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.

 

Wanted to invest and save in the UAE but heard too many scare stories? – Use these tips for successful investing

investment

There are new UAE rules regarding insurance products about to be introduced. They will benefit the consumer but I still think they do not go far enough.

Most of my readers know that I am not a fan of insurance backed investment products, due to the lack of flexibility. The fees involved, the punishing exit fees, the lack of clarity no disclosure and almost impossible to make money.

It is because I believe that the costs still far outweigh any service received. To quote one of my favourite investors Warren Buffet:

“Price is what you pay, value is what you get” jam

If clients knew what they were paying for a typical insurance backed savings account. They would run a mile. 18 months’ premium in fees? Redemption fees that almost wipe out your savings. Total fee structures that can work out about 6% p.a.

There is a change coming, the industry is fighting this change, but it will come.

Let’s look at alternatives.

There are three ways we can invest or save.

a. DIY investing: cheaper and can be fun with lots of risk and most likely underperformance.

b. Advisor directed: a qualified advisor giving advice, you say yes and “caveat emptor” is the result.

c. Discretionary investment management which should only be offered by individuals who have extensive experience in the investment industry and advanced educational credentials, with many investment managers possessing the Chartered Financial Analyst (CFA) designation. Discretionary investment management used to be generally only offered to high net worth clients who have a significant level of investable assets. However this is now changing and can even be used on a savings account.

If only it were that simple.

Yes, fees do make a difference, but unless you put all the pieces of the puzzle together it will not work.

What will affect my returns

  • Costs
  • Advisor remuneration
  • Market timing
  • Asset allocation
  • Investor psychology
  1. Costs:

Paying exorbitant commissions does not mean you get value. The higher the total fees, the more you must make just to stand still.

Fees can be broken down to

  • Advisory fees
  • Platform fees
  • Transactional fees
  • Discretionary management fees
  • Fees within the underlying assets such as mutual funds, Exchange traded funds etc.

It is imperative that you get all these fees to below 2% p.a.

  1. Advisor remuneration:

If an advisor is paid commission, he has a short-term goal and little incentive to look after the client long term. As such the investment structure, may be good for today, however where should you be tomorrow?

If an advisor is paid an ongoing fee, he is rewarded if he looks after the client. As client’s needs change then the advisor will be there to help and advise. When the markets get volatile the advisor will be the steady hand guiding you past these difficult times.

Compensation drives behavior, the wrong compensation drives the wrong behavior.

Ensure that the advisors goals are aligned with yours.

  1. Market timing:

I can name many top investment managers, but I am unable to mention one single top market timer for the simple reason that market timing does not work

There is empirical data that shows that market timers underperform the majority of the time.

In fact, market timing is one of the most dangerous words when it comes to investing.

Just as people go to Vegas to beat the bank, some may beat the bank, however most will not.

Market timing will often result in not being in the market when it goes through above average returns.

  • The market returned 8.18% on average during these 20 years.
  • However, if you missed the best 10 days then returns dropped to an average of 4.49%.
  • If you missed the best 20 days during these 20 years, the returns dropped to 2.05%
  • 60% of those best days happened within 10 days of the worst days.

I.e. when the market capitulates, you are either already out or this is where most now leave. They then miss this massive rebound. That is why we have this huge under performance.

  1. Asset allocation:

Asset allocation has a bigger effect on people’s portfolios than one imagines.

Diversification reduces risk and volatility. Many people buy different equity investments and think that they have diversified. However, if they are similar assets all you have is a concentration of risk without even realizing until it is too late.

As an example, we have seen equity draw downs from peak to trough of 54.5% yet a diversified portfolio into low or non-correlated assets would have seen peak to trough of about 25%.

In fact, over a 20-year period an asset allocation model had an average return of 8.27% (20-year average to Dec 2013) while the S&P average was 8.11%

  1. Investor psychology:

We often hear about performance numbers, but as Winston Churchill once said “I only believe in statistics that I doctored myself. Herein lies the problem.

The stock market returned on average 8.18% (S&P 500 1996-2015) however the average investor only managed about 4.5% during the same period.

Why such a discrepancy? A. Investor Psychology.

An investor will use his logical thought process to help determine his risk profile. However, when markets get volatile the investor then reverts to emotional behavior.

