Part 1. How to find a good agent: Spotting the good guys and avoiding the con-men
Today I was scrolling through a few threads and found that much of the "advice" come from a few insurance agents preying on gullible people here. So, I would like to share some general guidelines that people may find useful, especially those who are not that financially saavy. I also decided to include "doctor analogy", as I find the purpose of a financial adviser is to checkup your financial health and recommend the appropriate products (treatment). This may help newcomers understand things in terms that we are familiar with. I do not represent any insurance company and neither will I recommend any insurance company. I hope the mods can sticky this thread.
Starting from the worst:
Worst: Bank Staff (e.g. Relationship Managers)
To summarize - NEVER ever purchase any investment or insurance product based on a bank's recommendation!
Reasons:
1) Banks are notorious for hard selling, product churning, outright misrepresentation, etc... - I hope nobody has forgotten the miniBOMB (minibond) saga.
2) Banks relationship managers (or whatever they are called) have sales quota to meet - Your interest is NEVER in their eyes.
3) Banks will sell products that will make money for them first BEFORE the product makes money for you. Banks have been known to intentionally design products to profit from consumer loss.
By law, bank staff are now not allowed to sell investment products for people who come in to do basic transactions and did not explicitly requested for investment advice. This applies to fixed deposit too.
So, if you or your elderly parents ever go to the bank to apply for a FD, and the bank starts selling you some other stuff:
1) Tell them they are breaking the law
2) Don't believe what a single word they say (especially if they offer alternative recommendations)
3) If they persist, report to MAS, write to newspaper, etc... whatever
This is quite a hard line stance, but I think it is necessary. While I'm sure there may be responsible relationship managers out there, I think the probability of finding one is probably 0.01%.
Bad: Tied Agents or "Financial Advisers"
To summarize - One should never by products from a tied agent Yes, tied agents still make up the majority of agents and this may be offensive to the insurance agents and "financial planners" out there, but it's the truth.
Reasons:
1) Tied agents are trained to be salesperson 1st and financial adviser 2nd (if it all).
2) Tied agents are remunerated by commission and there is a conflict of interest between the agent earning money to feed his family vs agent responsibility in doing proper financial planning and recommending suitable products for his client. Many if not all tied agents will recommend you products that earn them the most commission and these products are usually the lousiest one for the consumer/client.
3) Tied agents are also usually pressed by upper management to sell more products to meet quota, much like bank staff.
While I do acknowledge that there may be some responsible tied agents out there, one other fact puts me off from transacting with them - they can only recommend products from their company. That by itself is a severe limitation. If you ever come across a tied agent who responsibly recommend products from other companies, you should advice him/her to join the IFA line where his ethical conduct may be put to greater use.
The only reasons why I will do business with a tied agent is because some companies do not partner with many IFAs (e.g. AIA, GE, Prudential) but such companies may have competitive products.
Doctor Analogy A tied agent is like a doctor that only prescribe and sell drugs from one drug company, and often the drug he/she prescribes is the most expensive one and may not necessarily be the most cost-effective medicine.
Fair: Independent Financial Advisers (IFA)
To summarize - All good financial advisers are IFA, but not all IFA are good financial advisers
One thing I learnt is that IFA does not instantly equals good financial adviser. Basically, I have classified IFA into a few categories.
Category 1 The Next Generation Salesperson
I admit, I have not met this type of IFA before. Nevertheless, I am listing down this "profile" as I am sure they exist. Probably "graduated" from a tied FA, this IFA is what I call the "next generation salesperson". He/she is still a salesperson at heart. Only difference is that instead of 10 products, he now have 100 products to sell!
Doctor Analogy This type of IFA is like a doctor who has the entire range of drug products. But he/she does not do a proper diagnosis of your health condition, and prescribe medicine that will earn him the most money, and the medicine may not be even relevant to the health condition!
Category 2 Wolf in the Sheep Skin
Very sadly, I have encountered this type of IFA, which I think is the most damaging out there. Unlike salesperson, whom a newbie can learn to identify quite quickly, this type of IFA will *appear* to be genuinely ethical but in reality they are not. They will usually do proper financial planning, but the product recommendation will be full of unnecessary high-expense, high-commission products.
Doctor Analogy This type of IFA is like a doctor who has the entire range of drug products. He/she does proper diagnosis and recommend the correct type of medication for your health condition. However, this doctor will prescribe the most expensive, which is also usually the least effective medicine, so that you will not be cured totally. Thus, you have to visit him again for more medicine, and he earns more money from you. In real life, I have encountered such doctors before, and I never visit them again once I learn of their unethical "business model".
Category 3 The Average IFA
I do hope the majority of IFA lies in this category, and in my opinion this is the minimum standard that consumer should aim for. This IFA will do proper financial planning and recommend appropriate products based on client needs. However, he/she will not source for the best product out there but will recommend something that is good enough.
Doctor Analogy This type of IFA is like a doctor who has the entire range of drug products. He/she does proper diagnosis and recommend the standard medication (neither super effective or terribly bad). Most family doctors in real life fall in this category.
Category 4 The Good IFA
Probably the minority of IFA out there, this IFA does everything properly from financial planning step to the implementation step. He/she places his clients interest before his own, and in many cases goes the extra mile at his/her expense.
