding anything to what you’ve already accumulated.  Some advisors portray transferring out of a defined benefit plan as a way to be able to take the 25% tax free cash that’s been enjoyed by the new pension freedoms available for the last couple of years with the UK Pensions Freedom Act.

But do you know your “transfer value” – it may be on your latest annual pension statement or perhaps you need to write to your scheme administrator and request it.  Even if you have never thought about transferring your pension, it’s very good to know what this value might be.

Unrelated to concern’s over a scheme’s health or perhaps recklessly releasing cash, there are other much more interesting and compelling reasons to at least consider a transfer.

+ You take control of your likely largest financial asset.  You know the exact amount that you have for your retirement, taking away the life expectancy gamble of dying early.

+ You can pass on the value to your family, it doesn’t end when you (or your spouse) dies, and will likely provide better future income for your husband or wife, as it’s not automatically reduced to a widow/widower’s pension upon your death.

+ You have complete flexibility on how much you how want to take and when you draw it, you’re not tied to a fixed monthly amount.  So as your income needs (and tax situation) change over the years you’re retired, you have flexibility in planning both.

+ Transfer values are currently so high that a lot of the investment risk can be reduced.  A 2% net investment return can provide the same level of pension, with some left over.

+ If you do need some cash, perhaps to pay off a mortgage or to help your children buy a home, taking the tax-free portion at age 55 is an option, although this does put a big dent in the amount left for future investing.  But if you have other sources of retirement funding it may be something to consider.

Knowing your transfer value is just the first step. You may have a recent annual pension statement that includes the transfer value.  Or you may need to write to your pension scheme administrator and request your transfer value.  They must respond to you within 30 days, and the value they give you will be valid for 3 months, during which time you need to take advice whether this transferring out is good – or bad – for you.  Take your time!  But as a first step, check that value.







Pamela Morgan CPA
UK Liaison and Guest Blogger
Investme Financial Services LLC


Strong pension, no problem? Maybe.

jamal-blogWe all recall last year’s demise of BHS and its failure to protect the company pension scheme.  Frequent news headlines report huge numbers where future pension liabilities exceed assets, and estimates of overall underfunded final salary (defined benefit, or DB) schemes are at 80 percent.

Years of low interest rates and increasing lifetimes have made it difficult for pension investment trustees and their actuaries to ensure that there’s enough in the pot to make good on pension promises.  DB schemes were originally designed for folks living 10 years into retirement – not 30.

It’s no wonder we worry about the ability of our companies to still be around when it comes time to draw our pensions.  And if a company goes bust, we have the PPF (Pension Protection Fund) in the UK, although there are limitations on that as well.

So your DB pension scheme’s not in deficit, life’s good? Not necessarily.

While many DB schemes (including all of the FTSE 100) have been closed to new employees for years, the cost of providing for existing members is still there and growing.  Increasingly, even well funded schemes are at this and concluding that changes must be made.

Marks & Spencer closed its scheme to new accruals from March 2017.  No additional benefits will continue to accrue to existing members – they’ll still get their pension, but future work won’t count.  Royal Mail made a similar announcement earlier this year, one that is likely to lead to a postal strike in the UK very soon. A company does not have to be in a situation like Tata Steel where the choice is closing the pension fund or closing the company.

34% of the FTSE 100 schemes are now closed to future accruals and the number is likely to rise. Some companies are rewriting other aspects of their schemes, such as making a “final salary” now a “career average earnings”.

There are a number of reasons for the large number of people transferring their pensions out of their company’s plan.  High transfer values (the multiple of an annual pension), wanting to take control of probably one’s largest asset and underfunding concerns may all play a part.  Considering a transfer out is a big decision and needs professional advice.  But uncertainty about changes to even strong plans is now adding another consideration to that decision.







Pamela Morgan CPA
UK Liaison and Guest Blogger
Investme Financial Services LLC


Why I love ETFs — but sometimes love can be blind

5Looking through the newspaper or on the Internet, I often see investment fund companies listing funds they’re offering – and most of these are highly rated 4 and 5-star funds.  So surely that’s the company to choose — are these guys smart or what?
But to quote Winston Churchill “I only believe in statistics that I doctored myself”.

This is because the funds listed do not represent the entire universe that the fund group has — or have had. Fund groups tend to close or merge under-performing funds, distorting the statistics and giving you a false sense of security.
It is a well-known fact that almost 90% of all funds perform less than their benchmark.  So — maybe not so smart after all.

