Can You Trust Your Financial Planner?

Below is the first article that I contributed to CPF's IM$avvy. It discusses the current state of the financial planning industry in Singapore. I hope readers find this useful.

Being too trusting of others can sometimes work against us in financial planning. Too often, we are not skeptical enough when it comes to financial advice offered by others. Can you trust your financial planner? Is he really providing independent and unbiased advice or is he just trying to close a sale?

Advisory Business or Sales Business?

When the Financial Advisers Act was first introduced in Singapore, many thought that the financial planning industry would come up with a new breed of financial advisors who were independent and unbiased. While the fee based or fee-only model of financial advice is slowly taking off, most people in Singapore are still unwilling to pay a financial planner for the time and energy he takes to craft a financial plan. As long as the market is not ready, financial planners will continue to be compensated based on commissions.

A thin line separates the financial advisory business and the sales business. A sales person is one who derives his income from commissions. On the other hand, the financial advisory business is supposed to provide independent and unbiased advice to clients. It is important to realize that potential conflict of interests arise when financial planners earn commissions from the sale of financial products.

If your financial planner is earning a commission from you, can you trust that he will make the best financial decision for you? If a financial planner is selling you a product that you know very little about, how can you trust that the product is suitable for you?

Financial Products and Imperfect Information

I just read a book and it talked about a wallet auction.

Imagine that I pull out my wallet from my pocket and placed it on the desk in front of me. How much will you offer for the money in it? Whatever the case, any buyer of my wallet will be certainly worse off as I will only accept offers that they should not be making. I know what I am selling but the buyer does not know exactly what he or she is buying. It all boils down to information asymmetry or imperfect information.

The same theory applies to financial products. Imperfect information exists and the buyer has to overcome his lack of knowledge of the situation or of the seller. Market economies often deal with this problem through the mechanisms of advertising and reputation. As a consumer of financial products, your perception of a certain company’s reputation might influence you to purchase the product or invest in certain instruments. Or perhaps you have seen some advertisements that offer yields and gains that are too tempting to resist. Or perhaps, your friend had recommended a “reputable” financial planner that you can trust.

The reason why buyers rely on reputation and advertising is that they are not willing to spend the time to overcome the information asymmetry that exists. For example, a doctor gives me a prescription for a certain ailment. I trust his recommendation because of his reputation and credentials even though I am clueless about the medication that he has just offered me. In this case, it is unwise of me to spend 5-6 years of my time going to medical school just to breach the information asymmetry that exists between him and me.

But are financial products so complicated that we cannot take some of our own time and effort to breach this information asymmetry? Can you still trust that your financial planners will give you the best recommendations when there is a potential conflict of interests?

Trust Yourself: Financial Education

One simple way to overcome this information asymmetry would be for the consumer to become educated in financial matters such that they are better able to understand their own financial situation and make better financial decisions. This would help them better understand the financial products that they wish to purchase. For the beginner, the CPF IMSavvy website has a comprehensive list of articles that should serve as a good foundation for anyone interested in becoming more financially literate.

Are you willing to invest the time and energy to learn more about financial planning? Or do you still trust that a financial planner will do the best job for you?

Why Financial Knowledge is Not Enough

For most people, financial knowledge is actually easily acquired through the internet, books, friends or various other sources. Financial knowledge is simply the simple know-hows of basic financial planning. Yet, it is perhaps surprising that even when many people do possess this knowledge, not many actually act upon it. In a certain sense, having financial knowledge is not enough to guarantee financial success.

Financial knowledge is not enough by itself. It is akin to knowing about healthy living and eating but still being overweight and living a very unhealthy lifestyle. When I am choosing what to eat for lunch or dinner, I know what are the healthy food choices. I know that I ought to stay away from fizzy drinks. I know that I ought to exercise alot more. Yet even when I am armed with all this knowledge, I do not act upon it. I continue to eat unhealthy food and skip my planned exercise sessions. What results (love handles, tummy, failing IPPT) is not due to my lack of knowledge about healthy living.

