Tuesday 26 July 2011

The downside of free financial advice

Financial literacy is still low in Singapore, despite our country being one of the leading financial services hubs in the world.  Other than recent government initiatives such as Moneysense, a large responsibility falls on the financial intermediaries such as banks, insurance companies and fund houses when it comes to financial education. Despite the overload of free financial information being bombarded constantly at us, I will explain why free financial advice can hurt both the customer and the adviser.

How it hurts the client?

 We all know there are no lack of financial salespeople in Singapore who claim to be “planners, consultants, advisers, wealth managers...etc”, and they would gladly provide “free” financial advice in the hope of securing a deal. Talk to an insurance salesperson and you will find out most of them will gladly give you an hour of their time for a free consultation, at a time and place of your choice.

If you ain’t looking for them, don’t worry, they are out there looking for you!  It breaks my heart whenever I see unsuspecting people being conned by financial advisers pretending to be financial advisers. Examples of these predators can be seen everywhere doing road shows from mrt stations to shopping malls. Due to my nice guy image, I have been approached by them several times before I joined the industry. What starts out as helping a sweet girl with a survey usually conclude with a product presentation. I am still waiting for them to publish their survey results despite conducting the same survey for decades.

However, what troubles me even more is why unsuspecting passersby can trust someone with 4 O’level credits who approach them at an MRT station to provide the solution to their retirement plan after 15 minutes of product presentation??!!

There is an information gap that exists between the adviser and the client. It is common practice for advisers only to present the benefits of the product and leave its limitations out. Most clients either do not know how to interprete the signed documents or do not bother finding out. The end result is they lose out massively in the long run. 

 How it hurts the adviser?

So how does giving free financial advice hurt the adviser then?  Anyone in our business knows that we are not being compensated for doing proper financial planning. Even when our clients want us to, there is no incentive to draw up a full financial plan, which can take days, when we are not paid a single cent for these efforts.  I had a unforgettable negative experience when I just started out many years back where after countless hours of consultation, fact finding, review and multiple email exchanges and travelling to and fro,  I realised I had just been conned by a poorly qualified prospect who just want me to clear up her financial mess in a pretence of giving me business. The high time and monetary loss I incurred made me realise there are also rogue customers who will gladly take advisers for a ride.

Thus many practitioners do things the smart way and do the absolute minimum in order to close the sale. Since remuneration is based purely on closing a sale, the industry shifts its focus from improving financial competency to improving selling skills.  In recent years, many financial salespeople have resort to highly advanced selling skills like Neuro linguistic programming (NLP), which aims to influence a customer subconsciously into buying.

Who eventually carry the burden of "FREE" financial advice?

My preference is that fees should be charged for ongoing advice if one is truly providing a valued service.  No one works for free and pretending that we work for free is hypocritical.  One does not have to hypnotise the client if the analysis is accurate and the recommendations are sound. My experience tells me that savvy and sincere clients can recognise a good deal when they see one.

Therefore I believe that charging fees is first and foremost protecting a client’s interests, as well as respecting my time and effort. An adviser who does not respect his time and effort will not be respected by the clients, regardless of the level of expertise.  It is unfortunate that many people in Singapore generalise financial advisers as salespeople who are out to make a quick buck. This negative perception has resulted in many academically inclined young people from shunning the industry to avoid being labelled as a "insurance person".  It in turn limits the growth of professionalism in the long run.

Financial planning is such an integral part of one's finances yet the many industry practices have made many people lose faith altogether. For example, the commission based remuneration we have in Singapore today only encourages a generation of salespeople that pray on the ignorant public. One truely has to ask, is the landscape in Singapore promoting professionalism among financial advisers? or salesmanship? 
(See: Difference between financial sales & financial planning )

Many of my fellow practitioners often compare an adviser to that of a financial doctor. The reasoning is that as long as one does consultative sales, professionalism can still prevail at the end of the day. This is still a far fetch dream in Singapore, to put it simply, would you trust a medical doctor's prescription if he earns his living SOLELY by selling medicine to you? 

Mr. Wilfred ling, a renowned fee based financial planner in Singapore, have written extensively about why fee based financial planning is the fairest way of remuneration and I strongly encourage readers to check it out.


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