While over half of UAE investors use a financial adviser, less than a third consider them trustworthy, according to a new study from the CFA Institute on trust in the country’s financial services sector.
Fifty-four per cent of UAE investors polled by the global association of investment professionals said they employ the services of an adviser, yet only 32 per cent assume they are reliable.
This compares to 29 per cent of UAE investors that said trust must be proven at least once before they will give their adviser the benefit of the doubt.
"Trust is essential in the world of finance, where well-functioning markets are necessary to create value, and in investment services, where experts work to safeguard and grow the financial wealth of their clients," the CFA Institute said in its report, The Next Generation of Trust: A Global Survey on the State of Investor Trust, which polled 3,000 retail investors.
The study, which found a significant gap between what investors expect from their financial advisers and how satisfied they are with the relationship, comes as the UAE’s financial advisory industry faces a raft of new regulations.
The UAE Insurance Authority and the Central Bank of the UAE both issued circulars last year outlining changes to the way savings and investment schemes are sold in the UAE.
The IA’s second draft circular, released in May as a follow up to a 2016 release, reinforced plans to cap total commission payable to entities involved in the sale and distribution of insurance products, such as financial advisers. It also proposed banning the use of charges such as advice fees and trailing commission fees on the products sold.
The Central Bank issued a circular in May advising banks and finance companies to resolve all outstanding mis-selling complaints “amicably” and within a deadline of just 90 days.
Both entities were responding to a high number of complaints from customers over expensive fixed-term investment plans.
With trust an issue for UAE investors, the report found many turn to other sources for financial advice with 31 per cent choosing friends and family and 15 per cent online research.
Despite this, when selecting an adviser, global investors place more emphasis on personal trustworthiness and ethical conduct, while investors in the UAE are more concerned with returns. UAE investors are also less concerned with the credentials and track record of their advisers than their global counterparts.
"The survey shows that people rely on their friends and family here for advice, and the bad reputation of many financial firms and advisers tarnishes the entire industry," said Steve Cronin, the founder of DeadSimpleSaving.com, which helps residents invest their money sensibly. "I wish people would be even less trusting though, as plenty are still getting suckered into buying long-term savings plans that are expensive, badly invested and hard to escape from."
When it comes to fees, a hot topic of discussion in the UAE due to the high prevalence of expensive investment products, 57 per cent of UAE investors said it is important that fees reflect the value they receive from the adviser. One in five also said they had switched investment firms due to an increase in fees.
The CFA Institute has called for universal disclosure of fees across the globe to raise levels of investor trust. Globally, 84 per cent of investors say their trust in the system is mostly driven by full disclosure with less than half satisfied.
“Higher trust comes with higher expectations, and we are not there yet until we can consistently prove our value to clients by providing solutions, not simply products," said Paul Smith, president and chief executive of the CFA Institute.
"We need universal disclosure of fees and performance to drive home this message."
For the industry to rebuild trust with its customers, Mr Cronin said it needs to only hire those with advanced and reputable financial qualifications.
"It needs to be fully transparent about all costs, fees and commission, ideally moving away from commission towards platform fees or hourly rates for advice," he said. "It needs to transform the remuneration of advisors, away from upfront commission and towards rewarding sustained service and out-performance. Finally, it needs to move away from selling complex insurance products disguised as savings plans."
Trust in advisory firms will be tested even further in the coming months as economists warn of a US recession in 2020, tying in with the presidential campaign, due to fading fiscal stimulus and rising interest rates.
"The [US] economy is poised for a bumpy ride in 2020, and if enough policy mistakes pile up - overly restrictive fiscal policy and excessively tight monetary policy - this could certainly create sufficient downdrafts to create a recession, or at the very least, a growth recession," warned Bloomberg Economics analysts Carl Riccadonna and Yelena Shulyatyeva.
Despite this outlook, 70 per cent of investors in the UAE believe their advisory firm is “well or very well prepared” to handle the next crisis, compared with just 55 per cent of investors globally.