May 7, 2007

Managing Your Own Money

I've never used a financial adviser. I've talked to several of them in the past, but always stopped short of actually engaging their services. My distinct impression was that none of them would be the best person to manage my money.

The best person would be me. Assuming, of course, that I first put in the effort to learn about personal financial planning. Which I did - through reading lots of books on my own. That was years ago. Nowadays I actively manage my own investments (and I do a rather good job at it).

Now it's 2007, and ironically I find myself having to
take the same exams as would-be financial advisers. I must say that it's quite interesting. I'm learning some useful ideas on how to manage my own portfolio. None of this, however, changes my earlier conclusion that financial advisers are not for me.

I'd go so far to say that any reasonably intelligent person willing to put in some effort learning about personal finance is probably better off managing his own money than using a financial adviser.

I've just been studying the chapter on "Financial Needs Analysis". A fancy term for a straightforward process. FNA is what happens when the financial adviser sits down with you, pulls out a long questionnaire and starts asking a long list of questions - your age, occupation, monthly salary, bank credit balance, number of dependents, type of home, outstanding mortgage, existing insurance policies etc.

All this information is relevant for your financial planning. The problem is - human beings tend to be rather complicated. They can't be easily categorised or classified. I'm quite confident that in many cases, standard questionaires will regularly fail to capture important pieces of information about a given client. The questions asked will simply miss out on special circumstances relating to that particular client.

Which means that the financial adviser's recommendations will, in the end, be less than optimal.

Why won't the client just tell the financial adviser about his special circumstances? Well, in many cases, the client will want privacy. In other cases, the client, not being knowledgeable about financial planning, will simply not even know that his special circumstances have any financial significance.

Some examples to show how easily this could happen:
Mr Tan has an illegitimate child that his wife doesn't know about. Mr Tan wishes to provide long-term financial support for his illegitimate child. For privacy reasons, he doesn't tell his financial adviser. Thus when the financial adviser draws up a financial plan for Mr Tan, the child is omitted altogether.

John, a father of three young kids, works in the manufacturing industry. His job is particularly vulnerable to being outsourced to China. Not being in the manufacturing industry, the financial adviser doesn't understand that. The adviser recommends a long-term savings plan whereby John will commit a good part of his monthly salary towards his children's future university education. Actually, the much more pressing thing is for John to build up cash reserves to deal with the prospect of impending retrenchment.

Linda is HIV positive. She still looks and feels healthy. However, the HIV condition has massive implications for her financial planning - there are immediate and high medical expenses; her life expectancy is reduced; saving for retirement is no longer a high priority; and it is foreseeable that eventually she will become too ill to work. Due to the stigma of HIV, she doesn't disclose it to her financial adviser.

Alfred is an extremely high achiever. He works in a growth industry and possesses a highly sought-after skill set. He can reasonably expect his salary to double in three years, and to double again in another three years. Not wanting to sound boastful, he doesn't tell his financial adviser that. The financial adviser therefore projects Alfred's salary to grow at a modest 2-4% per year for the next 7 years, and recommends an investment plan based on that.

Kumar is a 40-year-old male. His financial adviser recommends a critical illness plan suitable for the average 40-year-old male. Actually Kumar is a California Fitness personal trainer who exercises five times a week, consumes an extremely healthy diet and always ensures that he gets enough rest every day. Kumar's scientific risk of getting a critical illness is much lower than average. Rationally speaking, he should spend much less on critical illness coverage, and channel the money into pure investment products.
In each example, the client will receive less-than-optimal recommendations from his financial adviser. That's because each client had some special circumstance in his life, which a standard FNA questionaire wouldn't have picked up.

Who could have picked it up? The client himself, of course. Each of us is in the best position to understand the unique circumstances of our own lives. That's why we are all the best persons to manage our own money.

Provided, as I said, that we also do some financial self-education. Go buy yourself a good book today.

38 comments:

Anonymous said...

