At the basic end of the financial advice/financial planning business are people who are simply in the business of selling, whether it is an investment vehicle or an insurance policy. Their motivation may not be your satisfaction but their commission. Sales commission is not a bad thing per se – even sales people have to eat – but it can create a built-in conflict of interest. You may be being offered a product that is not what meets your needs but which generates the sales person the most commission.
Just because you aren’t physically paying an adviser anything directly doesn’t mean you are getting something for nothing. Commission usually means the provider of any products you buy pays commission to the adviser and deducts the cost from the value of your product. The cost of the commission is taken into account in the charges you pay under your product together with the other costs of setting up and operating the plan.
At the higher end of the ladder, it is now more common for financial planning to be fee-based. This may mean that you pay a fixed amount up front depending on how complicated your advice needs are or alternatively you may pay an hourly rate. Should you purchase any financial product that pays the adviser a commission you ought to be given the option to choose to have the commission rebated to you (if the product is an investment product it may be reinvested) and offset against fees incurred.
Sarah Lord, Financial Planning Director of Killik & Co (Middle East & Asia) says, “We believe in total transparency in remuneration whether it is on the investment side or the planning side. So if a client comes to me for financial planning there is no charge for the initial meeting. Following that meeting I will write to the client outlining the work I believe needs to be undertaken and the corresponding fee for that piece of work. The client knows from the outset what the cost of the advice is and we will only commence work once we get agreement from the client for the work to be undertaken. At the same time we will highlight to the client any product commission if in doing the financial planning there is requirement to put in place a contract. It is then the client’s decisions whether to use that commission to offset the fee or to reinvest the commission to enhance the terms of the contract. So – total transparency – we are not commission-based, we are fee-based with commission offset.”
Any financial adviser or financial planner that you deal with should volunteer information about how he or she gets paid. If you have to ask, you should at least get a straight answer.
Proper financial planning does take time. Sean Kelleher, Chairman and Chief Executive Officer of Mondial points out that at an initial meeting, his firm’s advisers go through a 30-page ‘fact find’. “This is how you tell how good a financial adviser is! Some of the unlicensed brokers work on barely six pages. This is not something you can do in five minutes. It takes up to two hours to do only averagely well. If potential clients do not want to come into a two hour meeting, how good can their financial adviser be?”
This is where you need to be pro-active, make sure that your financial planner has asked enough questions about your circumstances needs and preferences. You need to be certain that he or she has considered the alternatives and can give you clear reasons that make sense to you for any recommendation made. If you're not happy then it is up to you to ask more questions, good financial planners will always be prepared to make sure that you understand fully what it is they are telling you.
Be aware that many people who may call themselves financial advisers may focus on only one narrow aspect of your financial condition – the area that corresponds with whatever financial training they have actually received. As the saying goes, when you all have is a hammer: everything looks like a nail. Advisers who lack training in comprehensive financial planning often know only what their companies tell them about the various investments they're told to sell. Andrew Cole, Chief Executive Officer of Prosperity warns that, “Too many companies are filled with product sales people. What they are trained on is what you get.”
It was not that long ago that real estate in Dubai was being taken for a one-way bet. Now we know better (some of us already did). The only happy flippers left in Dubai are the dolphins! You may have had your fingers burned in the real estate boom – if you did, take responsibility for it and learn from the experience. Don’t be a trend chaser!
In past issues of WEALTH we’ve already talked about behavioural finance and how humans are prone to make injudicious decisions when they panic. You’ll have seen plenty of that in the financial markets over the course of the last couple of years. We have said it before but it is worth saying again, the one key rule in successful investment is to buy low (cheap) and sell high (at a profit). Unfortunately too many people do the opposite when markets turn against them
A proper financial plan will help to avoid that common error and make a real difference to achieving your goals. A good financial planner will help you understand and prioritise your financial needs as well as recommend products which can help you. A good financial planner will look at every aspect of your financial situations, from your budget to your estate plans. That's the only way to have truly customised, comprehensive planning advice.
Good, comprehensive financial planning doesn't ensure outsized returns. That may be a disappointment to you but it is a fact. The only way you might get supersized returns is by taking supersized risks and that is just not sensible! A proper plan should, however, allow you to protect your assets, take care of your heirs and grow your wealth over time.