The result is panic and exiting the market and beginning to revert to market timing. This is the worst thing that can happen.

One of the ways to prevent emotional decisions is to work with an advisor who will guide you through these tough times or to have your funds managed by a professional discretionary manager. This mistake costs the average investor 4% p.a.

To summarize,

  • Very hard to do yourself.
  • Keep costs low
  • Your advisor is your employee, the advisor is not a friend, he performs a service and is paid for it.
  • Only fools think they will win long term with market timing. It does not work.
  • Spread your risk in different asset classes
  • Remove your emotional buying and selling decisions by having your portfolio managed by professionals.

Gordon Robertson ACSI

http://investme.ae/

Investme Financial Services LLC – Dubai

Your Financial Advisor is Your Employee – How Much Should Your Employee be Compensated?

If you ever take financial advice and invest money. There are a few things about fees to be aware off.

It is very easy to pay too much to someone to help manage your investments and most likely you also would not know how much this is costing you.

The financial advisory businesses are experts at creating impossible to understand agreements. These agreements are designed to hide how much you are being charged and how much you are paying. Try reading and understanding a typical UAE savings plan policy! I had difficulties despite my 30 years plus in the investment industry. They tend to work on the 80/20 rule, which is that 80% of the clients will not query the cost structure.

Continue reading Your Financial Advisor is Your Employee – How Much Should Your Employee be Compensated?

QROPS? SIPPs Fact or Fiction or Is It Just Scaremongering?

5I have been in Dubai for a while and have observed that QROPS (Qualified Recognised Overseas Pension Scheme) is often marketed as a solution to SIPPs (self-invested personal pension).  It is as if SIPPs was a disease and QROPS was the cure, especially when you see QROPS being so aggressively marketed.

However due to the change in the tax laws QROPS have lost some of the advantages vs SIPPs.

As such I will try and explain the difference.

1.   SIPPs have the legal jurisdiction of the UK, QROPS are overseas.

2.   SIPPs at the age of 55, can pay a tax free lump sum of 25% (may be subject to residence tax if overseas.

3.   QROPS at the age of 55 (potential of 50) can pay 30% tax free lump sum of 30% (may be subject to residence tax if overseas.

4.   A typical QROPS valued at gbp 150,000 could cost gbp 5,500 up front and gbp 7,950 p.a.

5.   A typical SIPPs valued at gbp 150,000 could cost gbp 400 up front and gbp 3,000 p.a.

There is no IHT (inheritance tax) as such there is no need to have a Portfolio Bond or Insurance wrapper unless you want to pay huge commission to the advisor.

Always ask the following questions

1.   What is the setup and annual charges for a QROPS or SIPPS

2.   What are the Portfolio Bond or Insurance wrapper charges which should include admin fees, dealing costs, annual fees etc.

3.   What is the cost of the underlying investment? Such as ETF fees, Mutual Fund fees, commission on the products etc.

4.   What are the advisor fees and commissions?

5.   Get a written statement that all fees and charges have been disclosed (typically advisors are encouraged to sell Portfolio Bonds or insurance wrappers where they get paid about 7% in fees and commissions by the provider, these fees and commissions are ultimately recouped by charging you as the investor).

6.   Ask why they recommend a portfolio bond or Insurance wrapper when they most likely are not required,

7.   Ask about any redemption fees if you need your money back.

8.   Ask about PII (Personal Indemnity Insurance)

9.   SIPPs have a lot of protection as they are more regulated, however QROPS can hold esoteric (also high commission) investments with less checks and balances, so what legal protection do I have.

Warning

Often your annual fees are based upon the initial investment, if you take out money later, the fees will still be based upon the original investment amount thus making it almost impossible to have any growth in your portfolio.

Once you count up all those fees, you now know what you need to make in returns just to stand still. In times of low returns this could end up giving you negative growth.

When talking to an advisor ask check these important points:

1. size of the company is not important; the question would be if the company is regulated.

2. what are the qualifications of the advisor.

3. check complaints/feedback against the advisor or company from websites such as www.pissedconsumer.com

4. is the advisor compensated with commission (potential conflict of interest when recommending a product) or with an annual fee (compensation drives behaviour and the wrong compensation drives the wrong behaviour). Fee based encourages the advisor to work in your best interest as he is only compensated if you stay with them.