Think of it this way: If I offered you an investment that has only a 1 in 10 chance of beating its no-brainer benchmark and asking you for a lot of fees just to be able to underperform, wouldn’t you would question “why”?
This is one of reasons we are seeing a huge shift in money moving into passive funds, i.e. ETFs. An ETF (”exchange traded fund”) is similar to a mutual fund in that it’s a basket of investments.  An ETF tracks an index, the original and best known, SPDR (Spiders), tracking the S&P 500.  There are a lot of mutual funds that also track the S&P as well, (these tend to be called closet trackers pretending to be active funds to justify the high fees). But with a mutual fund, there is an active fund manager and all of the resultant costs that go towards actively trading every day to achieve the same result at the end of that day – so your return is minus fees: commissions, redemption fees, operational costs, etc. – that can be as high as 3%!  No wonder the size of the ETF market is expected to surpass mutual funds by 2023. Last year USD 326 billion left mutual funds, with an additional USD 429 billion going to ETF’s.  In the last 10 years, USD1 trillion has left mutual funds and flowed to ETFs.  There are also other benefits of ETFs (trading flexibility, tax efficiency) that I won’t go into here, as I’ll bore you another day on those.

Mutual funds can easily be 10 or 20 times more expensive than a passive fund (ETF), which has a cost of about 0.10% and will most likely follow its benchmark. So the goal of the ETF is not to beat the market but to match the market’s performance. The role of an active mutual fund manager is to spot better growth opportunities, achieve better returns and avoid the bad investments.

But as these 90% underperforming statistic shows, the majority of these active mutual fund managers have a poor track record. So why does your advisor show you active funds that can be 10 – 20 times more expensive than a passive ETF – and with historically the 1 in 10 chances of beating the market — versus a passive ETF fund that basically does what the market does. Perhaps one of the reasons why many advisors suggest these types of funds is because they historically pay a trailing commission to the advisor where an ETF does not (this is no longer the case in the UK and other jurisdictions resulting somewhat in a reduction of mutual fund fees). While many active managers are trying to reduce fund costs, there’s a very long way to go (perhaps never) before this benefits clients and results in slightly higher returns.

So, I can see why ETF index funds play an important role in a portfolio, and yet I say my love can be blind as there can also be some dangers lurking.  More on this in my next blog.

If you would like to know more from the author then please contact me at gr@me-group.ae


Benchmarking and Why Insurance Backed Investment Projections are Bad for Your Financial Health

jamal-investme2It is standard that all investment managers who either have separate investment mandates or mutual funds will benchmark their performance against an index.

This helps the client and advisors in setting expectations and giving themselves the ability to compare an active investment manager vs a passive investment.

However, Insurance backed savings and investment schemes do not do this.

They take a gross performance of an underlying asset class and then make projections on the return of your savings or investment plan.

These projections have nothing to do with reality and as such set the wrong expectations for the investor.

It is a well-known fact that 50% of investors do half of what the market does. Also, the projected returns by the insurance companies do not include the fee structures which at the time of writing can be as high as 4-5% p.a.

It is not surprising that clients are feeling disappointed. In this instance, the wrong expectations are being set and, it is most unlikely the client will achieve his or her goals.

Why are these projections from insurance companies not based upon the average return of their clients?

Take time to absorb that statement.

The insurance companies have empirical data to be able to benchmark their clients returns against the index’s so it is not a lack of technology.

I will make an intelligent assumption, if they showed the average performance of client’s vs the projection, no one would invest this way.

Protection and Investments do not belong together. They contradict themselves. Investments are a cost conscious structure, insurance is not.

The END GAME, Rip Off Savings Plans Adeiu!

I remember talking to friends and colleagues about it being harder to become a real estate agent than a UAE financial advisor. Blank stares, open mouths, bewilderment stared back at me. Although it reflected the IFA market, it also included the banks

There is a minority of advisors in the UAE who are dedicated and ethical, however they are overshadowed by a lot of unregulated, unqualified people even qualified advisors that sell investment products and savings structures, either through a regulated company, unregulated company or through a bank. They all however had one thing in common. Insurance Backed Savings Plans or Investment Plan that served the institution and advisor and not the client.

Over the last few months we have seen and heard very clear messages coming from the regulagors.

