Do not invest for the benefit of your financial consultant

Avoid financial advisers like the plague says investment expert Peter Cooper who warns that he has seen too many naive expatriates caught out by cold-calling salesmen.

Recently a guy I knew from one of the several lunch groups I attend passed away. He’d been a successful Dubai businessman for many years and left his family about US$5 million in total. His widow was approached by a neighbour in the financial services world who offered to draw her up a plan of how to invest this substantial sum.

Despite her grief-stricken state, she still had the wherewithal to run it past another old friend of mine who’s well known for being extremely honest. On his calculation the plan involved fees, commissions and other payments that would cost the widow $1m or 20 per cent of the sum invested up front. The investments in the plan, incidentally, were all perfectly above board and reasonable.

I've been following the articles in The National's Money section over the past couple of weeks about how individuals have been ripped off by financial consultants, and can only comment that there is nothing new under the sun, only a constant stream of naive people and new expatriates with more money than they have previously been accustomed to.

When I started in Dubai 20 years ago I was approached by several of these firms and I happened to mention it to my old boss, Ian Fairservice of Motivate Publishing. He told the tale of how he’d bought one policy as a new expat himself, I think it was back in 1980, and a decade later he had found the policy worth less than he paid for it. Anyway I took his advice and did not get caught out.

As the editor at the time of his Gulf Business magazine, I began a campaign to alert people as to the dangers of these freewheeling financial consultants. I must admit sometimes they do just take advantage of the fecklessness of some people.

There was my young colleague who got the full makeover and came back complete with funeral insurance, a seemingly innocuous payment of £5 (Dh28) a month just in case the worst should happen. As he was 25 and bursting with energy and good health, that was not very likely for another 50 years or more. Do the maths and it’s a very poor investment for an event you won’t remember attending and an insurance that you won’t be around to remind others that it exists.

But it gets much more seriously expensive when the financial guys really get down to work. If you take their advice on which funds to invest in for your long-term benefit they may well turn out to be the worst-performing funds that deliver the best commissions for advisers. Sometimes the fees are upfront and sometimes they are hidden, often both.

Warren Buffett always advises a low-cost equity tracker fund to anybody who asks for his advice. His reasoning is that avoiding the cost of commissions over time will make you far more money than picking the best-performing fund, and sadly he’s been shown to be absolutely right. What people fail to appreciate is that long-term investments grow because of the power of compounding, and commissions reduce the amount that is being compounded and do major damage to long-term capital value.

So it always pains me to read that nothing very much has really changed in the world of financial consultants, at least in the UAE. It is rather different in the United Kingdom, where financial consultants are almost forced to work for a fixed percentage fee rather than through commissions these days.

My advice is to just not go down this route. Avoid these guys like the plague and think for yourself. On the whole I don’t consider shares, bonds and funds a great place for the average person to put their cash. Property is far more reliable over the longer term so long as you buy it relatively cheaply at the bottom of what are the fairly predictable cycles of the market. You can also either live in it to save on rent, or rent it out for extra income or to pay a mortgage.

Over time your real estate investment will be proofed against inflation, and you won’t be as tempted to sell it when prices are low or when consultants come calling.

Peter Cooper is editor of ArabianMoney.Net

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