Feb 1, 2011

Paying for Your Financial Advice

An email from a reader:
Dear Gilbert,

I read your recent post, as always, with much appreciation for its practical content that impacts on Singaporeans from all walks of life. I do have a quandary though and in your post where you mentioned that you just hired a financial adviser sparked me to write to you.

I'm not exactly that savvy with my investments and I have come to a point where I seriously need to find a financial adviser that is not some run of the mill insurance agent type peddling products that I might not necessarily need at all to boost my nest.

I'm 26 and I have no qualms paying for one that could really help me before I fall back even further. Not asking for a recommendation, simply a finger to point in the right direction to find a decent one adviser and the basic points to take note of when choosing a financial adviser. Hope you can take some time off your busy schedule to write back with your thoughts.

A happy Chinese New Year to you..

[ xxxx ]
I recently got a financial adviser, because I recently made my first investment as an "accredited investor". For me, this is a new corner of the investment universe, so I need some advice to help me get acquainted.

"Accredited investor" means an investor whose income, net assets or lump size investment exceeds certain levels, such that the law no longer regards him as an ordinary retail investor. Therefore he can be offered different types of financial products which may not be approved for the ordinary retail investor in a particular country.

But anyway, back to the question of financial advice, for the general investor.

Financial advice comes with a cost. You have to pay for it. A financial institution cannot carry on a business that includes providing financial advice, without finding some way to charge for it. Otherwise it would be losing money. Because the financial adviser is himself a fixed cost - the financial institution has to pay him a salary - and because the ability to provide financial advice needs to be backed by an infrastructure that itself costs money to run (for example, a bank's research department).

The cost of financial advice can be passed on to the customer - (that's you, dear reader) - in a variety of different ways. For example, theoretically it could be a flat fee or time-based fee (although this is uncommon in Singapore). Or it could be a trailer fee (charged quarterly or annually) on the total amount of investments you place with your financial adviser (that's "Assets Under Management", or AUM for short). Or it could be built into the upfront sales charges for the investments you make.

Let's look at the following illustration. Here are three scenarios.

Scenario 1

You are an ordinary retail customer. You walk into a bank branch. You ask a financial consultant to recommend some investments to you. She asks about your financial goals; discusses any other investments you already have; determines your risk profile through a questionaire; talks about market conditions etc.

Then she recommends XYZ Equities Fund to you. You agree. You decide to invest $10,000. You pay 5% in sales charges, which is typical for an equities fund. That works out to be $500.

Scenario 2

You are a "priority banking" customer (this typically means that you have placed at least $200,000 with your bank). You walk into a bank branch.

You ask your relationship manager to recommend some investments to you. She asks about your financial goals; discusses any other investments you already have; determines your risk profile through a questionaire; talks about market conditions etc.

Then she recommends XYZ Equities Fund to you. You agree. You decide to invest $10,000. Being a priority banking customer, you typically get a discount and pay 3% in sales charges, for an equities fund at a bank. That works out to be $300.

Scenario 3

You are an ordinary retail customer. You visit a website such as Fundsupermart or Dollardex. The website has dozens of articles about financial planning, regular updates on market news and plenty of online tools. However, it's essentially a DIY process. You do your own reading and research. No one is there to specifically talk to YOU about your money.

You then decide to invest $10,000 online, in a particular equities fund (gee, guess what - it happens to be XYZ Equities Fund). Typically, you pay 2% in sales charges. That works out to be $200.

* * * * * * * *

Note that in all three scenarios, you bought the same exact equities fund (the XYZ Equities Fund). However, in Scenario 2, you paid less than in Scenario 1. And in Scenario 3, you paid less than in Scenario 2.

Despite being an ordinary customer, the Scenario 3 ordinary customer actually got a better deal than the priority banking customer in Scenario 2. Why? Because financial advice costs money.

That financial consultant, or that relationship manager, may have been pleasant, well-informed, patient and helpful. You may indeed have found her advice clear, informative and useful. But you have to pay for that. The payment is ultimately reflected in the extra 1 to 3 per cent you pay, in the sales charge.