Very true. A very nice practical approach for the Average Tan which you did mention you were aiming for in this blog, although I sort of got your drift by the second example :) I was just reading the introductory chapter to Freakonomics which has a similar premise to yours while using real estate agents as its example, that because of the way their incentives are structured, we cannot expect hired agents and advisors to give us the optimum advice. The flip side is that we have to incur some opportunity costs in having to overcome the informational imbalance between us and these so-called experts before we can make these decisions for ourselves with a comfortable level of confidence.

yh said...

What i noticed is many young people have not realised the importance of investing at a young age. When you are young and have relatively less responsibility, you can afford to take some risks in your investment. You do not have to be a genius to build a solid portfolio and a little effort now can have big impact on your financial health later on in life.

andrian said...

any good books to recommend?

vatsan said...

this is even harder in singapore considering the economy shifts upward in technical requirements every decade/15 years. 15 yrs ago i presume that a skilled blue collar worker, like a machinist would have had a reasonable salary in singapore, now that same person might be out of work/earning lower income in real terms. planning for this shift cantbe done by the standard FNA approach.

Ned Stark said...

Mr Wang,
Any particular recommendation?

Jay said...

Any good books to recommend, Mr Wang?

Anonymous said...

Any good books on the topic to recommend?

Anonymous said...

hi Mr Wang, care to recommend some good reads for us?

preferably something available from the NLB... heheh

Anonymous said...

what good book would u recommend, particularly for a married person in his late 20s with a kid who wants to start building wealth with only 30-40k income per annum?

Roger said...

I do agree with Mr Wang. As an accountant in training, my personal experience with the personal financial planning industry is that no matter how independent an adviser claims to be, as part of a financial organization he or she may be influenced, directly or indirectly to push certain products that may not be suited for your needs. And ultimately there will be information loss - a basic feature of communication.

Having said that I do believe there is a viable niche market for specialized financial needs analysis and planning for individuals looking to enter into complex assets which are becoming increasingly common (especially for companies looking at specialized assets)

Mr Wang, would you like to share any online resources (such as blogs) you frequent regarding this subject?

Cheers!

Anonymous said...

Luckily I have no money for people to manage for me otherwise I will probably incur some unneccessary expenses!

Weiliang said...

Hi.. What are some of the books you recomend? Not too complicated and tedious to read. Thanks.

Anonymous said...

Hi .. What are some of the books you recomend? Nothing too complicated and tedious to read

Anonymous said...

My personal gripe with personal financial advisors is that most of them have vested interest i.e. they have "products" to sell.

I think it's good to ask your prospective financial advisor for full disclosure especially if they come from the big banks that offer MANY products.

My 2 cents.

Anonymous said...

Hi Mr. Wang,

I'm reaching the age where I have to start worrying about investing and financial planning and I agree totally that its is best to do it yourself. Problem is I don't really know where to start. Care to recommend some good books/resources?

Elia Diodati said...

It would be nice to add as a postscript your recommendations for "good" personal finance books, or at least several criteria people can use to identify "good" books rather than rely on hearsay.

boonleong said...

Do you recommend any titles? (If you have done so in a previous post, I'm sorry if I missed it.)

Miss T said...

I totally agree with you, MW! The best financial advisor is yourself. There are certain aspects that you wouldn't just want to reveal to anyone, even though the advisor is your own best friend!

Anyway, I was told that the most marketed products are usually not the best investment products that's why we have to know all of the organisation's offerings and decide which one that is suitable for our situation.

Mr Wang Says So said...

I would recommend Personal Financial Planning by Koh Seng Kee and Fong Wai Mun.

Mr Wang Says So said...

Takes a bit of effort to understand the principles, but once you've got the idea, the knowledge is useful for a long time (like, the rest of your life). I think it's worth the effort.

Actually there are plenty of books if you want to consider the ones written by foreign authors. The thing is - when you read those, you have to bear in mind that some considerations are different and vary from country to country (eg income tax, social security etc) and you have to remember that some of those ideas don't necessarily apply.

Anonymous said...

"One Up On Wall Sreet" is also a pretty gd book for starters. The book (with "more than 1m copies sold") also illustrates why people in general nv learn from their lessons in investing... ;)

Mr Wang Says So said...

"Random Walk" is a must-read too.

Anonymous said...