The same case applies to most people when it comes to financial knowledge. They might know the need to save and invest their money. They know the importance of planning for their retirement. They know the importance of insurance. The problem is not really a lack of knowledge. The problem is that they fail to act upon it. I know of people who are well-versed in terms of financial knowledge but whose financial health itself are in a "mess".

In Bloom;s Taxonomy of Learning, it has been identified that people need to acquire Knowledge (K), Skills (S) and Attitude (A). As such, we can see that knowledge is just part of the entire learning process. Having knowledge alone does not mean you will succeed. It is an interplay between the K, the S and the A.

Financial Knowledge is not enough. We need to act upon that knowledge. We need to work on our attitudes that are so ingrained within us.

Lease Buyback Scheme

I am not yet over 30 but I guess it will be interesting to explore certain options that are available to me when I pass the age of 62.

The Lease Buyback Scheme or LBS is a new monetisation option to help lower-income elderly flat owners unlock the value of their homes to meet their retirement needs. As it has always been reported in the news, most Singaporeans are asset rich but cash poor. After pouring in alot of their money into buying a house, they are often left with insufficient money for their retirement needs. This scheme will help them to stay on in their own flat.

Under the LBS, HDB will buy back the tail end of the flat lease from the elderly household. On top of the housing value that is unlocked, HDB will provide an additional $10,000 subsidy. Out of the total amount, $5000 will be given to the household as upfront cash. The rest of the money will be used to buy a CPF LIFE Plan to provide a monthly stream of income for life. The household will continue to stay in their flat which will be left with a 30-year lease.

Eligibility

LBS is eligible for Singapore Citizens households who:

• are living in a 3-room or smaller flat
• are at CPF draw down age (currently 62 years) or older
• have not enjoyed more than one housing subsidy in the past
• have not previously owned a 4 room or bigger flat, or private residential property
• have lived in the flat for at least 5 years
• have a monthly household income of $3000 or less
• Do not have any outstanding loan of more than $5000

So am I eligible for it when I turn 62?

Firstly, I do not live in a 3-room or smaller flat so I will obviously not be eligible for it. It seems that this scheme is targeted at the elderly now and from statistics, only 25,000 households are eligible for LBS. This households will be those that fulfill the eligibility conditions stated above.

The amount that a household gets from the LBS depends on the valuation of their homes as well as the remaining lease.

LBS is not the only option for households who meet this criteria. Other monetisation options are also available for those with HDB flats. This might include renting out the HDB flat/room, moving to a HDB Studio Apartment or moving to a smaller, cheaper HDB flat.

For many Singaporeans, a HDB flat is their main asset and it will be useful to know that there are various options to generate income from their flats to meet their retirement needs.

In summary, elderly Singaporeans basically can explore 4 different options to generate income from their flat for their retirement needs. They are:

1. Rent Out Flat/Room

2. Move to a HDB Studio Apartment

3. Move to Smaller, Cheaper HDB Flat

4. Lease Buyback Scheme

Change of Ownership for AIG Global Investment Corporation (Singapore) Ltd

I received a letter from American International Assurance (AIA) about a week back regarding the change of ownership for AIG Global Investment Corporation (Singapore) Ltd. Here is the news:

American International Group, Inc (AIG) has announced on 29 March 2010 that it has completed the sale of a portion of its investment advisory and asset management business, including the entity formerly known as AIG Global Investment Corporation (Singapore) Ltd., to Bridge Partners, L.P., an exempted limited partnership owned by Pacific Century Group, an Asia-based investment firm. The divested portion of the asset management business has been branded as PineBridge Investments and operates in 31 countries. With effect from 26 March 2010, PineBridge Investments is an indirect wholly-owned subsidiary of Bridge Partners, L.P.

The resulting change in ownership has resulted in a change of name of AIG Global Investment Corporation (Singapore) Ltd. to PineBridge Investments Singapore Limited. Changes has also been made to the name of AIG International funds and sub-funds. PineBridge Investments is the fund manager for AIG International Funds. This change does not affect the names of AIA Investment-Linked Policy (ILP) Funds.