Taxation questions:

1.   Do I live in a country such as the UAE where there is currently no taxation?

2.   When will tax be a consideration? (Why pay high fees with less consumer protection if it is not necessary)

3.   Does the country where I live recognise a QROP structure for tax reasons. (US, France; Spain or Australia does not recognise this structure)

At InvestME Financial Services LLC, we believe in driving costs, commissions and fees down. These savings are passed back to the clients. We believe in full transparency in costs.

The author Gordon Robertson is not qualified to give tax advice. Any specific questions regarding tax should be referred to a tax advisor experienced in the relevant tax jurisdiction.

Gordon Robertson is a highly qualified advisor and both he and InvestMe are regulated by the Securities and Commodities Authority (SCA) in the UAE.

To know more or if you have any questions please contact me at gr@me-group.ae

6. Our notes have never lost money!

This may be true, but this does not reflect the entire structured note market, or the history of structured notes.

In the aftermath of the 2008 crisis, many financial institutions defaulted on the structured notes. Lehman alone defaulted on usd76 Billion.

7. You get access to a particular asset class normally onlz available to institutions.

This may have been a fact many years ago, however there are so many investment structures you can access via ETF’s (Exchange Traded Funds) and Mutual Funds with lower costs and lower risks.

The only benefit that makes sense is that structured notes can have customised pay-outs and exposures.  Some notes advertise an investment return with little or no principal risk, some quote higher returns in range bound markets with or without this protection and yet other notes often sold as generating high yields in a currently low yield environment. Sounds complicated but it is not.

Whatever you choose, derivatives allow the structured note to replicate a particular market or forecast. It is synthetic (does not use the actual shares) and often uses leverage (borrows money) to generate returns higher or lower than the asset it is supposed to replicate.

7. If a client asks about liquidity

The advisor may tell you there is a secondary market.

Liquidity, what liquidity? –. Structured Notes do not tend to trade after being issued

In fact, the term is “Illiquid” You are expected to hold the note till maturity.

However, in life, changes happen, what happens if you require money due to losing a job, another investment opportunity that you should take, what happens if we have another financial crisis similar to 2008. The only possibility is to go for an early exit and take any price the issuer offers you, that is assuming they are willing to make an offer.

Daily Pricing is extremely questionable. – As most of those notes do not trade after being issued, then it is logical that the prices being quoted on your statement are not actual prices you can sell at.

They are instead calculated using algorithms which is completely different than a net asset value.

As such the valuation is merely a guess at the best. If it is not the market that gives the price, who do you think it is?

So what are the disadvantages of Structured Notes?

Credit Risk – I mentioned that they are an IOU (promise) from the issuer, as such you bear the risk that the financial intuition can make good of the guarantee. ARC Capital, Keydata, Bear Stearns and Lehman are just a few that defaulted on the guarantee, Lehman alone defaulted on USD 76 Billion of structured notes. As such it is possible that the market is down 50% but the note is still worthless. It could even have a positive return and also be worthless. You are basically adding credit risk on top of market risk. Notes mostly do not have a risk rating, unlike bonds. If the financial institution goes into insolvency, then these notes are worthless.

In fact, the UK financial watch dog Martin Wheatley referred to them as “spread betting on steroids”

Mutual funds, stocks, ETF’s etc. will be segregated assets in your account. They may be down, but they still belong to you and have a chance of recovery. If the financial institution holding your account goes into bankruptcy, your assets will be transferred to another institution. Structured notes will remain as a promise by the institution to pay you after all other creditors have been paid.

Fees – fees and commission can be very high. This is what makes them attractive for the issuer and the advisor selling them “The higher the fees the lower the returns”. It is however possible to create your own structured notes with higher returns.

Who cares about credit risk, liquidity or pricing? – Let me give you an actual recent case study:

1.   RBC Phoenix A/Call Note Linked to 5 stocks

Cusip XS1978174411 issued July 18 2014 mature July 18 2019

Potential to return 12% p.a. with a defined level of risk and potential quarterly redemption.

Regular income and considered defensive.

What the client was not informed was that it was only meant “for professional investors only and not for Retail distribution”

The client was a low risk investor with issues about job security.

The position was valued on Jan 14 2016 with a loss of 59.28%

To know more or if you have questions please contact the author

Gordon Robertson: gr@me-group.ae

Baby Boomers – Retirement – Houston I think We Have a Problem

I remember my parents in retirement having a life style I envied.

