Sweeping changes to the financial services industry are on the way in the UAE — but a big question mark hangs over the future of individual advisers and the life insurance companies whose products they sell. While the long-term savings plan has been embedded in the market for more than 20 years, there are good reasons why savvy investors are already turning to other options.
The biggest casualties will be the financial advisers for whom years of profiting from high commission paid upfront for sales is drawing to a close. Their number has halved in recent years and it could drop by another 80 per cent through a combination of official regulatory moves and investor trends.
Limits on fees and commissions
The UAE Insurance Authority plans to limit fees and commissions charged to those buying savings plans and give them better protection with a raft of new measures. Hong Kong has already taken the step towards a fee-based financial advisory model, very much like in the UK, and this now is happening in the UAE.
When the new regulations come into force we can expect to see the big global wealth management firms move in with their fee-structured advisory services.
These are anxious times for the licensed life companies here, who know their business is under threat. New firms arriving in the market will all have qualified advisers giving qualified advice, and they’ll either be paid by the hour, like lawyers, or on a trail and drip commission basis over a period of time.
Longer plans, higher commissions
This is in sharp contrast to what has been happening for years in the UAE, where the culture of long-term savings plan is well established. And although the financial advisers selling them have often been branded as untrustworthy.
The source of the problem, however, was not so much the advisers, but the way the products were designed and how life insurance companies pay brokers. The system incentivises brokers to set up a plan for as long as possible.
The longer the plan, the higher the broker’s commission and the more the client pays. No surprise that brokers were keen to persuade people to pay inasmuch as they could afford each month and spread the plan over 25 years.
Problems occur when people find out only when it’s too late that their money is locked away for years, and they can’t touch it without paying high penalties. The bigger risk is that the money will not be there at the end because it may have been lost in the fund in which it was invested.
The reality is that the majority of advisers who have been operating here have no financial qualifications and don’t know how to manage funds.
Meanwhile, the life companies here each offer the same basic savings plan. They also restrict the funds that can be chosen to a few hundred out of tens of thousands available around the world.
In addition, the charges are extremely high, especially for the first 18 months, and it’s those charges that remain for the full term of the savings plan.
What should change?
This is where the fundamental issues lie.
What needs to happen is that the structure is changed, as the UAE regulator is now doing, so that brokers are no longer incentivised to sell long-term plans with high charges at the customer’s expense.
The life companies are going to struggle because the UAE Insurance Authority has made it clear they want change.
At the same time, people are far more savvy these days, going online to do their own research and take more control over their own finances. They’re looking for other alternatives, and that’s where private equity, real estate and other asset classes come into play.
Omar Jackson is a Partner with Berkeley Assets.