I hold an AIA ILP which I bought some years back. Here are the consequences for me as far as I can tell:

1. No change to the AIA ILP name. Mine is AIA Achiever.

2. There will be a change in names for all the AIG International Funds. For example, the AIG Greater China Equity Fund is now known as PineBridge Greater China Equity Fund.

Lending Money to Friends or Relatives

I realised that alot of readers like me to share my personal experience on financial matters.

Afterall, pure textbook knowledge about financial planning matters are available everywhere and sometimes, humans learn best from the experiences of others. I have thus created this tag on personal experience where I share my very own personal experience with readers and hope that you will be enlightened by it too. My personal experience are not textbook examples of how you should deal with your personal finance. It is how I dealt with my personal finance given my unique circumstances and scenarios. Sometimes, I acted against head knowledge because I treasure certain things more.

Lending Money

Lending money to friends or relatives is a common issue that crops up in personal finance. Very often, we might get unexpected requests from friends to borrow some money. I am not talking about $10 kind of money because they forgot to bring money with them. I am talking about them borrowing money that ranges from the hundreds to thousands of dollars.

I have one principle I use when I lend money to others. My father was the one who taught me this:

"If you ever lend money to others, treat the money as gone."

This is indeed a wise saying.

Once you decide to lend money to somebody, you should be prepared to write off the debt and the treat the money as a gift to them. If you are not willing to do so, then do not lend them any money.

Once you lend a friend or relative money, it will be very difficult to get the money back. It is a "face" thing amongst Chinese I guess to never ask people to repay back loans especially if they are close friends and relatives. So you will basically be at their mercy when it comes to repayment unless you have bothered to draft up a comprehensive IOU statement.

I am glad to say that I have lent money to friends and relatives on two separate events. I thought about it and asked myself whether I was willing to GIVE away this money and treat it like I will never get it back. Both times, I decided that I was in a position to give the money as my finances was good. Afterall, I view myself as only a steward of the money that God has entrusted me with. I also figured that since this people dared to ask me, they must really need the money.

I am glad to say that I got repaid back both times. One was paid back in a few weeks while the other took a few years. I did not ask for any repayment at all and did not charge any interest. To me, the money was a gift to them and getting paid back was considered a bonus.

I know of people who have lent lots of money to others and have failed to get their money back.

Invest with Temasek through Seatown

In the near future, it might be possible for the public to co-invest with Temasek. A new investment firm called Seatown has been established last year and it will admit sophisticated investors in 3 to 5 years and the public in 8 to 10 years.

That means that around the year 2018 to 2020, the public might get the opportunity to co-invest with Temasek Holdings.

This news was first announced by Ms Ho Ching last year.

Temasek Holdings seeded Seatown with over $4billion and has experienced executives running Seatown.

I am looking forward to this.

Cheap and Good Books

I am always on a lookout to buy cheap and good books to read. I am addicted to reading and always need a book in hand to keep my sanity. It isn't the coolest of hobbies as there really isn't much to talk about after reading a book. Nevertheless, I get immense pleasure from just reading books, especially if they are good.

I guess deep down inside of me, I always wanted to be a sort of novel writer or something. But perhaps that dream might never get fulfilled. Afterall, how many famous authors do we know from Singapore? Most of the famous authors hail from countries like the United States and Britain. Very few come from Asia. This is especially so when it comes to writing in English. Who will want to buy a English novel written by a Chinese writer? The market is really limited in that sense.

Anyway, back to cheap and good books.

I found out that Penguin books are usually really cheap and good. Recently, I bought The Beach by Alex Garland for $10.70 at PageOne. I devoured the entire book in less than three days.

Just today, I also managed to grab another Penguin book that cost $10.70. Apparently, there is a whole list of this Penguin books that have this plain orange coloured cover that are all going for $10.70. A really good deal if you ask me.

So if you are really looking for a cheap and good book, look no further. Penguin books are really worthwhile in my opinion.

Every once a year, there is also a Penguin BookFair that is held at the Singapore Expo. If you are patient enough, you can get the books there for an even cheaper price.