This is not to say that paying for financial advice is necessarily a bad idea. This is to illustrate that financial advice does come with a price - even if you are not explicitly told that it comes with a price. What you then have to decide is whether the value of the advice you get is worth the price you're paying for it.

That in turn depends on a variety of factors, two of which are (1) your own level of financial knowledge, and (2) your willingness to learn on your own.



Anonymous said...

Accredited investor - 2 million in net assets or 300k in salary in last year. Which is it? :-)
I guess the former

Anonymous said...

A small advice -

You are ultimately responsible for your own investments, even if you use a financial advisor. It is important to learn about basis finance and money management yourself. Perhaps read a few "Dummy" books on finance if you are new to this area.

Anonymous said...

" I have no qualms paying for one that could really help me before I fall back even further. "

Sounds to me like this person needs a shrink rather than a financial advisor.

All investments are risks. Figure out your profile and invest accordingly. If the market goes down, then too bad, but you took the risk that you were willing and able to.

Anonymous said...

Mr Wang, I started buying funds when I was (I think) 18 years old. I vaguesly remember I was still in JC, but I might be wrong.

I have come to discover that funds don't deliver as much as what I can do myself.

I guess, for the laymen, funds are still the best. They usually deliver just above inflation. But I just find it ridiculous to have to pay fund managers even if they screwed up and $1,500. But over the last 5 years, I have made about S$40,000 with my initial capital of about S$30,000 invested over time.

No, the stock market is not for everyone. Those who want to go into this, please read my next statement at least 5 times.


I started with penny stocks. Huge fluctuations. I learnt to observe the movements, months, max price, lowest price. I specialise in 2 counters, trading them between the bands. This is how I got my first S$10,000 from my initial low principal of S$5,000.

Now, I am into blue chips. Got ST Engineering at S$2.17 during financial crisis. Bought into commodities just before Christmas. Anyway, now I am more for dividends than captial gains. This is how I moved my objectives over time as my money grew with the market.

And why we should not be holding cash for this one year: USA just printed TRILLIONS of dollars. Eurozone going the same money printing to save some of their member countries. There will be liquidity all around. Inflation is a definite. Don't hold cash, hold an asset that can float with the inflation.

And what do fund managers flooded with liquidity do? Mostly put the money into one of the following:
1) Properties
2) Commodities
3) Currencies
4) Stock market (include bonds)

So just hit one of the above, and you should ride with the waves. Make sure you do your research before you put your money in!

From a local non-talent econs major from NUS with no Honours degree.

Anonymous said...

My 2 cents worth ....

People tend to forget about the factor of PERSONAL TIME. If you are very free and are interested in the stock market, it may suit you fine to spend hours glued to your computer screen staring at the ever-changing stream of data and prices streaming in from SGX.

If you are not so free, and not so interested, and would rather spend your time on your full-time job or personal activities like raising kids, going to church, playing golf, exercising, meeting friends etc etc, then investing in funds is much more time-efficient .....

Of course, if you are one of those people who spend hours and hours of your time playing useless computer games, it is probably better that you spend hours and hours of your time playing the stock market. Because .... At least you can make some REAL MONEY. :D

Anonymous said...

Wow Mr Wang, you have revealed your net worth.(at least $2m)

You have succeeded very well in the Singapore system and at a relatively young age too and as a true blue Singaporean. And yes, it this is a good measure of talent.

I think there may be many, many more who may be worth half or even quarter of your worth. They have succeeded too, but to a lesser degree.

That's why I think because of many such people, PAP will most likely repeat its past victory again at the next election.

And also largely why the opposition is the way they are. Because talented people wanted to make money, not involved in politics unless they are invited and strongly persuaded by PAP for PAP politics.

Eaststopper said...

Wonder how much you are paying for financial advise as an 'accredited' investor?

Anonymous said...

to the anonymous local non-talent econs major from NUS with no Honours degree - thank u for the advice.

i have a financial advisor. i have found though that reading up myself, keeping an eye on the market myself is absolutely essential to my financial health. the advice i receive from my advisor is like taking supplements, occasionally helpful but not essential or always useful.

Anonymous said...

It's important to qualify "financial adviser". In Singapore, overwhelming majority of so-called "financial advisers" are just salespeople of financial products.

Henry Leong said...

Here some advice!