Discussions around poor financial advice in the UAE have ramped up in recent weeks as insurers and advisers battle it out over who is to blame.
Friends Provident International, one of the biggest providers of expensive fixed-term investment plans, has blamed “the quality of financial advice” for “discontent among customers” in the UAE.
In a column penned for The National, Philip Cernik, Friends Provident International's chief marketing officer, says: "The resources of insurers should be invested in improving the standards of the advisers they are working with, for the ultimate benefit of their customers."
His comments come almost a year after he wrote another column stating that contractual savings plans are failing customers and that the company "could do better". FPI, like most insurers, pays advisers high commissions on the sale of its fixed-term products.
Justin Quan, a senior associate at the private equity company Berkeley Assets, which works with advisers, says the UAE’s “under-fire independent financial advisers [IFA]” are being made the scapegoat for the limited supply of investment products such as retirement benefit plans and education savings plans made available in the market by offshore pension providers.
“Consumers are demanding better products and solutions from their IFAs and are far more savvy. As a result, they will no longer accept expensive products with poor returns from advisers who are tied to two or three providers and act as marketing agents rather than independent advisors,” says Mr Quan.
“The top IFAs are the ones who are moving away from the long term, inflexible savings plans offered by life companies and moving to a genuinely unbiased advisory service which offers solutions across the full spectrum of investments and asset classes.”
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The financial advisory space has come under fire in recent years due to a surge in complaints from customers frustrated by high fees and poor performance on contractual savings products.
As a result distrust has crept into the sector with a March poll from the CFA Institute, a global association of investment professionals, finding that while 54 per cent of UAE investors use a financial adviser, only 32 per cent consider them trustworthy.
To help bring more transparency and credibility to the market, a raft of new regulations were proposed last year by the UAE Insurance Authority (IA) and the Central Bank of the UAE to clamp down on the mis-selling of expensive savings and investment schemes provided by insurers. However, some experts say the new rules will not come into effect for a couple of years, leaving investors at risk.
Steve Cronin, the founder of DeadSimpleSaving.com, which helps residents invest their money, says insurance providers and financial advisory firms that sell their products enable each other and so are both "equally to blame for consumer discontent in the UAE".
“Most providers offer huge commissions and have structured extremely complex and deliberately opaque long-term plans to be able to do this,” he says.
“Advisory firms typically make their money from commission provided by the plan providers and the fund managers, rather than directly from the clients. So insurers that provide the most commission are usually the ones the advisers push on their clients, as long as they are sellable and within regulations.”
FPI, which was bought by International Financial Group for £340 million last summer, is one the leading providers of fixed-term products in the UAE and other markets in the Middle East and Asia. The plans promise good returns but also come with high costs that include upfront commission fees and charges.
It is these high commissions that can encourage unscrupulous advisers to “churn” through products, securing high commission by selling and cancelling plans to unwitting investors.
This was highlighted in the case of Neil Grant, a British financial adviser who was convicted of running his company without a licence by the Dubai Criminal Court. Investors who lost hundreds of thousands of dirhams from being mis-sold products have launched a civil case to claim their money back, as more victims came forward claiming they were misled.
In his column, Mr Cernik says when the IA publishes its new regulations for life insurance and family takaful, the measure will address “the requirement to meet and maintain minimum professional standards”.
“Advisers will have to carry out annual reviews with customers to ensure they remain on course to meet their goals. This means they will not be allowed to just take their commission and move on to the next customer,” says Mr Cernik.
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While some firms have stopped selling fixed-term investment and savings plans altogether - offering low-cost alternatives and fee-based advice rather than selling products based on a commission concept - other players continue to market the products.
Mr Quan says the top IFAs are treating their customers’ money "as if it were their own and offering solutions which deliver consistent growth without excessive risk or management fees".
Mr Cernik said the company launched a Financial Adviser Academy in 2015 "to help develop the adviser community and improve customer outcomes".
"Its sole purpose is to educate and train advisers, to help them give better advice to their customers," he says.
Graham Thornton, a partner and compliance manager at Abacus, a financial consultancy firm that has recently banned its advisers from selling contractual savings plans, says: "It’s not FPI’s responsibility to provide the training, the qualifications should come from doing the right exams. For a life firm to train an adviser is the wrong way."
Cornelius Lillis, the managing director of Abacus, says the purpose of having a term applied to an investment contract is put there by life companies to encourage advisers "to sell and be rewarded quite well for selling".
"If you remove the term there is perhaps less incentive for the adviser to sell," says Mr Lillis, adding that life companies "shift the responsibility of the advice away from themselves to the broker".
"If you strip away a lot of the charges, you are going to be stripping away the commissions and then you strip away the distribution so there will be no sales and that’s almost what the life companies rely on. So they are almost nervous to remove this suddenly in case their distribution to market facility disappears completely."
Mr Cronin adds: "To survive in the future, traditional insurance providers must improve the transparency and effectiveness of their products. Financial advisory firms must change their business models to ensure they match their recommendations to clients' needs rather than their commission potential."
