For many ordinary investors, wealth management can be something of a mystery. Banks are unlikely to offer personalised services to anyone but the ultra-rich, leaving many investors in the UAE to go it alone, use international service providers, or even getting roped into buying high cost products.
“Wealth management solutions have traditionally been accessible only to a small segment of consumers,” says Deepak Mehra, Head of Investment Solutions at Commercial Bank of Dubai (CBD).
“A large majority [have been] unable to receive personalised services or the best risk-adjusted returns and at the same time end up overpaying for the services.”
But that’s changing now with digital wealth management platforms, where much of the process is automated.
CBD has launched its own robo-advisory service, Investr, having partnered a leading European WeathTech company. “We are confident that CBD Investr will help democratise investments in a big way and will be a game-changer in the wealth management industry in our region,” says Mehra.
A large majority [have been] unable to receive personalised services or the best risk-adjusted returns and at the same time end up overpaying for the services.
Mark Chahwan, co-founder at Sarwa, says that traditional financial institutions have failed to capture the younger demographic. “Technology is creating more accessibility to financial literacy and products that were once only available to the high-net-worth individuals,” he says.
Sarwa is one of the best-known digital wealth platforms in the UAE, which are often referred to as robo advisors. That’s because the process of creating a risk profile for investors and assigning them an investment portfolio is done by an algorithm, using data provided by investors, whether by answering a questionnaire, inputting information on income and age, and even financial goal. It’s worth noting though that typically the client doesn’t have to accept the recommendation, but can self-select different portfolios.
Robo advisers offer highly diversified portfolios, and rebalancing is often handled by the platform. Why does this work? Mehra notes that data show that the majority of fund managers cannot beat the markets, let alone an investor trading on their own. “Eventually well diversified, actively managed portfolios have outperformed every other asset class,” he says.
Most offer fees that are considerably lower than many other discretionary investment options, and most offer a single fee that covers all aspects, including rebalancing, without additional charges such as entry or exit fees, or fund lockups. They also have low minimum investment amounts, meaning investors can start small.
Nevertheless, from a relatively empty landscape a few years back, investors are now spoilt for choice. In addition to CBD Investr and Sarwa – which recently raised $15 million in a funding round led by Mubadala – there is also StashAway and Wahed.
Singapore-based StashAway has a presence in several countries in Asia, and launched in the UAE late last year, with approval from the Dubai Financial Services Authority (DFSA).
Technology is creating more accessibility to financial literacy and products that were once only available to the high-net-worth individuals.
Ramzi Khleif, general manager of StashAway MENA, highlights the platform’s low fees – its base fee is 0.8 per cent for customers with less than $25,000 invested, which can drop to as low as 0.2 per cent, while noting that the sign-up process is fully digital, meaning clients don’t need to send in any physical documents.
Khleif says that the market remains wide open for digital wealth platforms: he’s adamant the real competition is not between the various robo advisers, but with cash “sitting idly in banks”.
“Saving is one thing, but that’s only the first step in the journey. Then you need to invest your savings, and invest it in the right way,” says Khleif. “So it's not about [us] taking market share from anybody else, it’s about tapping this massive pool of cash that’s not being deployed appropriately.”
That view is echoed by others. “A lot of what we see in the UAE is people hoarding money that's sitting in cash or a savings account,” says Chahwan. “Up to a certain point, once you have an emergency fund set aside, the rest of that cash is just losing value over time due to inflation.
“Everyone should be able to invest and put their hard-earned money to work if only to keep up with inflation. We see a growing awareness on that front,” he says.
Junaid Wahedna, chief executive officer at Wahed, which offers Sharia compliant ethical investment options, sees a lack of viable investment options for low or middle-income earners as potentially contributing to inequality within societies, given that wealthy individuals can typically increase their wealth via their investment portfolios.
“High net worth individuals are growing with the market so that inequality coefficient is being created. We’re saying, look, you can get on this train as well, and your risk reward profile can be same as an ultra-high net worth individual.”
Saving is one thing, but that’s only the first step in the journey. Then you need to invest your savings, and invest it in the right way.
The investment portfolios
How do these platforms look to differentiate themselves? One area is the portfolio offerings.
StashAway offers 12 different portfolio options: each includes a mix of equities, fixed income, real estate and commodities, with anywhere from seven to 12 different ETFs. Khleif describes the company as taking a “sophisticated” approach to portfolio construction, with its Chief Investment Officer, Freddy Lim a former Global Head of Derivatives Strategy at Nomura, the Japanese financial services giant.
Users are given relatively straight forward information on its various portfolios: at the more conservative end they are described as having a 1 per cent change of losing 6.5 per cent in any given year; while more aggressive core portfolios have a 1 per cent chance of losing 22 per cent in any given year, giving investors a realistic way to understand their risk exposure.
CBD Investr creates globally diversified and portfolios of stocks, bonds and other asset classes using low-cost ETFs, while the personalized portfolios are automatically and actively managed “using advanced algorithms that work on various market parameters to deliver optimal performance,” says Mehra. “These portfolios are tailored based on specific goals, risk appetite and investment time horizon. They are actively monitored and optimised based on changing market conditions to deliver the best possible performance without any involvement or management by the customer.”
Backtesting over the past 10 years of market data have shown average annual performance of 4.9 per cent for the conservative portfolio, the balanced 8.2 per cent, growth 11.3 per cent, and high growth 12 per cent he says.
Sarwa has a wide range of portfolios, encompassing conventional, halal, and socially responsible investments, with different risk levels for each. Portfolio constituents include global and US bonds, US stocks, global and emerging markets stocks, as well as real estate.
This year Sarwa launched a crypto option for investors, allowing them to add a 5 per cent exposure to Bitcoin, “for those who believe in the future of this cryptocurrency while staying diversified,” explains Chahwan.
Wahed offers Sharia compliant investing options. Wahedna says that while their platform naturally appeals to Muslims, there’s also a broader appeal to investors who want to invest ethically, especially among youth.
“There’s nobody today, whether they're Muslim or otherwise, who wants to invest in unethical things,” says Wahedna. “No one likes to create inequality. No one likes to invest in weapons companies or so on so forth.”
But that approach doesn’t have to come at the cost of returns: their portfolios have consistently outperformed their benchmark he says. “So people see you don't have to give up performance just for your ethics. And that goes a long way.”
Their platform also adheres to Sharia principles down to the smallest details. For example, all their ETFs are physical, meaning they hold the underlying stocks rather than derivatives, while the securities cannot be lent out by the broker, notes Wahedna.