Jacky supported his friends who became financial advisers by buying their products, many of which did not really meet his needs. When most of them later changed jobs or careers, he was left paying for the products long term. He also lost friendships with those who feel ashamed to meet him again.
A 2016 article in the Straits Times reported that 72 per cent of those polled by the Financial Planning Association of Singapore did not know who to trust when it comes to receiving financial advice.
To protect yourself, avoid these costly mistakes Singaporeans make when choosing a financial adviser.
1. Going easy on loved ones
Whenever Eileen's father, a financial adviser, could not meet his monthly sales quota, he asked her to buy something from him. Eventually, Eileen accumulated duplicates of similar policies totalling over $1,000 monthly yet not meeting her financial needs.
When supporting friends or relatives by buying their products:
- Note that these products are long-term commitments.
- Buy only if you benefit. They create value for you, and in the long term, you retain the relationship.
- Hold them to a higher standard than usual, because the familiarity works both ways. You will be helping them.
You can do this by asking them questions you wouldn't dare to ask an average adviser:
- How much commission do you earn from selling this to me?
- How much are you paid for keeping in touch with me?
- Who pays you to process my claims?
- What are your plans to stay in this line of work for the long term?
- Did you buy this product for yourself or your whole family? Why or why not?
- What happens if something goes wrong and I find this product unsuitable for me?
- Will I lose money if I cancel this product? Will you lose money?
2. Buying from a complete stranger
A financial adviser contacted me on Facebook to quote me a term plan without finding out my occupation, financial situation, and goals. He promoted his product as the cheapest around, regardless of whether the product was suitable for me.
Financial advisers who cold call, text message complete strangers, and participate in roadshows tend to be unable or unwilling to build their reputation to get business. Why do you think this is so? Trustworthy financial advisers build their reputation to attract customers by word of mouth and creating ever-increasing value for their clients.
3. Focusing only on products
Every company offers good and bad products. Every company has its specialisations, but no company is good in the full range of products. If an adviser knows of a similar product from another company that is better for you compared to the product sold by the company they represent, how would they advise you? The answer tells you where the adviser's interests lie.
Be careful of financial advisers who are more excited to talk about their products and benefits than about your situation, needs, and goals.
4. Favouring a financial adviser for his career success
"This financial planner belongs to the production club, is one of the top performers of his company, and has many clients, so s/he is good."
In the financial advisory industry, success is usually measured by the volume of sales generated for the company. An adviser can be recognised for a huge volume of business from a single client or for acquiring hundreds of clients with minimal planning.
That doesn't indicate how good a particular financial adviser is for you.
5. Valuing a financial adviser's experience too much
"This adviser has been with his company for many years. S/he can be trusted."
A long-time adviser is more experienced, has most likely developed a way to stay in business, and may likely not switch companies. However, such an adviser may stick to the old ways of the industry, which is pure sales. Staying long in a sales business alone does not indicate the quality of value s/he can create for you.
Recent improvements encourage advisers to actually provide advice regarding the products they sell. Yet, newer advisers may be more desperate for sales and lack experience.
6. Focusing on the financial adviser's client profile
"This financial adviser serves high net worth clients. Since these people use the planner, s/he must be good."
High net worth clients tend to be very good at what they do. That doesn't mean that they manage their money well. Like you and me, high net worth clients are susceptible to fear and greed, which salespeople exploit. Despite being high net worth, such people can still be naive in the area of personal finance.
7. Succumbing to sales tactics
Financial planning begins with uncovering your needs, financial situation, and goals. Only with a clear understanding of where you are, and where you want to be in the future do products come into the picture, so falling for such sales tactics is one of the worst mistakes you can make.
One adviser is tried to get sales by dangling a free $300 CapitaLand voucher. It is foolish to fall for a $300 free gift if it means making a mistake costing much more yearly. It's not as limited as it seems; companies offer free gifts all year round. It's to entice you into making a hasty decision to a long-term commitment.
Financial advisers interest you in a small, low-cost product. When you meet, they talk about another that is more profitable for them instead. You purchase more than intended, and you feel lousy afterwards.
Talk and talk
The adviser spends most of the meeting talking about themselves, their products, the company they represent, and how their products can help you, without considering your financial situation. The meeting can last for hours. The purpose is to wear you down mentally and, at the end, get you to buy something when your willpower is low.
When I met this adviser in person, we talked for over 3 hours! Building rapport, he called it.
In 2012, the Monetary Authority of Singapore released the results of a mystery shopping exercise:
- 30 per cent of product recommendations were clearly unsuitable for the client.
- Another 40 per cent may not be suitable.
This shows that financial advisers have mostly been recommending unsuitable products for clients! With financial advisers compensated like salespeople, this will be hard to change, so stay vigilant always.
Daniel Tay founded Master Money Management to provide holistic fee-based financial planning. He is listed on Consultwho.sg, a platform that helps users with their personal finance issues.