I agreed with you. A financial advisor may not know the finest details of your needs. I have only bought a couple of insurance policies and some funds using CPF which I look at it as an investment. I know nothing much about investments honestly. As for my financial advisor (or in fact shall I call them insurance agents) also know very little about the funds they are selling. All I hear from them is..."the price is moving". Personally, I feel that investment is not just about looking at the moving price. If that is the case then this is call speculation. I have wanted to start learning but no clue on how to start.

Jimmy Mun said...

Financial advisers have an important role in preserving your sanity - those who have dabbled in the stock/commodity/currency market will know how manic-depressive it is. The trouble is that 99% of all self styled financial advisers for the man on the street are all insurance agents. You can fill a million analysis forms and they will still conclude you need to buy more whole life insurance, because this product best suits THEIR needs.

The financial advice market is a microcosm of Singapore's sales culture: we incentivise ignorance over technical competence of the salespeople. The more ignorant you are, the more you can honestly repeat all the lies you were told unquestionably. The consumer like to hear beautiful lies about "guaranteed" profits by a "certified professional" too, so the two are made for each other.

Since a good financial adviser in Singapore is practically impossible to find, we will have to rely on ourselves.

For some young people, the best advice for starters is to slow down the amount of debt they pick up, especially that of credit card rollovers.

Then there are the financial ascetics like Mr Wang, who refuse to buy car or condo even though he earns 5 digits a month - see lah, you could have easily cave in to hedonism and bought some condo in the Marina/Sentosa area last year and fatt tatt big time already by now.

Indeed, before anybody talks about financial management, one should question something more fundamental. What is the meaning of life? What is the role of money in the life you choose to live? Only then you will realise for eg. how stupid it is to buy life insurance for your newborn baby. Do you really need a financial consolation if your baby dies?

It is important to know the difference between gambling and investing or you will lose your sanity in the process.

The biggest fools in the financial markets are often the most prudent risk averse people. You may think the stock market worldwide is in a bubble now, but just imagine how you will feel if the market bubbles on for another three years while you stayed out.

Anonymous said...

my husband works in the banking sector. he firmly believes that one has to take charge of his own investments; an outsider (likely to be an insurance agent)will probably "highly recommend" their own products irregardless of returns/risks.

PanzerGrenadier said...

I'd like to add to Mr Wang's article by saying that I too manage my own money after paying fund managers their annual management fees for mediocre and sometimes under-performance against stated benchmarks.

I realise that if you have tertiary education and do invest some time and effort in reading about personal finance, investments and savings, one can manage one's own personal finances because it is your own hard-earned money. ;-)

The key to financial independence is to live within one's means. When I realise (I mean really really understand) that I could never earn enough as my wants will always outstrip my needs at every level of income, I began to have more control over deciding what are wants vs needs. So long as one's income exceeds one's needs, the excess can be channelled into savings and investment and a bit into wants as living a 100% ascetic life may not be everyone's cup of tea.

I have started a humble blog in sharing my own experiences in personal finance. Do drop by and feel free to comment!

http://fivecentstencents.blogspot.com

Cheers.

PanzerGrenadier said...

andrian

Can try "Richest Man in Babylon" by George Samuel Clason, written in parable form such as "Who Moved My Cheese". Good fundamental truths about personal finance and investment.

Cheers.

Anonymous said...

If I have one advice to proffer, it is to avoid like the plague capital guaranteed or capital protected structured products. They are often passively 'managed" products. The bulk of your capital is used to buy a bond ( sometimes a couple )usually zero coupon and the rest minus the sales charge and all management fees upfront is then used to buy call options on some basket of market indices or stocks or funds. These call options have to be at a strike price above the current and will have value only if the underlying security's market price at maturity period is higher than the strike price. If the directional bet is right, this is the investment return earned. If not the options expire valueless. Normally, the options are re-purchased at the end of each period at successively higher strike prices if there is a secular uptrend. But you as an investor is always losing out as there is always a gap in price between current and option strike price each time a new option series is purchased. Don't fall for the crap about there being a "guaranteed payout of XX% at the end of the first 6 mths whatever. This can easily be just funded from your orinal sum invested if the directional bet is wrong!

