Tuesday, 11 October 2011

Why most financial product purchases end up badly

A couple of years ago,  I had a particularly memorable experience when I was working in the consumer banking channel in a retail bank. A woman in her 50s was screaming and calling us liars and cheats and making a din in the bank. She had lost around $100K investing in a lehman brother linked structured product, which is her entire life savings.  This woman would drop by our branch and demand to speak to the manager at least once a week. Eventually after 2 years of harassing the the bank’s management, she managed to recover only a small part of her investment. It left a strong impression on me as I never realise that a flawed investment decision can drive people nuts!

Stories like hers are widespread, even in a financial hub like Singapore where regulations play a key role in protecting the consumer.  At the height of the financial crisis in 2008, there were many lawsuits from victims of such toxic products against the banking institutions deemed responsible. Unfortunately, only a small proportion of investors considered to be highly vulnerable are fully compensated. 

My experience in financial advisory taught me that most financial product purchases usually do end up badly. The reason is because people in general buy based on emotions, not logic. The implementation of a financial product usually requires prior detailed analysis of the fine print as well as assessing its usefulness in the context of one’s financial portfolio.  This crucial step is usually ignored by the average consumer due to the changing climate in recent years.  (See Below)

Information Overload & Attention Scarcity

As financial products relating to investment, insurance, loans etc become more sophisticated, even financially trained professionals like businessmen, accountants and engineers have been victims of poor product purchases. In addition, the strong work ethic and long working hours committed by the working class means many Singaporeans do not have a lot of free time to gain expertise in a field not related to the course of their work.  A combination of product sophistication and time shortage ultimately lead to information overload and attention scarcity.

Common responses to these syndromes relating to personal financial issues are either to postpone decision, or to engage in ad hoc planning.  I will explain why both actions can be potentially damaging to one’s financial well being.

Postponing Decision

The path of least effort is always status quo, which is doing nothing and postponing decision. As we all know, people tend not to change an established behaviour unless the incentive to change is compelling. Unfortunately, there are certain financial decisions where postponing decision can lead to catastrophic outcomes.

A good example is insurance purchase. We truly do not know what life has in store for us. I had recently met an auditor whose father is terminally ill.  He only got to know his physical condition during the end stage about 1 month ago.  The doctor mentioned he had less than 6 months to live. It was a big blow not because of its severity but also because there is no warning signs. Scenarios like this do not only happen in drama series. Many of us who have lived long enough probably would have had friends or relatives who pass away at a relatively young age either through accident or illness.

Postponing action can have devastating effects when the cost of not doing anything is substantially greater than the costs of action.

Working out. Now or later?

Ad Hoc planning

Ad hoc planning usually involves makeshift solutions and insufficient planning. Examples of adhoc planning include :
  •  Buying insurance policies from banks, roadshows, friends (part time agents)
  • Investing in stocks, unit trusts, property w/o consideration of future financial commitments.
  • Taking up car loans, home loans as long as monthly repayment is affordable

It is not advisable to do ad hoc planning for a few reasons. Firstly, ad hoc planning provides one with unclear direction for the future. It is usually made in impulse than reasoning as little time is spent on research. Secondly, ad hoc planning is often in response of problems rather than preventing them. Lastly, some problems can be so great that it becomes an impossibility to solve. (E.g. Losing lifetime savings in inappropriate investments?) 

In recent years, the most common form of ad hoc planning done by the younger generation Singaporeans include using credit facilities like credit cards as emergency funding.  Very often, what starts out as small amounts of liabilities often snowballs to mountains of debt. 

Bottom Line

Not taking action is a sin, taking the wrong course of action can be a bigger sin. Either engage a competent financial planner, or be your own financial planner.  

Feel free to leave your comments............. 



  1. It's wrong for you to blame the woman for making a flawed investment decision. She was probably looking for a safe investment to park her life savings of $100k.

    The woman was probably told by the sales people at the bank that the Lehman investment was 100% safe, and the principal amount will not be lost should anything happen.

    This fault largely lies with the bank sales people. In the pursue of commissions, they will promote the good side of the investment, and hide the flaws.

    I hope you're not one of those type of sales people.

  2. I do agree that financial salespeople do have a bad reputation, especially among retail customers. The turnover in banks for relationship managers is particularly high not because of the high stress levels to hit sales targets, but also because many people like myself feel that the approach used to clinch a deal is to the detriment of our clients.

    Working as an independent broker now allows me to develop relationship and market suitable & competitive products, something i was not able to do in a banking environment.