Mark Chahwan, a Lebanese-born Canadian entrepreneur, says seeing many of his UAE friends lured into rip-off investment plans - that enrich brokers at the expense of investors - prompted him to start Sarwa, a low cost wealth management business that relies on computer-generated algorithms and low-cost exchange traded funds.
The idea came to him and his co-founder Jad Sayegh, a childhood friend, while Mr Chahwan was working as a management consultant at Accenture. There, he noticed the robo-advisory revolution - which was dramatically reducing fees in the US and Europe by using computers to invest in low fee index tracking funds, based on the risk appetite of customers - had not yet penetrated the Middle East.
“A lot of our friends end up in Dubai from the Lebanese community and while we were having access to great solutions, they had no clue what to do with their money,” he says. “Many professionals move to Dubai specifically to better themselves and have better career opportunities but when it came to follow up, there was no idea what to do with it, no education.”
Mr Chahwan contacted the Dubai International Financial Centre in 2016 with a view to setting up shop there but quickly realised there were regulatory hurdles and paperwork to overcome first.
The entrepreneur got lucky, however, when in April 2017 the DIFC announced it was creating a FinTech Hive to nurture start-ups and invited entrepreneurs to apply to the programme, which had a slot for a robo-advisory.
The company gained admission along with 10 other start-ups, with the 12-week programme - which began in August 2017 - providing the founders with networking opportunities and advice as part of Dubai’s efforts to make the Emirate a FinTech hub.
Sarwa received mentoring and advice that culminated in an investor day in November when the firm and the other winners presented their business ideas to investors and government officials.
“The timing was perfect, it was so much on our side," he says. “For a young team to have the support of the FinTech Hive when FinTech was just starting to become a buzzword.”
Like many robo-advisers, Sarwa offers a number of portfolio models that are assigned to investors based on risk tolerance. Those portfolios use six ETFs, that include four stock ETFs and two bond ETFs, from Vanguard and Blackrock, the two biggest ETF providers in the world. As the business grows, Sarwa will look at the possibility of adding ETFs that cover other asset classes such as commodities, Mr Chahwan says.
Since starting operations in November, the company has grown its assets under advisory from zero to $100,000. It has also caught the attention of investors that see the potential.
Shorooq Investments, an Abu Dhabi-based private equity and venture capital firm, were the first to invest in Sarwa. The company has also attracted angel and individual investors and it is currently between seed funding and series A.
“We wholeheartedly believe that this business model will disrupt the traditional, expensive investing strategies in the region,” says Shane Sin, managing partner at Shorooq Investments.
“The concept of robo-advisers presents a clear, cost-effective alternative investment strategy and has already improved how millions of individuals invest in the US, Canada and Europe. We are confident that Sarwa is on-track to become the clear market leading robo-adviser platform as well as one of the FinTech unicorns in the region."
One of the biggest challenges Sarwa faces is the lack of investment education in the region. The company’s head of wealth advisory, Danny Jabbour, says he has been busy in recent months producing educational videos on prudent investment and the importance of reducing costs in the long run in order to keep more money out of the hands of middle men.
The lack of investment education has often been exploited by unscrupulous brokers in the UAE who sell long-term investment plans, often without disclosing all the fees and the penalties that are levied on customers if they break the plans early.
The fees for such investment plans can exceed five per cent annually, making it difficult for the investor to make any gains in the long run. Mr Jabbour says such exploitation reminded him of what the investment landscape looked like in the 1970s when most financial advisers put their own interest ahead of the interest of the client through a commission-based model rather than a more transparent fee-based model that is becoming the norm in the US.
“The best model is to bring a fee-based model here and especially coming from the US, which is the lowest fee landscape in the world in terms of investing. People here are being charged 2 to 3 per cent with a traditional brokerage firm,” Mr Jabbour says. “Sometimes I have heard horror stories of 4 to 5 per cent.”
Mr Jabbour says he left a career in wealth management in the US, where he was employed with Merrill Lynch and then UBS, because he saw the tide was turning for wealth management in the face of the exchange traded fund and robo-advisory revolution.
Exchange traded funds are traded like stocks on exchanges and bundle together securities, usually members of a particular index, such as the S&P 500, and come with fees that are a fraction of what fund managers who pick stocks charge.
The cheapest ETF by expense ratio, the Schwab US broad market ETF charges 0.03 per cent. Meanwhile, the average fee for actively managed funds ranges between 0.5 per cent to 2 per cent and often have fees applied when you buy into them and when you sell.
Robo-advisory firms in the US can charge as low as 0.25 per cent. while in Europe the average is 0.75 per cent.
Sarwa, however, will not be a pure robo-advisory firm, Mr Chahwan says. Instead, it’s created a hybrid model that will also incorporate an element of human advice. The fee for investing with Sarwa is 0.85 per cent a year, deducted on a monthly basis, and the larger the investment made with Sarwa, the lower the fee.
“It’s something that we want to look at reducing,” Mr Chahwan says of the fees.
And while robo-advisers like Wealthfront, Betterment and Charles Schwab have sprouted up in the US, none of them operate in the Middle East, providing an opportunity for locally grown businesses to tap the growing demand for such services. Expanding to markets like the Middle East however comes with regulatory costs that may put off many from branching out to this part of the world.
“The truth is, there’s a speed to market and there’s a speed to execution,” Mr Chahwan says.
The UAE robo-advisory wealth management market is particularly attractive because the country has a young affluent population and smartphone penetration is among the highest in the world. That’s not to say the road ahead will be a stroll in the park as new businesses always face unexpected challenges.
“Coming from consulting, there was quite a big transition from making something that could look so perfect on paper, the design and everything aligning, being packaged so nicely, to pure execution,” Mr Chahwan says.
“You have to let go of so many standards, so many concepts and be used to fire drills all the time. You always hear that execution is key but once you live it, it’s a huge skill set."