High costs of fixed-term savings plans means lost trust in financial advisers must be rebuilt a step at a time
With many residents wary of consulting a UAE-based financial adviser after being stung by the high costs of fixed-term savings or investment products, trust in the industry has been eroded.
But with proposed new regulations from the UAE’s Insurance Authority looking to clean up the sector and one player pulling its products from the market, the outlook is looking a little rosier.
The industry, described as the “wild west” by personal finance author Andrew Hallam, who said the investment and savings plans sold in the Middle East are “the most expensive in the world”, has taken a battering of late.
Mr Hallam was speaking at The Money Roundtable in The National’s office this week, which examined whether the plans are still effective in today’s market. The event was prompted by numerous letters from readers worried about being tied into the products.
But change is already afoot. Old Mutual International closed its managed savings account and managed pension accounts to new business last month. In a circular to financial advisers, the company’s regional director for the Middle East and Africa, Brendan Dolan, said the decision was taken because of the “evolution of the market”.
“We are seeing the market move away from the discipline of contractual regular premium products, towards solutions that more closely match the needs of today’s customers, whose careers and savings patterns are typically less predictable,” he said in the circular.
Sold by financial advisers and administered by insurance companies, the long-term plans promise good returns but also come with high costs that include upfront commission fees and charges. These must still be paid in the event of an early exit, which is when most policy holders realise how expensive the plans actually are.
And if you do complete the policy term there are additional charges related to the underlying funds invested into, which also eat into a policyholder’s returns.
Experts say that advisers are motivated to push the plans on the back of large upfront commissions they receive when they make a sale, which could be about US$24,000 on a policy worth $2,000 a month for 25 years.
The insurers behind the products – Zurich International, Generali Worldwide, Friends Provident International, RL360 and Hansard International – were invited to attend The National’s roundtable event but declined.
Last year, the UAE Insurance Authority said it planned to introduce regulations that would change the way the plans are sold after it received an “alarming” number of complaints from policyholders. The IA’s Circular No (33) of 2016 (Life Regulations) will compel sales advisers to provide a detailed breakdown of all fees and commissions for the life of the policy, among other protections.
While media reports said the initial six-month consultation period had been extended by two years, Peter Hodgins of Clyde and Co said that some changes will happen very quickly and within the six months, while others may require more time – such as changing how financial advisers are remunerated for selling the products.
“Weaning people off one style of remuneration and into something different cannot happen overnight,” he said at the Roundtable. “And if we try and do that overnight we will decimate the advisory industry. We will have no one left to advise and we will have no products left on the shelf. That will take time. Does that need to be two years? No, not necessarily, but it’s not going to be six months.”
All of the participants of the Money Roundtable agreed that change was needed and some, particularly those who sell the policies, suggested one of the biggest problems in the market was the hundreds of thousands unlicensed brokers operating within it. But as The National’s personal finance editor, Alice Haine, pointed out, many of the complaints the paper receives are for licensed companies.
“Unfortunately a lot of the complaints we get are actually predominantly about the licensed brokerages. It is the same names that come up again and again and again and the same products that come up again and again,” said Ms Haine.
“The problem is for the consumer, the person on the street, who thinks they are with the licensed guy and he is going to look after them – they don’t feel they are being looked after.”
She said many start to question their plans and advisers three, five, or even 10 years after initially signing up when it becomes apparent they are not working the way they should. Yet advisers ask them to trust them and wait for it all to come good.
“Why should they trust that adviser? He has already been paid. He was paid within the first 18 months or within two years. The insurance company has also been paid at some point and they are taking their money on a monthly basis. The person has this product that is $10,000 down, $50,000 down, $75,000 down,” said Ms Haine.
However, Mr Hodgins insisted that the insurers want to alter how advisers are rewarded for making a sale to help rebuild trust in the market.
“I know the insurers aren’t here but I know full well from the feedback given to the Insurance Authority every insurer you listed as having been invited said that they would prefer to see a move to a fee-based model,” said Mr Hodgins. “They have no inbuilt incentive to use indemnity commission [a commission based on the full value of the policy term]. That’s not the driver for the industry.”
When asked why this system is still in place, Mr Hodgins said that was what “has historically has been necessary to play in this marketspace”.
“It was inertia. It is a model which has existed for years and years and years,” he said. “But frankly they have been quite vocal about calling for a change to the remuneration model.”
Tim Searle, the chairman of Globaleye, which sells the plans, admitted that the industry could do its job without upfront commission and David Hughes, the regional director for the Gulf region of deVere Group, another broker for the plans, agreed.
“There aren’t many people in the marketplace who don’t want it but it’s not going to happen overnight. It simply isn’t,” said Mr Hughes. “Could they make some dramatic changes very easily? Some of the stuff that has been talked about could quite easily be changed very easily. But they seem to want to do some of the big jobs to make massive dramatic changes, whereas actually some of the smaller changes they could make could impact and get back some of the trust in this industry.”
Mr Searle called for minimum education standards for financial advisers, minimum qualifications and a register of brokers who should only sell regulated products to address the issue of trust.
But while licensed advisers are selling regulated products, those campaigning against the products say they are simply out of mode for the market and for what people need.
Mr Searle suggested that the commission should be paid over a period of time and tied to milestones, rather than receiving it all on day one.
An independent consumer advice-type bureau to offer people with concerns about the plans advice on issues such as fees and how the products work would also be helpful, added Mr Hughes.
“But that’s what an independent adviser should be doing, ie, they should be taking a fee and giving advice, as opposed to insurance-based advice,” said Sam Instone, the chief executive of AES International.
“Many people don’t need advice. We can just give them a helping hand and point them in the right direction and if we help them they will come back at some point in the future when they want to know about lending, mortgages, Lombard lending, financial planning, some type of defined outcome plan,” he said.
So what should you do if you are one of the many UAE residents signed to a long-term savings plans not performing as well as expected?
As a first step you should seek advice from a fee-based adviser, said Mr Hallam, adding that some of the plans cost double that of a typical hedge fund model. “I travel prolifically. I talk about money and I talk about investing. I haven’t seen anything like this anywhere in the world.”
Analysts claim savers stick with the plans for just 7.6 years, on average, but policyholders receive little back for exiting their plans after five, 10 years or even longer. Barely one in 20 completes the 25-year term, according to estimates.
But you should also consider exiting the plan early, even if it is going to mean taking a one-time hit, said Mr Hallam.
“The really painful part of this is if you do the maths – and this is what is really crazy – and look at what your redemption penalty would be. Let’s assume you have $100,000 and you try and pull your money out and find that you are hit with a $30,000 penalty for pulling out. Many people are then reluctant to then pull out because that would leave them with only $70,000.
“However, over a 20-year period, that $70,000 in a low-fee platform would make far more money than the $100,000 you would leave in a high fee platform.”
And that holds true almost every time when you do the maths, he said. So he advises most people with the plans to get out as early as they can.
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Updated: February 10, 2017 04:00 AM