They did not have as much fun while they worked compared to myself, but I am referring to how comfortable they were in retirement. The reason is due to us having two behavioural issues.

The first one being “Present Bias” this is where we put our current enjoyment and hobbies before our long term requirements to achieve the same quality of retirement my parents had.

Continue reading Baby Boomers – Retirement – Houston I think We Have a Problem

What Does You IFA Represent?

The term IFA stands for Independent Financial Advisor.

This is a term that is often used in Dubai. 

As such I thought I would expand on this. 

We are seeing regulatory changes happening throughout the world which is now defining the responsibilities of both an IFA and a broker.

There is a difference between a broker and an IFA, but for some reason in this region this role is rather muddied.

Brokers have historically been allowed to sell expensive products regardless if it made sense for the client. I.e. the broker was not legally required to act in your best interest.
Many did, but many did not.

However, an IFA is different

An IFA has always been required to act in a fiduciary function. I.e., he has to work in the client’s best interest.

In the region we have very few requirements for qualifications as an IFA. This is now changing for the better. However, the exams are really not that difficult which puts into question:

  1. is the advisor offering an investment solution using financial modelling tools

B is the advisor using external resources to come up with an investment solution.

  1. is the advisor selling expensive products that benefit him more than me.

Let me recall an incident last week. I spoke to someone who had the required qualifications but really had little experience in the financial world. I doubt if many of them really read financial websites, financial news and articles. His lack of knowledge in financial structures which cover risk vs. return and volatility puts into question how he is sharing his knowledge.

Continue reading What Does You IFA Represent?

Volatility Survival Techniques 101

I have noticed the wild swings in the market and it’s still persistent since mid-August. I think this is the best time to review how we can survive volatility in World Markets.  Well, the first rule of thumb we need to remember in any market is to fix our mindset and to never react to a sell off.

Let me explain? I know that after the beating we’ve experienced in the last three months – it may sound a little late with 20/20 hindsight. However, we need to accept the fact that volativility is always there. Most of us would resort to a sell mode, we go into panic mode because the market is having a bad day and we want to save our hard earned money – but it’s like pouring gasoline on a fire – you’re just making things worse.

Continue reading Volatility Survival Techniques 101

New Will for Expats and Non-Muslim: Total Protection from Sharia Law

Anyone that has a property in the UAE should have a court attested “Will” to protect their property in case something happens to them in the near future. Wills are typically prepared by a professional who would then have it notarized in the Dubai courts.

Not having a court attested Will in Dubai, would result in the estate being subject to Sharia law.

Continue reading New Will for Expats and Non-Muslim: Total Protection from Sharia Law

Who needs a Will?

For expatriates living in the UAE, there is a very simple reason to make a Will. The Government of Dubai’s official website states that ‘the UAE Courts will adhere to Sharia law in any situation where there is no will in place’.

In 2009, according to the Dubai Health Authority, 1,572 expatriates died in Dubai. For those who died without a will, their property in the UAE was distributed according to a formula fixed by UAE law (Sharia) (source: The National, February 2011)

If you die without a will, the local courts will examine your estate and distribute it according to Sharia law. While this may sound fine, its implications may not be so. All personal assets of the deceased, including bank accounts, will be seized until liabilities have been discharged. A wife who has children will qualify for only 1/8th of the estate, and without a legal will, this distribution will be applied automatically. Even shared assets will be frozen until the issue of inheritance is determined by the local courts, and surviving family members are often left without access to money during this period.

Continue reading Who needs a Will?

The Difference between a Mortgage Broker, Mortgage Advisor and Mortgage Provider

In the world of property finance especially in the UAE, the term mortgage provider, broker and advisor can be a bit confusing. The difference between a broker and advisor can be even more subtle, but it can have a huge effect on the outcome in terms of legality, savings and liabilities. The mortgage products and services available can be overwhelming especially when you consider that there are over 300 available mortgage products in the UAE market.

The chance of picking the best product on your own is a difficult and almost impossible task. Picking the wrong product can literally cost you hundreds of thousands in unnecessary interest and costs. As such I will discuss the various pros and cons of the different resources available on the market.

Continue reading The Difference between a Mortgage Broker, Mortgage Advisor and Mortgage Provider