When the British entrepreneur Steve Cronin was looking to invest his savings a couple of years ago, he quickly realised the pitfalls facing many expats. The fees on most financial investment schemes are outrageously high and long-term savings plans are often sold without disclosing key details such as what is being invested in or the penalties for breaking a contract early.

To top it off, there’s little recourse to right wrongs when disputes with the sellers of these products (such as complex insurance-linked offshore investments) arise because the regulation in the UAE is still nascent. This allows many dodgy purveyors of financial products to bilk the unsuspecting.

Mr Cronin, 38, a Cambridge University-educated former management consultant who now runs his own health businesses in Dubai, says he was advised against signing up for a long-term investment scheme – which typically range from five years to 25 years – by a friend who had lost money after breaking his own plan.

“I nearly signed up for a 25-year plan but stopped when my best friend said ‘Please don’t do this, I did it and lost quite a bit of money’,” he says. “I didn’t particularly know where to invest my money. I had some funds in the UK and thought ‘I am in financial services and I don’t know where to invest stuff’.”

So Mr Cronin spent time researching options, eventually shifting his money into Vanguard Funds, a low-cost asset manager, back home in the UK.

US-based Vanguard was one of the first firms to offer low-cost indexed mutual funds – funds that mimic any given financial asset benchmark. It has received cash flows into its funds in recent years as investors start to cotton on to the benefits of investing in the cheapest possible way. Investors poured US$236 billion into Vanguard funds last year.

While many mutual funds that are actively managed typically charge about 1.5 per cent management fees per year, exchange-traded funds and mutual funds that just follow an index, can charge a sliver of that. For instance, Vanguard’s Total World Stock exchange-traded fund, a fund that tracks more than 7,000 stocks globally, charges 0.14 per cent in annual fees.

In the meantime, financial advisers are having to reinvent themselves and rely less on commissions and more on fees. In the US, new regulations have been put in place to protect consumers from unscrupulous financial advisers. There are also signs of change in the UAE, with a number of financial advisers shifting from commission-based structures to fee-based, such as AES International and Killik Offshore.

To help expats avoid the pitfalls of investing while abroad, Mr Cronin set up a non-profit online forum last month called Wise, which offers advice on what to avoid when it comes to picking investments and how to dodge unscrupulous advisers. He also plans on helping groups of people, such as teachers, manage their finances through lectures and seminars.

One of his biggest tips is to ignore the cold callers that many expats in the UAE are familiar with. They operate by getting existing clients to give them phone numbers of friends and colleagues, creating a sense of trust and familiarity. But once they get hold of a willing prospect, they will often sell them all sorts of products with sky-high fees, such as so-called mirror funds that mimic a branded stock or bond fund but charges fees that are twice as high.

“It’s a legal scam,” says Rory Gilbert, a Dubai-based managing director at AES International. “The main problem is that the regulator to some extent has turned a blind eye and a lot of market participants have taken huge advantage of that. These are many of the things that we saw in the UK 20 years ago and were legislated out of business.

“But what many financial advisers here particularly take advantage of is the ability, for as long as it lasts, to charge commissions and then they put icing on that by not disclosing the commissions and upfront charges.”

Not everyone has been as lucky as Mr Cronin at avoiding the snare of an investment scheme sold by unethical sales people.

Martin Boon, a 57-year old Briton, came to the UAE four years ago in the hope of saving enough extra cash to buy a home back in the UK.

Instead, the Dubai-based executive says he will probably have to work longer in the Emirates to make up the money he lost after being sold a high-risk investment product rather than a low-risk option he specifically asked for.

He says he was introduced to a financial adviser at a social event soon after he arrived in 2012. The adviser promised to help him reduce his exposure to taxation by shifting his UK pension into so-called offshore bonds.

The adviser put £200,000 (Dh1.03 million) from £388,000 of Mr Boon’s life savings, that he had entrusted to the adviser, into two high-risk funds managed by Morgan Stanley and Goldman Sachs, with the advice that they could offer up to 11 per cent annual return and that they were low risk. Since then, those two funds have lost half of their value on paper.

While Mr Boon had asked for low-risk investments, these two funds were essentially investing in emerging market stocks through a convoluted product called an auto-callable structured note, whereby there is a measure of capital protection. That protection only kicks in, however, if the value of the investment loses 30 per cent or less after five years. If the funds lose more than 30 per cent, Mr Boon will have to bear the loss himself.

When the executive dug deeper into the funds after noticing their drop in value, he discovered not only was his money invested in the risky world of developing nations, but that a big chunk of his money was in Russian and Brazilian stocks, shares of listed companies in two countries that have been crushed by the collapse of commodity prices and which have also suffered from political fallouts.

