UAE commission cap goes live, making way for a new opportunity for fee-based financial advisers such as SJB Global
What does the UAE financial advice market current look like?
UK pensions, savings products, lump-sum investments and insurance products currently have very little regulation in the UAE and no cap on the amount of commission financial advisers can charge. Often this leads to clients being advised into high commission paying products that have a very long tie in periods between 10-25 years.
Regular Savings Plans
The issue clients face is that the adviser has been paid for 10-25 years of advice up-front which leaves the adviser with very little motivation to service the client moving forward. The client is often unaware this has happened and would be difficult to justify the amount of money the adviser is making should this have been disclosed to the client beforehand. Indemnity commissions were often paid based on the entire period the investor planned to save meaning if you planned to save £2,000 a month for a 25-year period, the adviser would earn a commission based on the total amount of regular savings premiums over the entire 25 periods i.e. on £600,000 in this example. Sometimes up to 4%! The regulators have taken the right action here.
Lump-Sum Investments and UK Pension Transfers
Previously, up-front and undisclosed commissions paid the adviser anywhere between 7-12% of the initial premium. The on-going cost of the portfolio suffered dramatically to pay for these commissions leading to a very high on-going cost of between 3-5% per annum. This has a detrimental effect on a portfolio. A study from Vanguard conducted a study which showed that a fund cost 1.5% compared to a fund cost of 0.2% would decrease the overall returns of a portfolio by 35% over a 25-year period. Considering most commission paying products have on-going fees that are much greater than this, the impact to the portfolio could decrease the overall returns by showing a negative return over a 25 year period even when there has been investment growth! It poses the question “why pay for very expensive advice to potentially make a loss?”
What has changed?
- A commission cap of 4.5% has been introduced on the sale of lump-sum portfolio bonds or offshore bonds which are commonly used inside UK pensions.
- Indemnity commissions have been banned – a sum paid upfront to advisers on the full value of an insurance policy. Instead, the commission paid must be capped at 50% of the annualised premium or 50% of the total commission payable under the product, whichever is lower. Commission paying regular premium plans will now be subject to claw-backs within the first 5-years of the policy, at a minimum. This means that should an adviser sell a regular savings plan which ties the investor in for a period of 10 years, but the investor decides within 5 years to cancel the plan, the adviser will have to pay back the commission earned. This poses a huge risk to financial advising firms offering this type of advice but provides a good opportunity for firms who operate on a fee-based model such as SJB Global.
How SJB Global are revolutionising the industry
Here at SJB Global, we pride ourselves on transparency and putting our client’s needs first. We work off a fee-based model with a long-term view of growing our assets under management as well as retaining our clients by providing the best possible service each year.
We are able to offer clients a savings plan at a fraction of the cost that other commission-based advisers offer to give savers the opportunity to have the retirement they deserve. With a one-off cost to set up a savings plan of £1,000 and no fixed tie in period really allows you, the investor, to benefit from letting your funds grow with low setup costs, low on-going fees and no hidden secrets which could come to light many years into their savings plan.
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