PC said...

A truly competent financial advisor would be one who TOTALLY understands his client. I've met a couple who fit this profile. The goals of these individuals do not have a primary goal of earning their own dough though product sales. Instead, they truly understand and advise clients according to what is the right thing to do.

Takes time. But find yourself a really trusted adviser

Mr Wang Says So said...

LOL. I also met one who fit this profile. We once had lunch together in Suntec City. He told me that he found it difficult to reconcile his strong personal principles of acting in the client's best interests, with the remuneration structure for financial advisers. That is why he quit being an FA, and went on to sell mortgages instead.

You know who that is, don't you, PC?

Christopher Ng Wai Chung said...

Mr. Wang,

Good advice and I must say that you have a great way of coming up with examples of people who cannot possibly benefit from a vanilla-FNA.

While many readers may disagree with me on this, I think we can even take your argument one step further - It's actually better to lose some money managing your assets yourself than hand it over to a financial advisor.

The financial planning industry profits too much from ignorance that it's actually worth getting bitten to really understand how markets work. This actually allows the person in question to learn important life lessons like minimizing risks through position sizing and always keeping some cash reserves for personal emergencies.

Case in point some unit trusts charge up to 2.5% in management fees while good ETFs can be found at expense ratios of 0.58%.

An investor can afford to lose 2% to get a solid financial education and still be ahead of most investment plans with a wrap acount fee.

I gave a roadmap on the books to read for more financial literacy, it can found im my blog treeofprosperity.blogspot.com. ( 1st April 2006 entry )

As I'd like to be seen as being fair, my own book is not on that list.

Regards

Nathan said...

Quite true. Good article and I agree with you. I find that with the availability of more prolific writers, books, internet, almost everything we encounter in our lives can be DIY.

I really don't see a need to hire a lawyer to handle my legal affairs (I wrote my own will and drafted my own rental contract), since I am doing reading up myself and I have been updating myself on health to keep myself well and most of the drugs/supplements can be purchase off the shelf. I have also done part time study in accounting and therefore I don't need an accountant to handle my accounts. My wife took up a course in childcare and teaching and now we don't have to spend extra $$$ for the branded childcare because she also studied the same techniques that they used. When we travel, we also DIY, skipping the travel agencies, and making our travel arrangements via Internet.

By doing DIY, we can save the difference and for investment trading (I am using TA and reading up Bogle's website) and not pay all anything extra for those people who claim that they can do a better job than ourselves. With knowledge, we can do better than all those people who claim they can do this and that, after all, we can read up all the best references, DIY and do better.

Is that anything that we can't do better than those "so-call" professionals? In fact, most of the resources to do anything can be found using Google.

Anonymous said...

actually the rise of all these "middleman" business is because we all too lazy.

i felt like kicking myself for having to pay the property agent the commission. all he did was to make the calls and show me the place. i was naive then.

after observing what he did - i realised i can do the same. I have a road directory and a phone. just look at the classified ads, call the seller/buyer, go down and take a look. i still can't get over the fact that I paid someone $5,000 for doing such a simple job. all the paperwork is easily available and i can read and write - so what's the problem? I dun think there is anything that he can do that I can't do.

if i had invested that $5,000 at a mere 10% p.a., I would have earned a good amount by now. my father even suggested a better way: instead of looking at the papers, just advertise what I need and wait for calls.

i hope with the advert of info technology, we can remove all those "middle layers", save the comm and get good returns from the hard earned money we saved.

PC said...

Mr Wang

I certainly do :o)

So... when are you and the financial advisor getting together for lunch again?

Mr Wang Says So said...

If you can buzz down to my vicinity at lunchtime, I am most happy to have lunch with you, sir. I am in the Raffles Place vicinity these days.

PC said...

Can. The problem is, I only have your old office number.

Buzz me?

spgohjc said...

funds and units takes 2-5% fees outfront without even doing anything. do you get your salary before you work or do you get it at the end of the month?

spgohjc said...

funds and units takes 2-5% fees outfront without even doing anything. do you get your salary before you work or do you get it at the end of the month?