Forty-two-year-old Australian, Nadia Diehl, wasn’t happy.
A large nursery chain in Dubai offered a free First Aid course for parents.
The company also offered information on guardianship, in the unfortunate event that something might happen to the parents.
You might wonder, “What’s wrong with that?”
It sounded great.
But Nadia says it was a ruse to sell the parents' financial products.
“At the end of the session we received the First Aid informational pack from a representative of a finance company. Afterwards, we received several phone calls to book our free guardianship session. When the financial sales representative came to our home, he took a lot of information from us (income, assets etc) and then pushed education schemes, insurance products and of course investment products.”
The investment schemes were like kayaks with multiple hidden holes.
Unfortunately, they’re prolifically pushed because they pay luxury yacht-sized commissions to the people who sell them.
Such commissions aren’t legal in regions with stricter financial regulations, such as Australia and the United Kingdom.
But they're the most commonly sold schemes in the Middle East.
Here are two tests to determine whether you own one:
- Can you sell anytime without paying a penalty to the investment firm?
If the answer is no, you’ve likely been duped into an investment-linked assurance scheme. - Are your investment deposits called premiums?
If the answer is yes, you’ve bought an investment-linked assurance scheme.
Here’s how they work.
Assume you committed to investing $2,000 a month.
In that case, the financial salesperson would earn an upfront commission of about $27,000.
Some of that money goes to the salesperson’s brokerage, but the majority goes to the salesperson’s pocket.
No, this doesn’t sound like a normal commission transaction, does it?
When you sell a home, for example, a real estate agent receives a percentage of the sale proceeds.
But in this case, that upfront $27,000 commission is a fraction of what the insurance company eventually plans to bleed from your account.
To recoup the commission that the insurance company paid the salesperson and to make an even larger profit for their firm, the insurance company charges high internal fees on the investments.
When coupling the investment fund costs with the insurance company costs, investors typically pay up to 4 percent per year in fees.
That might not sound like much, but it almost guarantees the investor won’t make money.
For example, assume the investments (before any fees) averaged 8 percent per year.
Anyone paying 4 percent in annual fees is giving up half their proceeds every year.
If inflation averaged 3.5 percent (the historical, long-term average) the investor would earn an after-inflation return of just 0.5 percent.
Now let’s circle back to that fat commission.
The insurance companies are clever.
They know most people eventually catch on to the legal con.
As a result, investors (like the unwary parents at Nadia’s children’s daycare) often ask their investment sales representative, “Could you please get me out of this thing?”
Unfortunately, the investor can’t…without paying a huge penalty.
That penalty is typically equal to the total premiums paid during the first 18 months. In other words, it equals the commission that the insurance company paid the salesperson.
That’s how the insurance company breaks even…at the very least.
Any investor who wants to close such an “investment account” during the first 18 months, is typically charged a penalty equal to everything they invested.
The penalty that the insurance company levies on early withdrawals look like it decreases the longer the investor remains with the scheme.
But that’s smoke and mirrors.
The insurance company hopes to keep the investor as long as possible.
After all, the longer the investor continues to make payments, the more money the insurance company can eventually take, in fees.
Forty-four-year-old Matthew Backus works as a Technology Integrator Teacher in Dubai.
He often joins a weekly group of educators from a variety of different schools for a round of golf.
“One evening,” recalls Matthew, “there is suddenly a new ‘friend’ in the bunch who is very chatty, friendly, and has brought prizes. I was quickly angered when I saw these prizes – golf balls, hats, towels, and ball markers, all with a brokerage logo. The salesman was standing next to his prominently parked fancy yellow sports car with a trunk full of beer!”
He gave out business cards with beer and offered to serve the teachers (the way Bonnie and Clyde served banks).
Such salespeople are no longer allowed to cold-call UAE residents.
But that hasn’t stopped their backdoor efforts.
Mark Hough works as a Chief Financial Officer for a UAE-based business.
“They aren’t allowed to cold call?” he asked in surprise. “I seem to still regularly get them [cold calls]. Although some of them do come through foreign numbers.”
When Mark asks the callers their location, however, the salespeople reveal they are in the UAE.
If you own one of these schemes, here are some points to understand:
- On your account statement, the financial number labelled “market value” or “account value” is not real. The real value of the account is the number labelled, “surrender value.”
- In some cases, salespeople tout “bonuses” that investors can earn. Unfortunately, such bonuses won’t count towards the surrender value unless the investor remains for the duration of the plan (often 25 years). At this point, the bonus is a tiny Band-Aid on a massive, seeping wound.
- Such schemes often come with a death benefit. But that “benefit” isn’t what it appears. It’s typically stated as a value equal to, “101 percent of the investor’s cash-in value.” This means, that if the investor dies, the surviving beneficiary will receive at least 1 percent more than what the investor paid in premiums. In other words, if you invested a total of $100, and your account value was $80 when you died, your surviving heirs receive (at least) what you deposited, plus one dollar. If, upon death, your account were valued at $120, your heirs would simply receive the money in your account. Not a penny more.
- Buy insurance for insurance purposes. Buy investment products for investment purposes. Never mix the two in a single product.
The good news is that longer-term residents are growing wise to these schemes.
The bad news is that there’s always a fresh batch of new expats arriving every year.
Andrew Hallam is the best-selling author of Millionaire Expat (3rd edition), Balance, and Millionaire Teacher.