Doctor Analogy This type of IFA is like a doctor who has the entire range of drug products, does proper diagnosis and recommend the most effective medication. In real life, I only know of one family doctor that is up to this standard.
So the biggest question know if that since we know Banks and Tied agents should be avoided at all cost. How do we distinguish the good IFA from the bad IFA? That's coming up next...
Category 1 The Next Generation Salesperson
Meeting the Next-Gen Salesperson IFA is going to be detrimental to your long term financial health. Not only does he/she does slipshod financial planning, his product recommendations is also equally bad. I think such salesperson is quite easily to identify even for newbies. Some tell tale signs:
1) Jumps straight into product recommendation without doing a proper cashflow analysis.
2) Missing out key parts in financial planning, such as (a) understanding your investment objectives, (b) understanding your background economic situation, (c) understanding your risk tolerance, (d) not drawing up an investment portfolio, etc...
3) "Neglecting" to mention important but low commission products, such as H&S Shield Plan.
4) In the sad scenario that you took him/her as your IFA, you'll notice that this type of IFA will contact you regularly to buy some latest products. "Regularly" here can be loosely defined as recommending a new product every quarter.
Category 2 Wolf in the Sheep Skin
Admittedly, this class of IFA will provide proper financial planning, so you will have stuff like H&S Shield plan unless you decline not to take it or are not insurable. Nevertheless, because this kind of IFA recommend expensive products, your returns over the long term will suffer. Also bear in mind for investments, every % count. A return of 4% vs 5% may seem the same, but over a 30 yr period, a $1000 sum becomes $3200 (for 4%) vs $4300 (for 5%). As you see even 1% returns over time can make a non-trivial difference to how much money you will have when you retire. Some telltale signs for this kind of IFAs:
1) Downplaying the importance of important but low commission products - e.g. Disability income insurance.
2) Recommend things like ILP and Endowments and even talks about the benefits of them.
3) Recommend Whole Life insurance over Term insurance.
4) Claiming that you should buy insurance to help you to save.
Category 3 The Average IFA
With the average IFA, more-or-less your financial health will be ok in the long term. However, because he does not really source for the products that is in the best interest of his clients, you may be missing out some returns in the long run. Some telltale signs for an average IFA:
1) Recommending Term insurance over Whole life insurance.
2) Recommending Unit Trust investment (and not ILP or Endowment).
3) Subscribes to a Buy-Term-and-Invest-the-Rest (BTIR) philosophy.
Controversy over Whole Life vs BTIR (Buy-Term-and-Invest-the-Rest) philosophy
Here is where some IFA will disagree, but my stand is that almost everyone should BTIR. Actually there is fundamentally no difference between BTIR and Whole Life - both approaches takes your money and split them into an insurance and investment part. The only difference is who manages the investment part. It's either you (or your IFA on your behalf) or the insurance company. Some IFAs may cite that Whole Life may be suitable for financially disinterested clients... but they forget the point when one buy Whole Life, he/she is implicitly outsourcing the investment part to the insurance company... so why not let your IFA do it for you? Another reason is that financially undisciplined clients may benefit from Whole Life as it forces them to save... again I say why don't just RSP into a portfolio managed by your IFA. It's the same thing...
Category 4 The Good IFA
This type of IFA is hard to find, primarily because the IFA may get to lose out in his commission earnings as some products might have no commissions. Some telltale signs of a good IFA:
1) Recommends H&S Shield Plan, Disability Insurance and Term with CI coverage - these are the most basic 3 insurance that everyone should have if it is within one's financial means.
2) Introduces the ideas of minimizing expense ratio for investments, passive (and not active) investment, talks about ETFs and index fund.
3) May use Unit Trust, but will select low expense, low turnover Unit Trust.
4) Discloses the commission he will earn from various products, and highlight any conflict-of-interest in his role as a financial adviser. - Seriously I'm not too sure if anyone does this, but before purchasing from an IFA I would ask for a full disclosure of his/her remuneration.
5) Talks about Estate Planning, an often neglected but important aspect of financial planning for those who have a next generation to consider.
6) Does not guarantee you a returns of a fixed % every year (note that saying you will likely get 5% returns till retirement vs saying you will guaranteed get 5% returns till retirement are two different statements btw).
7) Does not talk about >15% returns every year over a long period of time (simply put because no investment can do that).
8 ) Reminds you that past performance is not an indicator of future performance and tells you that fund performance ratings are basically bull****.
9) Does not talk too much about the current investment hype you are hearing all around you (now it is Gold, few years back it was China & India fund, and even before that it was Technology fund). Basically, if your IFA sounds like the today's economic news be very afraid.
Controversy over Passive (Index) vs Active Investment
No matter what financial gurus may tell you, including those big shot Wall Street con jobs (oh I meant Wall Street experts actually), it is an established fact that passive investment strategy will outperform active investment strategy over the long term (>20yrs). This is proven by over 20+ years of research. For anyone else who argues otherwise, it's bull****. In my opinion, this is a pretty black and white matter, and I don't believe there are many cases where active management may be better.
In my last post, I will cover my experience with the various IFA firms I have engaged so far. While I think the quality of IFA is probably not tied directly to the IFA firm, nevertheless I think it reflects on the IFA firm as a whole and should be included.
