Those that can’t afford this potentially face “being absolutely lied to” by advisors who offer guaranteed returns, or who sign clients up to payment plans lasting 20 years that heavily penalise early redemptions, he said.
“There's a lot of shady business that goes on here and the general community has a lack of exposure to true expert advice at a low cost,” he argued.
Jabbour, who has spent most of his career in the United States as one of those wealth managers advising high-end clients at UBS and Merrill Lynch, said that robo-advisory firms in the U.S. have been gaining prominence since the early part of this decade and have been winning market share from traditional wealth managers.
“When robo-advisors came out about six to seven years ago we laughed at them and we thought there's no way these guys are ever going to compete. Who is going to ever want to have their money in a digital platform when they can have access to a human, and who is going to trust this technology?,” he told Zawya in an interview earlier this month at the company’s base within DIFC’s Fintech Hive space.
“And then as millions and millions of dollars started flying from our funds, we stopped laughing,” he said. He argued that over time he became more and more convinced of the benefits, particularly in terms of offering wider market access to investing, and when his second cousin, Mark Chahwan, co-founded Sarwa last year, he came to Dubai to investigate in November, and started working for the firm in January.
Robo-advisory firms are based on the ‘market portfolio theory’ devised in the 1950s, which is the basis of passive investing. It argues that a diverse portfolio of assets replicating the overall market will offer investors the maximum returns for a given level of risk.
The argument is that cheap funds with low fee structures such as trackers or exchange-traded funds (ETFs) often perform better than funds that are actively managed by money managers, as these come with higher fees but are often unable to justify the excessive returns required to justify them.
Passive vs. active
A note by Moody’s in February last year stated that passive funds currently account for 29 percent of the market in the U.S., but at current growth rates are likely to overtake active funds within the next six years.
Robo-advisors use online platforms that ask investors a series of questions governing personal circumstances and investment priorities. Through a series of algorithms, a suitable portfolio of investments will be generated which investors can track and, if necessary, rebalance, online.
The removal of the requirement for a human wealth advisor from the process allows robo-advisors to reduce both fund management costs and the minimum balance amount required to open accounts.
A paper published last week by Dubai-based Al Mal Capital stated that robo-advisors are already currently managing assets worth over $224 billion, but that this is expected to grow to $8.1 trillion by 2020. It said that companies offering robo-advisory services had raised more than $1.3 billion globally from venture capital and private equity firms since 2012.
Chahwan co-founded Sarwa with chief technology officer Jad Sayegh. Both had been working in Canada - Chahwan as a consultant for Accenture, and Sayegh as a software developer working on trading algorithms for a hedge fund.
Although they had been working on building the platform for a while, it was only when they were chosen as one of 11 participants in DIFC’s Fintech Hive accelerator in August last year that Sarwa moved from concept to a fully-fledged start-up.
Nadine Mezher, who had been working as a consultant during the pitch to join the Fintech Hive, became a late-stage founder in the business in September last year and is now chief marketing officer.
She told Zawya that Chahwan and Sayegh “came here and they realised that there is a massive gap in the market in the region”.
“There is really no services that provide investment that’s accessible for everyone and that's affordable for everyone,” she told Zawya.
Cutting through redtape
Working through the Fintech Hive accelerator provided a number of benefits, Mezher explained, not least in terms of regulation, which has proved a stumbling block to other firms looking to set up robo-advisory services in the past. Under the Innovation Testing Licence regime launched to encourage fintech development last year, Sarwa had an ‘in-principal approval’ for its licence by November and was able to complete a beta launch for its service earlier this month.
She also explained that Sarwa is essentially a hybrid service to begin with, as opposed to pure robo-advisory.
“We're a technology-driven company, but we offer a light-touch human advice because the region here, I believe, needs to have a bit of a more personal interaction and… it's really a brand new offering that we have.”
The firm has launched with six investment products based on exchange-traded funds created by passive fund specialists Blackrock and Vanguard. These mirror equity and fixed income portfolios for both developed and emerging markets, while others track real estate and commodities. Initially, three portfolios will be generated, with weightings either being conservative, balanced or growth-oriented, but both the range of weightings and funds are likely to be expanded in the future, with an investment committee advising on these.
Jabbour said that, as with other robo-advisors, it offers relatively low fees, charging 0.85 percent for funds under advisory. It also has low barriers to entry, with a minimum account balance of just $2,000. He was also keen to stress that any assets bought through the platform are registered via custodian accounts in the client’s own name, meaning that if either Sarwa or its custodian ceases to exist, the client’s asset is still safe.
The company has set itself a target of having at least 1,000 customers and $25 million in assets under advisory by the end of its first full year of operations, Jabbour said.
The firm has already received seed capital funding and is shortly expected to embark on a bridging round before going into the market for a full Series A fundraising.
Cash not flash
Mezher argued that although Dubai might seem to be a place that has more of a spending than a saving culture, there are plenty of people who are interested in saving but are wary about where they put their cash. Across the Middle East, she said, people traditionally saved to buy property but in many parts of the region this has not proved to be a sound investment.
“A lot of us have good jobs that are making enough money but it's not doing anything. So, whether it is my sister or my friends who are young professionals, they have really a great career but they don't think about what to do with their money.
“If you look at the Middle East, it's 150 million people in the middle class right now and no one's catering to them,” she said.
In the longer term, the company wants to move into the business-to-business sector by offering a low-cost pensions service to corporates, and to provide a ‘white label’ service where existing banks and wealth managers can offer robo-advisory services using its platform.
In January, accountancy firm EY said in a press release publishing its third annual GCC Wealth and Asset Management report that 60 percent of the 24 wealth and asset management firms it surveyed had already begun partnering with a technology firm to offer a robo-advisory service or were looking to build their own platform in-house.
It said that 49 percent of the financial advisors it surveyed were upbeat about the prospects for robo-advice, but 22 percent felt it was a potential threat to their business.
“Going forward, we can expect to see a large number of asset managers and independent advisors partnering with skilled technology firms that are able to optimize robo-advisor technology much more efficiently than they could do in-house,” said EY Mena’s wealth and asset management leader, George Triplow.
(Reporting by Michael Fahy; Editing by Shane McGinley)
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