First, we had SCA regulating funds, companies, demanding education, qualifications and annual CPD targets.

Then we had the Insurance Authorities starting with Circular 33, and after much consultation with the various stakeholders they announced Circular 12. The end of consultation was May 11 with an intended rapid introduction of the new laws. It was regulations, qualifications, fees and sanctions.

Thirdly we had the Central Bank on May 11 throw their hat into the ring. They did not wait for the response of the IA (bearing in mind that the Central Bank does not regulate the insurance side), however they do regulate the banks.

The message has been repeated time and again from all regulatory authorities.

“The responses provided to the Consumer Protection Department at the Central Bank in relation to these ongoing complaints were not satisfactory”

The words being quoted “customer profiling”, “suitability of products”, “transparency” “grievances redressal mechanism (handing complaints)”. “qualifications”

Very similar words from the IA and Sca.

Then you hear the voices of the product providers, banks and IFA’s, we welcome those changes.

Well why did it take the IA, SCA and the Central Bank to step in and say STOP! We have had enough.

The blame lies on the industry, the companies and the advisors, despite what was happening in other jurisdictions and we knew why these changes were happening they still continued making hay while the sun shone even though the clients were suffering. The providers were also happy to deal with unlicensed companies, with products that fail to deliver what is promised. Products that they knew benefited themselves and the sales people more than the clients. Fee structures that were so opaque very few people could understand them let alone clients. These stakeholders had little moral compass to make a stand and either change or demand change.

Yet there were other individuals and companies that did make a stand, did change and become more client focused. They should be applauded and continue to flourish.

The message is now clear, The Game is Over.

For unlicensed companies, just close shop and move on.

For individual IFA’s go to work for a regulated company, become regulated, registered, do the exams, do your CPD and take this Holistic view you keep talking about, bring clients products and fees that are designed for the client. If you are unable to survive in this new environment, then move on.

For companies and banks, train up your staff, do wealth management with the customer first. Do what you should be doing “Wealth Management” not selling overpriced, inflexible savings plans,

The clients were not there to service you, you were there to service the clients. The clients need help to save and plan, do that, help them.

To those who said you can’t survive on the new fee structure, this may be so, but in the last century when I worked for an investment house, our fee structure for the clients worked out at 1% p.a. and it was success. For the clients, for the company and for the employee. It was a win win solution.

I and many other professionals look forward to the new future.

Have a great day.


The UAE IA’s Circular No. 12: ‘Advisers, get ready to be registered, tested’

Towards the end of last month, the United Arab Emirates Insurance Authority quietly went public with a 26-page synopsis of its latest thoughts with respect to its already-flagged-up plans to introduce a raft of new regulations governing the way life insurance and insurance-based savings and investment products are to be marketed and sold in the country. 

The IA regulations package, which is currently being referred to simply as “Draft Circular No. 12 of 2017”, updates the IA’s previous missive, Circular No. 33 of 2016, and in so doing, contains a number of new elements – the most surprising of which is a change is in the minimum requirements for insurance intermediaries looking to practice in the UAE, and news of plans for them to be registered, according to Gordon Robertson, founder and director of Investme Financial Services.

Below, Robertson, pictured, takes an in-depth look at Draft Circular No. 12 of 2017 (subtitled “Draft Regulations Regarding Life Insurance and Family Takaful Business in the UAE”), and shares some of his findings and conclusions – a key one of which is that the UAE’s advisory industry is currently “not prepared” for the changes it will soon be expected to take on board. 

Since last November, we have been aware of the coming changes in the way insurance-backed savings and investments are sold and marketed in the UAE. There were hopes that “Circular No. 33”, as we came to know the document outlining the proposed changes, might be watered down.

Now that we have the next instalment of what the Insurance Authority is planning to introduce, it says, as soon as possible, in the form of Draft Circular No. 12, we find that although there have been some minor changes as to the implementation,  the real surprise lay in the way the IA is proposing to regulate the UAE’s army of financial intermediaries.

If the regulations take effect as set out here, it is clear that quite a few intermediaries will be forced either to close, merge, or leave the industry in the UAE.

The timing hasn’t been formally set, but the Insurance Authority has made it clear that it is setting a May 11 deadline for input on its proposals from “life insurance companies and family takaful operators and other interested parties”, after which it is hoping “to issue the final regulations without undo delays”.

Once published in the Official Gazette, much of this will become law immediately; some of it a year later, and the rest in another year’s time.