Your financial planner should make sure that your investments are well-diversified and that other aspects of your finances, including insurance coverage, tax situation (as appropriate), estate plans and retirement planning, are in the best shape possible.
REGULATION
One thing you should make sure you understand is just who is regulating the financial adviser or financial planner you are dealing with – if they are not regulated or if they are unwilling to explain how they are regulated that would the time to make your excuses and leave! Killik & Co (Middle East & Asia) is a rarity, being based not in the UAE as such but in the Dubai International Financial Centre. This means KIllik is subject to the regulations applied by the Dubai Financial Services Authority (DFSA). Killik holds both retail and professional licences, meaning that it may advise any client.
Kashif Arbab, Managing Director of Killik & Co (Middle East & Asia) explains, “We are currently Category 3-licensed by the DFSA. That allows us execution directly from the branch and also allows us to manage clients’ portfolios on a discretionary basis. Obviously our internal policy is that we inform the client how we are managing it, every time there’s a change. For the discretionary portfolio management we do have a minimum, which is £100,000 ($150,000) but our Category 3 retail endorsement means if a client wishes to start his portfolio and we can advise on structuring the portfolio or give advice on the deals there is no minimum at all.”
Mondial operates under licences provided by the Central Bank of the UAE, the Dubai Economic Department and the Dubai Chamber of Commerce.
Prosperity as a firm is a relative newcomer, having been created in 2009. Prosperity is licensed by the UAE Insurance Authority. Andrew Cole explained, “There are two licences you can have: the Central Bank licence or the UAE Insurance Authority licence. There is currently a grey area as to what is advice and guidance. There are still a lot of companies out there that don’t even have a UAE Insurance Authority licence and they get round this by placing their business through someone that is regulated. In fact there are no longer any Central Bank licences for the type of activity we do; there are only six in the market place. There were 200 licences available through the Insurance Authority, 60 are insurance companies and 140 were brokers. At the end of last year the Authority cancelled 70 of the licences because firms were not conforming to the regulations.”
ADVICE OR PLANNING?
Sean Kelleher believes financial advice is a ‘multi-tiered concept’ and sees his job as making sure that his firm’s clients are speaking a person who understands their needs, “We want to recognise that our job is selling a relationship. That’s what a really modern financial adviser has to do; to be able to recognise that not everyone is equal and there’s nothing as unequal as the equal treatment of unequal people – that’s what burns relationships. My challenge is to match advisers with clients!” He is also firmly of the opinion that many banks are just not offering a service that meets the needs of their HNWI clients, “There is no service out there for ‘baby’ millionaires – you can be worth about $5-10 million and get no service from a bank that adds value to your portfolio.
“At one extreme you have product salesmen that do not understand asset allocation and performance at all and at the other end are people with money that the industry hasn’t formulated any quality standard or code of conduct around.”
“In my opinion [financial advice] is being specific to certain areas where a client may need advice, say focusing on retirement planning or school fees, but not looking at the situation holistically. So advice is specific to specific areas,” said Sarah Lord of Killik, adding, “Financial planning is when you look at everything holistically, working with a client to understand and identify their financial planning objectives and then start to create an actual plan to enable them to meet those objectives. ‘Financial planning’ covers all areas of financial needs and objectives.”
Andrew Cole defines Prosperity, “We are financial planners, not advisers. We actually plan through the short, medium and long term, rather than advising on one single product. We’re actually looking at every angle: banking, trusts, wills, products – whether investments, life, medical or general insurance.
“In financial planning, whether you are from the UK or Timbuktu – you’ll have similar requirements. We will all retire, we all have to educate our children, and we all have to cope with unexpected events. What may change is the degree of funding needed in each individual country.”
Sarah Lord agrees, “Wherever someone comes from, whatever nationality they are, financial planning, broadly, is the same: everyone has to save for retirement, education, property etc. So from a financial planning perspective, I can create financial plans for anyone. As far as the tax situation is concerned, the UK is my specialist area but I do keep up to date with any significant legislative changes that would impact on other nationalities out here… ultimately, financial planning is the same the world over.”