Of the £388,000 initially invested, on paper it is now worth £290,000. And while you don’t lose until you sell, Mr Boon is not optimistic that emerging market stocks will rebound to the levels they were at when he bought.

“How could you take someone who has five years to retirement and asked for something low risk and put them into something high risk? It’s like expats ripping off expats,” Mr Boon says. “We’ve had to change a lot of our things in our planning to make up for the shortfall, possibly by staying longer.”

When contacted by The National about Mr Boon’s investments, the investment company said that he had signed documents confirming that the products and the charges had been understood.

“We are always clear and transparent with clients on product structures, risks and charges where they sign to agree that they have fully understood these risks and agree to the terms and conditions,” a spokesman said. “Clients are always given product provider brochures containing charges and sign to confirm that they have understood them.”

Because investment schemes that are administered by insurance companies fall through the regulatory cracks in the UAE, there is often very little recourse to address grievances.

Mr Boon says he has registered a complaint with the Central Bank of the UAE. The irony, he says, is that moving his cash to an offshore bond was largely unnecessary from a taxation point of view.

Mr Gilbert says that while there might sometimes be a reason to shift pensions from the UK to offshore equivalents, expats must carefully analyse whether it’s worth the fees and potential pitfalls of doing so. Most often than not, he adds, it’s best leaving things as they are.

To ensure investors make the right decisions, Mr Cronin recently arranged a talk by Andrew Hallam, a Canadian financial journalist who has written a book to help expatriates manage their finances. The event was so well attended there were not enough seats to accommodate everyone.

“He’s one of the few people spreading the message that you can take control of your fin­ances and you can invest offshore easily, cheaply and flexibly,” Mr Cronin says. “Not many people are doing that.”

Mr Hallam advised listeners to do their due diligence when choosing a financial adviser, researching the company and the advisers and making sure that they haven’t been fined or censured by any regulators. Mr Cronin says it’s not always easy for expats to open accounts at discount brokerages because some of the major players such as Vanguard and Fidelity don’t allow you to invest unless you are a resident in the US or UK, or a small number of other countries.

The Briton says there are, however, a number of reputable brokerages including TD Direct Investin in Luxembourg and Saxo Bank that expats in Dubai can easily open accounts with.

For financial advisers, Mr Cronin’s recommendations include Dubai-based AES International, which Mr Boon eventually gravitated to because the firm works on fees rather than commissions, meaning that it’s in the best interest of the adviser to see his client’s wealth grow. He also likes Investme and Killik Offshore.

mkassem@thenational.ae

Keep a careful eye on your returns over the years

Harvey Jones

Keeping track of all your pensions and savings over the years isn’t easy, and all too often things can end up in the wrong place.

Financial advice you took years ago may no longer be relevant. Or maybe your money was put into overcharging funds or offshore bonds by rogue advisers more interested in generating fees for themselves than higher returns for their client.

Briton Jackie Pym, who has been living in Dubai for six years, decided it was time to tidy up her pensions and savings and it didn’t take long for her new advisers from UAE-based AES International to discover that much of her money had been poorly invested.

After taking financial advice from another company, Ms Pym, who works for a real estate developer, had set up a self-invested personal pension plan (Sipp).

This can be a flexible way to save for retirement because it can hold a wide range of investments, including individual company stocks, mutual funds, and trackers such as exchange-traded funds (ETFs).

This puts savers in charge of their money and allows them to build a low-cost portfolio to maximise their returns.

Unfortunately for Ms Pym, her former adviser had recommended she invest the Sipp in a pair of expensive insurance company bonds, and the high charges were eating into her returns.

Worse, about 30 per cent of her pension wasn’t invested at all, giving her zero return on her money.

“My pension wasn’t being properly looked after,” she says. “I was paying too many fees, and losing money as a result.”

Like many busy expats, she failed to make the time to check where her pension was invested, solely relying on the adviser.

“I didn’t really think about it, I thought I had been given good advice and was being looked after, but that wasn’t the case,” she says.

Her pension has now been invested in a diversified portfolio of low-charging funds and ETFs, and performance has been transformed.

“My pension is suddenly growing again, it is worth around £10,000 more after just a few months.”

Ms Pym says it is important that her savings are as flexible as possible, because at some point she plans to leave Dubai, either to return to the UK, or the Costa Blanca, Spain.

“Some advisers like to put expats into 25-year savings plans, but I don’t want anything as ­rigid as that.”

pf@thenational.ae