Unhappy customers of cold calling financial advisers in the UAE say expats should be wary of what they are buying into when seeking long-term offshore investments.
Be careful when investing your UAE earnings
Instead of a secure financial future, Mr Naidoo, 35, ended up with "a dud investment" that he claims was sold to him without highlighting important facts. These include the 25 years of management fees he would pay even if he chose to exit the plan early, a plan he says he was unwittingly locked into by a pushy adviser.
Mr Naidoo had relied on the services of a personal financial adviser - someone who can claim to have an enriched financial know-how but often has few qualifications and who relies on commissions, often making speedy deal closures the most important goal.
"I urge other expats to tread carefully when making long-term offshore investments," says the married father, who had signed up with Zurich-based deVere.
In the meantime, Mr Naidoo says he is paying 1.5 per cent a quarter in fees on his investment plan, which translates into a 6 per cent annual fee - a rate that in the long run eats deeply into returns. Already he has paid more than $9,000 in fees in five years on an investment that's valued at about $90,000. If he cancelled his policy today, he would lose about $36,000.
On top of that, the IT executive was told in 2012 that one of the funds he had invested most of the his money in had been frozen after a wave of redemptions.
He had been putting 50 per cent of his monthly contributions, or US$1,000 a month, into deVere's Strategic Growth Fund, which promised investments into companies that sell baby food and pharmaceuticals, industries he was told would weather any downturn in the economy because people always buy food for their babies and drugs.
A spokesman from deVere said the only information he had on the Strategic Growth Fund was that it is a medium-risk fund, managed outside of deVere, and that it invested a small amount in private equity in 2012. Typically investment funds come with a fact sheet that includes a precise breakdown of its biggest holdings and performance that can be updated and sent to clients as often as each month.
"It should be made clear that any money invested in the Strategic Growth Fund has not been lost; it is in a suspended fund, which could be unfrozen at any time," the spokesman says. "While we hope that the fund will soon be reactivated. DeVere continues to consider all the options available to it and its clients, including possible legal action."
DeVere also urged clients to read the small print carefully when signing up for any investment plan.
Nigel Sillitoe, the managing director of the Dubai-based financial consultancy firm Insight Discovery says one of the biggest challenges facing consumers taking financial advice, whether from a financial advisory firm, bank or private bank, is who to approach if they wish to complain. "Is it the adviser, the product provider or the regulator? As it will be difficult, if not impossible to create a single ombudsman within the UAE, one way to improve the reputation of the industry is to ensure a greater number of advisers have the necessary minimum qualifications," he adds.
The UAE has made great strides in recent years to build a financial services industry including at the Dubai International Financial Centre, the regional de facto hub for global investment banks, putting in place a regulatory framework to oversee it.
The UAE has also put many consumer protection laws in place over recent years, but one area that seems to have fallen through the cracks is investment schemes administered by insurance companies such as Friends Provident, Zurich and Generali. These are then sold - through financial advisory firms - to individuals who often possess little financial know-how and put a lot of trust in what they are being told by advisers.
A spokeswoman for Friends Provident, which administers Mr Naidoo's policy, says the company does not offer investment advice or make any representation as to the suitability of a fund. "We are not party to a customer's individual circumstances and have no involvement in the advice provided by an independent financial adviser," she adds.
Matt Cowan, the regional director for the London-based Chartered Institute for Securities & Investments, a body that awards industry qualifications, says that there is currently no regulatory requirements in the UAE for wealth managers to be professionally qualified. And that opens the door for fly-by-night operators looking for a quick buck at the expense of their clients.
The British expat Pete Manzi, 54, says he ended up losing £11,000 (Dh65,462) on investments when he was hooked by a financial adviser.
The owner of a window-cleaning business says advisers are able to act without fear of being taken to task because there isn't a regulator that has clearly taken on the role of overseeing these types of investments. Neither has he been able to get any watchdog to address his grievances, he says.
"There is no one to go to," says Mr Manzi. "I went to the administrator of the fund I was put into and they basically ignored me. They said tough luck. The problem in the UAE is that there isn't a regulatory body and you can actually become a financial adviser without any qualifications. You can walk off the street and say you want to become one. So buyer beware, caveat emptor as my father used to say."
Mr Manzi became a client of Dubai-based Globaleye after receiving a cold call in 2012 from an adviser offering to manage his £33,000 UK pension for him. Mr Manzi later sold all his holdings at a loss.
He says this is because after requesting to put 75 per cent of his investment into low-risk funds, 15 per cent in medium risk and 10 per cent in high risk, he discovered that all of his money had been transferred to a fund in Hong Kong without his permission - a fund that he was given no information about.
However, Tim Searle, the chairman of Globaleye says this is not possible. "There would be a prior permission in place to allow the provider of that portfolio to move those monies. It can't be done otherwise.
"All the funds we use are all regulated funds. Fact sheets are available. We tell all our clients what we are doing all the time. Unfortunately, funds go up and funds go down."
William Wells, the Middle East director for the London-based asset manager Schroders says: "What you've seen over the past five to 10 years is a lot of smaller boutique products being sold because they've paid additional commission to the financial advisers.
"The funds that have sometimes been sold have been done so because of the higher levels of commissions being paid to the brokers. And the other is the long-term savings plan being sold to them without full disclosure or without the client being aware of the implications."
However, although rogue salesmen and funds do exist, there are also many solid fund managers and advisers. And while the world of financial advice is not as developed in the UAE as it is in other parts of the world, industry executives say progress has been made to clean up the profession.
The newly created UAE Insurance Authority, perhaps the only body that may eventually clamp down on unethical sales practices, is putting tougher rules in place for financial advisory firms doing business in the UAE.
Late last year it notified financial advisory firms that to remain in the UAE they would, among other things, need a paid-up capital of Dh3 million instead of Dh1m by November this year, industry executives revealed earlier this year.
Additionally, financial advisers will be required to take more examinations that qualify them as advisers, they said. No one at the Insurance Authority or central bank was immediately available to comment.
Nigel Green, the chief executive of deVere, said in an interview with The National earlier this year that new regulations should help to address complaints that come from clients, which centre on being sold schemes without being made fully aware of the clauses that govern them, such as penalties for early liquidation.
While the discipline of saving can be good in the long run for clients, Mr Green urged clients of financial advisory firms to read the fine print carefully.
Matt Waterfield, the Middle East managing director for Friends Provident, said the majority of brokerages are respectable. Mr Waterfield, however, defended the practice of long-term investment schemes and the collection of fees in advance, which Mr Wells sees as unfair to the consumer who should not be expected to know what his circumstances will be three years down the line, let alone 25 years.
As for Mr Naidoo, he now believes the best way to manage his finances is to do it himself. He says he may cut his losses with his offshore investment plan, take his money out and put it into low-cost investments, such as broad exchange-traded funds.
What to look for in a money manager
Do your research on the financial adviser and check how long you'll be tied to any product. Verify what qualifications they have.
- Ask for recommendations from previous clients.
- Find out how you will pay for the services provided by the adviser. Will it be commission based or fee based? Get as much clarity as possible.
- Check what the penalties are for early exit on any investment plan you sign up for and be clear about how many years you want to invest into the scheme.
- Make sure they assess your appetite for risk.