These proposals will clearly alter the face of insurance-backed lump sum and savings programmes in the UAE. This is possibly not surprising, as they’ve been brought about in response to a huge number of mostly-justified complaints from clients who have been reacting to what they consider to be excessively high fees, the lack of commission disclosure, and up-front commissions, as opposed to commissions being spread out over the life of a policy.

What the Insurance Authority is proposing to change:

Savings products

  1. The maximum fee that advisers, under the new proposals, will be allowed to charge on savings products is 4.5% of the periodic premium (investment portion), to a maximum of 90% of the first-year premium (down from the current 7% to 8% level).
  1. First year commission is capped at 50% of the annualised premium, or 50% of the total commission paid, whichever is less. The rest will be paid over the life of the policy to the adviser.This will be paid by the product provider, and not through the client’s account. There will be a commission claw-back against the agent during the first five years, based upon the first year’s commission.

Ten percent of the annualised premium (protection portion), times the number of years of the policy, with a cap of 160% of the first years premium (single premium is 10% of the premium).

Example A: regular savings programme

Here’s an example of how it would work. Let’s assume someone has savings of AED100,000 (£21,156, US$27,225) to invest in a regular savings programme each year, for the next 15 years. This would break down as follows:

a. AED90,000 for investments,  and

b. 10,000 for the protection (insurance).

Commission would be: 90,000 x 15 x 4.5% = 60,750

10,000 x 15 x 10%  = 15,000

Total commission would then be AED75,750, of which 50% would be paid to the agent in the first year, and the remaining amount over the life of the policy.

Year One, for the agent, would be  half of  AED75,750 , or in other words, AED37,875, with AED2,525 annually for each of the next 15 years.

However, the first-year commission would be subject to a commission claw-back during the first five years of the policy.

[Important note: The minimum amount insured, under the new regulations, is now 10%, up from the existing 1%.]

Example B: Term products (no maturity benefits)

Under the Insurance Authority’s new regime, the maximum commission that may be deducted is 10% of the whole premium, or 160% of the annual premium, whichever is less.

In other words, a client saving US$1,000 for ten years would pay a maximum commission of US$12,000 (or 1,000 x 12 x 10, for a total commission of US$12,000.

Single premium policies will have a maximum commission is 10%.

 Retrocession/trailing commission

The adviser can still be paid a trailing commission; however, the fees can no longer be recouped from the product.

In other words,  if a client buys a current mutual fund, it traditionally has had a high Total Expense Ratio (TER); this is because part of that TER was being reimbursed to the adviser. This will no longer be permitted.

As such, the funds will have a lower TER, giving a higher return to the client. However, that may be reduced by having to pay a higher commission to the product provider (they are not allowed to breach the previous overall commission limits).

Short term products

Maximum commission for life and takaful products in the UAE is currently capped at 25% indemnity commission (this is where a life company pays commission upfront to an intermediary based on the full value of the policy).

This is being stopped, and replaced with a system whereby the commission will be paid when the client pays the premium.

Products with an insurance portion below 10%

Going forward, these will only be able to be marketed when it is clearly stated in a bold red font that “the product has a limited or no life protection benefit”. The customer’s signature is required immediately below this disclosure.

Takaful products

The rules governing the sale of takaful products are similar to the way general insurance is structured.  However, the wakala and muduraba fee for short-term products is set at a maximum of 35% of gross written contribution.

Multiple channels
Going forward, clients will no longer subsidise other sales channels. This will help reduce costs to most clients, as they will be paying only for the sales channel they are using.


  1. All parties to the transaction must sign off on the product sales document, clearly disclosing each one’s responsibilities. This includes the insurance intermediary, the agency representative, the broker etc. The documents must be in both English and Arabic.
  2. It was the usual practice previously that before an adviser gave an investment product proposal to a prospective client, they would often ask for certain documentation, such as a copy of the individual’s passport, visa, bank account information, etc. Under the new regime, this will not be allowed.
  3. No product will be able to be sold without all the relevant documents, and a copy of these must be supplied to the client.
  4. A declaration that the client signs will say that the client is aware the returns featured in the illustration are not guaranteed.

