One afternoon late last month, I was diligently working in my office when out of the blue I got a call from my bank. The person at the other end of the line wanted to know if I would like to invest any of my money into the various mutual funds that the bank has.
In the three years I have been in the UAE, my bank had never before called me to ask this question and maybe that’s not such a bad thing. Such conversations should probably be initiated by the person seeking the product rather than the person selling it.
In my time in Abu Dhabi I have been inundated with cold calls from dubious financial advisers – ie, not my bank – who would like to lure me into long-term investment plans whose fees are so corrosive that the chances I have of ever making much money in the long run are slim. Factor in the insane fees that you have to pay to get out of these schemes and the proposition amounts to nothing more than a vaguely respectable looking scam.
That these schemes, which are often wrapped with insurance and administered by some of the biggest names in the business, are often sold to residents without all the terms and conditions being fully disclosed, has led to much unhappiness among investors. The authorities are not blind to the situation. The Abu Dhabi-based Insurance Authority has been up and running for a year and is dealing with people’s complaints, including one that my wife had after a spat with an insurance company over her car insurance.
Maybe my bank is making up for lost time, because by and large this country’s banks seem to have been slow in pursuing the opportunity of managing other people’s money. There is clearly a market for such services and it seems to be dominated by the financial advisers. Most banks in the UAE have asset management divisions and are typically able to offer customers much more transparent services. Yet while one often sees billboards about personal loans, one never sees banks advertising investment solutions.
It’s odd that banks aren’t giving this as much attention as it deserves as the UAE has a young and affluent population. It’s true that the cost of living has gone up in recent years as rents rise, but by and large most people are saving enough to remain here.
Banks are also feeling the pinch amid lower oil prices and have been diversifying. As well as lending, they are now beefing up lines of business such as trade finance, securities brokerage and asset management.
The fact that banks offer asset management services for individual customers doesn’t mean that those wanting to invest should jump at the opportunity without doing some due diligence – because what your bank offers might not be a considerable improvement on the schemes that a cold calling financial adviser will be pushing.
The bank might try and sell you some of the mutual funds that it or one of its partners manages. Mutual funds are all well and good, but the problem is that they often come with onerous terms. Unless they are index-linked, have very meagre management fees and similarly tight entry and exit fees, my advice would be to forget them altogether. Some of these funds, which are actively managed by a portfolio manager, will have fees as high as 2 per cent a year. While that does not seem a lot, it compounds over the years. And many banks will charge you a commission of up to 5 per cent to buy mutual funds and a similar percentage to get out, which frankly is outrageous.
Increasingly investors around the world are shunning actively managed mutual funds for so-called index trackers. These funds will mimic a benchmark and charge a fraction of the cost of actively managed funds. Vanguard, Charles Schwab and Fidelity, three of the largest US-based asset managers that offer such funds, have management fees on their biggest US stock index funds that range between 0.07 and 0.09 per cent, a sliver of the cost of almost any actively managed fund.
If you are not a US citizen, however, you might find it difficult to access these funds, though some of these companies have international arms that you can sign up with.
Failing that, the best option for investors in the UAE would be to open an account at a discount brokerage and invest in index-tracking exchange traded funds (ETFs). Like index-tracking mutual funds, ETFs typically track an index but are traded like a stock and can be bought and sold throughout the day. The trick, though, is to buy them through a low-cost brokerage and avoid the temptation of playing around with them.
mkassem@thenational.ae
This continues our series of weekly analysis articles by a rotating group of The National’s beat reporters. Mahmoud Kassem covers banking and finance.
Follow The National's Business section on Twitter
