Sunday, January 08, 2006

Financial Adviser's Dilemma

There has been recent emphasis on financial planning, that Singaporeans who rely solely on Central Provident Fund (CPF) for retirement will find that it caters only for the basic needs and will not be sufficient to maintain a sufficiently comfortable retirement. Monetary Authority of Singapore (MAS) has also issued and revised things such as the Financial Advisers Act to protect people against inferior advice from financial advisers.

All this appears to be very good and well but these regulations seem to be flawed after I was chatting to my financial adviser friend (I am not employed in the Financial sector). The topic we were on was specifically investments, equities versus unit trusts (UT) versus insurance linked products (ILPs). Personally, I have never taken an interest in ILPs as I prefer to keep my protection and investment elements separate.

Somehow, we got to the issue of doing a personal financial review (PFR) before which a product can be recommended and sold. The fact finding exercise, if it finds the client to be a conservative investor, actually mandates that only bonds can be recommended or in the extreme case, no products should be recommended at all!

What is the problem with this sort of PFR rules? All astute investors know that different classes of investments perform well at different time. Inept financial advisors who follow strictly to the guidelines on the obtained PFR results may end up not acting in the best interests of their clients while competent advisers may run foul of regulations when they provide good advice! Sounds complex?

To make it easier, ask yourself these questions:

  • Will you buy bonds if interest rates are on an upward trend?
  • Will you buy equities if there is strong indication of a rally forming?
  • Do you know there is sales charge incurred on your UT purchases and it decreases your returns?
  • Will you hold equities even when you know that there is a bearish sentiment in the stock markets?

There could be more pertinent questions but I cannot come up with more at the moment. There must be more freedom for competent financial advisers to dish out sensible advice without fear of breaking the regulations and losing their licenses. Only then, can we truly expect Singaporeans to be better prepared for retirement and also that financial advisers will take efforts to upgrade themselves and truly provide good counsel.

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