‘Free look period’ is fixed at 30 days minimum

  1. Under the new rules, if an insurance agreement is cancelled during the ‘free look period’, the adviser must refund to the client all of the commissions that may have been taken; then the pro-rated first year commission must be paid back.
  2. The adviser is not allowed to pressure the client to recoup the cost of the adviser’s time and effort in preparing the structure.
  3. If there is a decision to cancel, then the client will be refunded their full premium. This may include any profit or loss on the fund but will not include the bid and ask pricing of the fund.
    If there has been a cost of a medical exam as part of the sale process, that can also be charged to the client. The client will receive a copy of the receipt for the medical as well a copy of the medical report.
  4. the intermediary is not allowed to ask the client why they want to cancel. However, a third party, such as the company or other representative, may ask, so long as they do not abuse this right by using pressure tactics.

Illustrations to be given to the client

Under the proposed regulations, product illustrations given to clients must show:

  1. The frequency of payment to be used, such as monthly/quarterly/annual/single payments.
  2. The full and proper name of the plan; its sum assured, coverage term, and premium payment term.
  3.  The death/protection benefit, account value and surrender value should be clear and distinctly presented.
  4. The premium shown should always be gross of all fees, but the death benefit, account value and surrender value should always be net of all fees.
  5. Any illustration should state that it is either “illustrative value” or “guaranteed value”, whichever applies.
  6. The cumulative plan premium should be indicated.
  7. All compulsory charges must be disclosed.
  8. Revised illustrations must be supplied if requested, and would be compulsory if any top-up premiums are more than 20%, or if there is a withdrawal more than 20%; also, if there are changes to benefits, this must also be disclosed separately with a revised illustration.
  9. The life insurance company behind the product being illustrated must quote the gross return, based upon cash flow, and then deduct all other charges so that the client is able to see clearly whether there is any actual benefit in having this type of policy.
  10. Two scenarios at a minimum should be illustrated.
  11. Maximum investment return is based upon the three-month EIBOR (Emirates interbank offer rate) plus 4%, rounded up to the next 0.5%.
    For example, current EIBOR (1 May 2017) is 1.46%; plus 4% is 5.46%, rounded up is 5.5%. The first calculation, therefore, would be based upon 5.5%.
  12. The second scenario must show a clear picture of the effect of charges or a reduction in yield. This will illustrate the effect of all the charges, if the illustration is not clear, then they must show a zero-pct. return.
  13. Under the new regulations, any fees paid by a mutual fund to the IFA, or to the IFA’s company, are considered to belong to the client, and must be reimbursed to the policy holder.
  14. Surrender charges and the surrender value of the policy at the end of each year must be provided as a separate document. The font must be in red, and the client must sign this document separately.
    If there is a discrepancy between the illustration and the valuation, then this must be justified by the actuary.
  15. For “with profit” policies, a qualified and appointed actuary must certify the illustration before it is shown to any prospective clients. The illustration should also be consistent with the valuation reports, and if it isn’t, the actuary may have to explain why it’s not.
  16. The annual valuation report has to be sent as a separate document, and not bunched with other documents. The “font” must be red, and the client must sign receipt of this document.
  17. To ensure that that the profitability of each savings product is achieved throughout the policy period, and that the policyholder is not heavily penalised for the company’s profit in the initial year(s), the actuary must ensure that any surrender charges are equitable between the provider and the client.
    These charges are only to mitigate risk in relation to the actual expenses incurred by the provider.

Declaration by the policy holder

  1. Under the new regulations, the client will be required to sign a declaration stating “I have received a copy of this illustration and understand that non-guaranteed elements illustrated are subject to change and could be either higher or lower. The intermediary (John Jones) has told me that they are not guaranteed. Further I confirm that insurance intermediary (John Jones) has not made any verbal or written communication, electronic file or any other material that is different from this illustration”.
  2. A statement to be signed and dated by the intermediary or fund manager must be included, saying to the effect, “I certify that this illustration has been presented to the applicant and that I have explained that the non-guaranteed elements illustrated are subject to change. Further, I confirm that I have disclosed all charges and fund management fees to the customer, and I have made no statements in any form that are inconsistent with this illustration.”
  3. Historical performance of the top five funds for that product in the client’s risk strategy must be provided to the policy holder.These top five funds are measured by assets under management (size of the fund), and with a minimum of five years’ history (track record) unless the fund has been in existence for less than 5 years.
  4. The client must receive information on all funds available in a period. The client will then select the funds they wish to buy, rather than the company or adviser suggesting a limited choice for the client.This must be disclosed at the point of sale and on an annual basis to the client.These top five funds must be chosen from the range of funds that are available to retail investors within the UAE.

