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When I arrived in Dubai
When I arrived in Dubai, I looked for advice on how to save and invest for my retirement. I spoke to 4 different financial advisors from 4 Dubai based international firms. All were professionals, regulated by the local authority. All of them advised that I sign up to a long term savings plan. It seemed as if that was the only way to invest as an expat. of As we will see, it’s far from being the best option for the investor, but that was the practice in the industry.
I lost 12,602 USD to the fees and costs of the plan
After selecting the advisor which had the best credentials and who could best answer my questions, I was convinced to sign up to a 10-year plan where I would contribute 850 USD every month. I was convinced to lock myself into what I now know is one of the most expensive and most inflexible plan there is. Over the next 5 years and 3 months, I contributed 51,345 USD and I lost 12,602 USD to the fees and costs of the plan compared to a simple 3-fund Bogleheads portfolio. That’s 25% of my investment!
My advice is to avoid signing up for such long term investment/savings plan.
In this article, I would like to share my experience, as well as my understanding of how much money I have lost so that you are better equipped to make decisions and not make the same mistake. In summary, my advice is to avoid signing up for such investment/savings plan.
How do you know if this applies to you as well?
A lot of investors in the UAE to whom I used to tell this story, respond: “I’m so sorry for you. If you want I can give you the contact details of my financial advisor, maybe he can help you.”
Well, that’s because they think their plan is better. And in most cases they’re wrong, unless they have an advisor that charges them a fixed percentage fee for managing their portfolio (and don’t get any other sort of commission for selling you any product!).
If your plan has any of the following features, chances are you’re paying extremely high fees for a very inflexible plan:
Commitment to contribute a minimum amount on a monthly basis
Commitment to a certain agreed period of time (often 5, 10, 15, 20 or 25 years)
Use of the words 'premiums' anywhere (biggest giveaway it's an insurance product)
Any restriction in access to full account value at anytime (e.g. penalty charges to close the plan before the end of the agreed period)
Any mention of 'surrender fees' or 'mirror funds' or 'policy' or 'assurance' in documents/fine print
The use of 101% payout is another dead giveaway - the extra 1% is use to bypass laws so it is regulated as insurance and not investment
Advisor paid by the product provider (his/her services may even be presented as free to you!)
Multiple layers of unclear or hidden charges and fees
Here is what happened
So I contributed to the plan 850 USD (3,000 AED) per month during 63 months, starting in April 2012 and ending in June 2017, for a total of 51,345 USD. In July 2017, the value of my account was 57,853 USD. The following graph shows the cumulative contributions over time, as well as the average growth of the account.
From this perspective, the plan was generating some returns. An average of 4.5% per year.
But I had signed up for a plan of 10 years, so there was a penalty for leaving the plan early.
When I asked for the details about how my surrender value would be calculated, I received the following table showing the percentage of account value I would be able to retrieve if I were to close my account before the end date (for some reason, the table was in Spanish). My plan duration was 10 years so it’s the column on the far right that applied in my case. I had completed 5 years of contribution so I would be able to recover about 90% of my contributions (there was also a small penalty-free allowance)
The following graph helps visualize how this compares with my contributions over time. If I were to surrender before the end of the plan I would only recover the orange part.
What the plan did not show
What the plan did not show me was how much fees I was actually paying. When I asked the product provider for a breakdown of the fees charged on my investments (and despite insisting for more details), all I was given were contractual and information documents that came with the product, as well as a pdf with a long table of the mirror units and their information (without any actual fees or costs information). The way the fees and charges are applied to the plan is so complex that attempting to estimate them based on the information received seemed unlikely to be very accurate.
So the only way to estimate how much this plan was costing me was to compare it with a simple portfolio of index funds following the no nonsense Bogleheads approach.
Something important to note is that, after 1 year in the plan I managed to reduce the ongoing management fees of the underlying funds: I moved all my money into the funds that were the closest to the all world index, reducing the average fund management fees from 2% to 0.6% (still way too high, but that is the best that was available). Thanks to this, comparing the outcome of my plans with the outcome of investing the same contributions using a simple Bogleheads portfolio makes even more sense. It is also equivalent to estimating the opportunity cost of not being advised to invest using this simple approach.
Using the free backtesting tool of Portfolio Visualizer, I calculated how much my portfolio would have been worth if I had invested 850 USD per month in a moderate Bogleheads portfolio (60/40 stocks/bonds global low cost index funds). This in itself is quite conservative given that my asset allocation at the time was more aggressive. The result was 64,283 USD. With an average annual growth of 8.5% over that period of time.
My ongoing cost was 5.4% per year!
That is 4% more than what my plan had achieved. Overall on average I had been paying 4% per year, and this after reducing the underlying funds fees by 1.4%. If I had not made that initial change I would have been paying an average of 5.4% per year!
So here is a better representation of the reality, including the costs of investing in the plan (which the plan does not show you!):
Here you can see how the surrender penalty works. It’s basically a way to capture the charges for the entirety of the plan upfront. As time passes and the surrender penalty is reduced, the plan fees and charges increase gradually to compensate.
I lost 12,602 USD (or 25% of my contributions) to the fees and charges of the plan
Overall, when I closed the plan in July 2017, I recovered 51,681 USD. I lost approximately 6430 USD to the plan in-built fees and 6172 USD to the surrender penalty, for a total of 12,602 USD or 25% of my contributions.
I spent 15 months of my life saving to pay for the plan charges!
This is also equivalent to 15 months of contributions. So another way to look
at it is to say that I have saved money for 15 months only to pay for the fees of this investment plan!!!
Looking back
In hindsight, while I believe I was poorly advised (that sort of advice being the general practice in the region is not an excuse), I also believe I was lucky to come across the simple investing approach developed by the Bogleheads. It enabled me to reduce my costs slightly (by changing to low cost index funds within the plan) and gain the confidence to leave the plan despite the penalties.
If I had done this analysis earlier in the plan, I would have left earlier as well. I knew I was paying fees that were higher than necessary but I didn't know they were that high! A combination of loss aversion and the sunk cost fallacy probably also kept me in the plan for longer. If a group like SimplyFI existed back in 2011, I may have even avoided this whole thing completely! This is one of the reasons we now exist!
Conclusion
In conclusion, this was a pretty bad investment, but I consider this loss to be the cost of one of the most important financial lessons of my life, as this was my first attempt to investing. I have since learned that there are much simpler and much more efficient ways to invest for the long term!
In the next articles, I will explore what would have happened if I had continued with the plan for 10 or 25 years. Be ready for some scary numbers! I will also put together a simple guide to help you estimate the real costs and losses of your plan if you are in a similar situation.
Cheers,
Sebastien
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Sebastien is the founder of SimplyFI.org where he helps expats better manage their personal finance and build financial resilience. He is also the founder of Impactivated.com where he writes about how financial independence empowers us to do good in the world. You can follow his work on Facebook, Twitter, LinkedIn and Instagram.