Banc assurance

Banks often buy insurance at a discount from a provider. Under the proposed new regulations, the banks will no longer be allowed to mark up the price, and thus make an extra profit, when selling insurance to their clients.

Under the new rules, the banks will can only be compensated by the insurance provider separately.

Also, banks will no longer be allowed to insist that the client buy the credit insurance from the bank, but going forward, will be obliged to accept a credit life policy from other companies.

Insurance Intermediaries

Any person acting as an insurance intermediary must be:

  1. Employed by a licensed company
  2. Sell only products that are sold by this licensed company
  3. Be licensed by the authorities, and this license must be renewed on an annual basis
  4. Meet minimum educational qualifications for practicing in the insurance intermediary profession, as well as engaging in CPD (continuing professional development) every year
  5. Be at least 21 years old, and have a minimum two years of  experience in the insurance industry
  6. Have no criminal record of a felony or misdemeanour involving moral turpitude, trustworthiness or against public morals, bankruptcy and not having rehabilitated
  7. Never have been suspended or had qualifications cancelled without these having been formally restored while working in the insurance industry
  8. Must have professional liability insurance
  9. Comply with all the laws, regulations, instructions and decisions issued the authority and other relevant legislation

Annual renewal

The intermediary must be able to demonstrate to the IA that they meet the minimum service standards such as:

  1. They hold regular annual review meetings with their policyholders, discussing the progress towards the agreed savings targets;
  2. Their review documentation will include the actual performance of the product to date, and a new projected performance plan, going forward to the intended policy termination date;
  3. An annual gap analysis to enable the client to assess the need for additional contributions, or a change in risk appetite to achieve the planned savings goal

Application for license and registration

The new application form will require applicants to provide:

  1. Their name, nationality, address and place of residence
  2. A copy of their Emirates ID, if a UAE resident; and a current passport, if  non-resident
  3. A certified copy of the minimum qualification and membership from an entity accredited by the Insurance Authority
  4. A declaration that they have never been subject to disciplinary actions by any professional body that they belong to, or by the supervisory authorities in other jurisdictions
  5. A certified copy of their academic and professional qualifications
  6. An official certificate proving that they have never been convicted for an offence involving moral turpitude or trustworthiness along with a declaration that the applicant has never been declared bankrupt or bankrupt and rehabilitated
  7. An undertaking to comply with all regulations and laws issued by the Insurance Authority
  8. Proof of payment of the fees as per the regulations, as well as any other documents requested by the Director General

The IA will notify candidates of their approval or rejection within 20 business days of their having completing their application.

  1. If more information or documents are required, this must be submitted within 60 days of the date of the notification
  2. Failure to supply the information sought will result in the application being cancelled, and a three-month waiting period must pass before the applicant can submit another application
  3. If their application has been approved, and the necessary fees paid, they will then be entered into the official register
  4. If they are rejected, they can appeal the rejection within 30 days. (A Board of Directors decision, however, will be deemed to be final.)
  5. The licence has a maximum validity of one year, and expires on 31 December.
  6. On an annual basis, the insurance intermediary will submit a renewal document with supporting documentation no less than 30 days prior to expiration of their licence.
  7. The intermediary must inform the authorities within 10 days of any change to the intermediaries’ documentation, to ensure continued compliance. 

Commission abuse penalties

Under the new regulations, all forms of commission abuse will be  strictly prohibited. Those who are found to be in violation of this may be subjected to the suspension or non-renewal of their licence.


Once the new laws are published in the (monthly) Official Gazette, the new laws will be implemented as follows:

  1. Fees and commission abuse regulations will take effect on publication
  2. Commissions, disclosure and regulations regarding pure protection will take effect one year after their Official Gazette publication
  3. All other elements of the new regime will take effect two years after publication

As indicated earlier, many of the proposed changes will be seen by the UAE advisory industry as Draconian, and will introduce a dramatic change the entire industry – to the benefit, many of us believe, of the industry’s clients.

The biggest adjustment, for many, is likely to be that of having to comform with the new minimum requirements to become an insurance intermediary.

As mentioned above, the consultation period on the latest version of the regulations is set to end on 11 May.

Documenting Change

It has been described as a ‘game changer’ by some, but whatever the terminology, the changes being introduced by the UAE Insurance Authority will impact on advisers and providers in equal measure, as Gary Robinson has found out by speaking to those affected.

Following an announcement on April 25, the United Arab Emirates Insurance Authority issued its regulations package, which is currently being referred to simply as “Draft Circular No. 12 of 2017” and updates the IA’s previous missive, Circular No. 33 of 2016.

The UAE’s insurance industry regulator has, as expected, decided to go ahead with a planned overhaul of the way life insurance products are marketed and sold in the jurisdiction.

The package of new regulations includes a ­ban on indemnity com- missions, as well as fee limits, new charges on life insurance products, and new rules affecting financial advisers who sell insurance products in the UAE.

Gordon Robertson is the founder and owner of Investme Financial Services, a Dubai-based holding com- pany for a group of financial services businesses operating in the UAE that he launched after originally coming to the Gulf in 1998, to oversee the opening of a Prudential-Bache Securities office.

In the early days, he says, he was “amazed and disappointed” at the quality of financial advice on offer in the region. In the years since then, he has observed the progress of Dubai’s financial regulatory environment with interest, and, at times, some scepticism.

The IFA industry in the UAE, he argues, is “not prepared” for the shock it is being asked to take on board, given the fuller clarification of the licensing and educational requirements for intermediaries.

“Since November we have been aware of the coming changes in the way insurance-backed savings and investments are sold and marketed in the UAE,” says Robertson.

“There were hopes that the Circular 33 might be watered down. There have been some minor changes as to the implementation, but the surprise was the change in regulating financial intermediaries.

“These changes will no doubt mean quite a few intermediaries having to close, merge or leave the industry in the UAE.”


At least one financial adviser that International Investment spoke to in the days after the Board Decision No. 9 document was released said that it revealed the regulator was pushing ahead as planned, “without pulling any punches” and that it had not been deterred by those ­industry players that sought to have the changes brought in more slowly.

The announcement of the decision to go ahead with the package of new regulations, which also cover the Takaful industry, was contained in a draft circular ­on the UAE Insurance Authority (IA) website. It came after feedback from major international life companies and a meeting held with industry.

The UAE Insurance Authority’s proposals

Gordon Robertson of Investme Financial Services takes a closer look at some of the finer details of the proposals.

Savings products.

  1. Under the new proposals, the maximum fee that advisers will be allowed to charge on savings products is 4.5% of the periodic premium (investment portion) to a maximum of 90% of the first-year premium (down from the current 7-8% level).
  2. First year commission is capped at 50% of the annualized premium or 50% of the total commission paid whichever is less. The rest will be paid over the life of the policy to the advisor. This will be paid by the product provider and not through the clients account. There will be a commission claw back against the agent during the first five years based upon the first year’s commission. 10% of the annualised premium (Protection Portion) times the years of the policy with a cap of 160% of the first year’s premium (single premium is 10% of the premium).

Term products (no maturity benefits). 1. Under the Insurance Authority’s new law, the maximum commission deducted is 10% of the whole premium, or 160% of the annual premium, whichever is less. 2. Single premium policy: Maximum commission is 10%Retrocession/trailing (or trail) commission. The adviser can still be paid a trail commission; however, the fees can no longer be recouped from the product.

For example, mutual funds often have a high Total Expense Ratio (TER), this is because part of that TER has been reimbursed to the adviser. This will no longer be permitted.

Short term products. 1. Maximum commission for life and Takaful products is currently capped at 25% indemnity commission.

This is being stopped, and replaced with a system whereby the commission will be paid when the client pays the premium.

Takaful. Similar to the way general insurance is structured, however the Wakala and Muduraba fee for short term products is a maximum of 35% of gross written contribution.

Multiple channels. Going forward, clients will no longer subsidise other sales channels. Penalties. (a) All forms of commission abuse are strictly prohibited. (b) All complaints, if found to be in violation may subject the offender to suspension or non-renewal of their licence. Enforcement. Once the new laws are published in the (monthly) Official Gazette, the new laws will be implemented as follows: (a) Fees and commission abuse effect on announcement in the Official Gazette. (b) Commissions, disclosure and regulations regarding pure protection is one year after the announcement in the UAE Official Gazette. (c) All others have a two-year implementation period.

Other key changes include a major overhaul of illustrations to be given to the client, the declaration by the policy holder, disclosures and the ‘free look period’ which is fixed at 30 days minimum. Also, new rules relating to Banc assurance and insurance intermediaries have been introduced.

For more detailed analysis and a link to the 26-page Insurance Authority document, visit www.internationalinvestment.net. Representatives on January 12, and follows on from the IA’s initial announcement last November of its plans to crack down on the industry.

The 26-page document (see left for a full breakdown) says that the IA “invites life insurance companies and family Takaful operators and other interested parties” to comment on the latest version of its regulations before 11 May, but warns that “absolutely no extensions will be granted”, so that it is able to issue the final regulations “without undue delays”. Because of the significant changes that impact on the way products currently are being sold, a number of industry executives have called for more time to prepare.


Still, ­there are few observers that will argue with the changes at least not publicly. Simon Willoughby, head of proposition at ­Utmost Wealth Solutions, who also chairs the Association of International Life Offices, echoed many in the industry when he said that Utmost’s view on the matter was that any move towards higher regulatory standards and greater cost transparency for customers in any market was to be “applauded”.

“The sensible transitional arrangements announced by the Insurance Authority recognise the industry feedback provided since the November announcement, and the level of change this will require for both providers and advisers,” said Willoughby.

Another well-known industry figure noting that he is “pleased” that the IA is moving forward so decisively with its new regulations is Sam Instone, chief executive of AES International, the expat-focused advisory firm with a major presence in Dubai.

“We couldn’t be happier that the IA have moved forward with all of this without delay,” Instone said. “Individual qualifications, CPD and registration will raise professional standards. Commission caps and an end to large indemnity commissions will be fantastic for consumers, and it is an excellent step forward for the UAE.”

As for as the likely impact, he said he thought it would result in “dodgy financial salespeople” leaving the UAE, possibly to “pop up somewhere like Kuala Lumpur” next. Nigel Sillitoe chief executive of the Dubai-based marketing consultancy, Insight Discovery, also welcomed the Insurance Authority’s announcement and said the new regulations were certain to “be­ welcomed by both distributors and consumers”.

“Invariably there will be operational issues for distributors in the short term, especially with the proposed commission caps,” he noted. “There will also be some players frantically looking to create new products and product codes – different operational structure to each product in each GCC [Gulf Cooperation Council] market, rather than a generic product across each – to make sure they comply, while others will be conducting full strategic reviews of their licensing going forward.”

Sillitoe noted that the United Arab Emirates was still “an emerging market”, and that, while this made it an exciting market, this needed to be remembered when comparing it­ “with other, more mature, jurisdictions”.


In last month’s edition of International Investment, Bryan Low,­ a long-time analyst of the cross- border life insurance industry, issued a stark warning about the possibility that a precipitous decline in unit- linked life insurance product sales in two key Asian markets would likely next hit next in the UAE.

Low points out that “the regulator’s initial proposals suggest a Hong Kong-style scenario that would have a significant impact on advisers’ use of unit-linked linked life products, and therefore, on many advisers’ traditional business models”.

As for the life insurance companies currently active in the UAE market without a local licence, the impact is likely to be “even more profound”, Low added.

“Sales of unit-linked savings and investment life policies in Hong Kong in particular have been decimated, falling by a whopping 89% across the last five years,” Low, who until last year spent a decade and a half as a cross-border life insurance industry consultant, added.

“Although the fall in sales in Singapore has been less dramatic, the next round of regulatory changes there will impact on the spreading and capping of commission, and prompt a further sales decline.”

This fall in sales occurred “in direct contrast to Asia’s continued economic prosperity” during the same period, and took place “in spite of extensive efforts by major multinational life companies to have locally authorised products in these markets and to promote them on a fully-regulated basis.”


Once published in the UAE Official Gazette many of the proposals will become law immediately, some in a year and the rest in two years.

Robertson adds that the proposals will alter the face of insurance-backed lump sum and savings programmes in the UAE, with changes to the minimum requirements to become an insurance intermediary, the “biggest news” of all.

“This [release of the document] is possibly not surprising, as it’s been brought about in response to a huge number of mostly-justified complaints from clients who have been reacting to what they consider to be excessively high fees, the lack of commission disclosure, and up-front commissions as opposed to commissions being spread out over the life of a policy.”

“As can be seen, many of the proposed changes will be seen by the UAE advisory industry as draconian, and will change the entire industry – to the benefit, many of us believe, of the industry’s clients.”  ■