There are only three reasons why advisers do not recommend passive or index funds:

1. They are ignorant. Many advisers only know how to sell but don’t know what they are selling. Do you dare to hand over your wealth to an adviser who doesn’t know what he is doing?
2. They are stuck with product providers. Tied-agents are the most pitiful lot because they could only sell their company’s products. If their company products do not have index funds, they cannot sell. But many IFAs companies which claim to be able to sell many products from different companies are in no better shape because the only index funds available for them is the pathetic Infinity series which the fund sizes are so miserable. I believe some of my clients’ own net asset is larger than the fund size!
3. They only sell what pays a commission. Only unit trusts and single premium ILPs pay a commission. Recommending an index fund such as ETFs pays no commission and no trailer fees.

Although it seems to be written in American context, it seems quite relevant to Singapore. Here are my comments:

It is common to hear fellow practitioner that says that they make the recommendation while the client ultimately makes the decision. On the surface it sounds true because it is the client that must sign the transaction form; it is the client that signs the cheque. Also it is the client that signs the disclaimer forms which contains all sort of disclaimers and you really wonder why bother to engage a financial adviser. I do not think client makes the decision. Why?

This blog entry is meant for financial advisers to read only.

In year 2006, I attended a workshop on financial planning. It was one of the workshop in the AFA Congress. The AFA Congress is an annual event attended by independent financial advisers. The speaker was a well known financial practitioner. His opening words were “Your commission is your obstacle”

I did a google and found quite a number of fee-based IFAs all from the United Kingdom. As these firms write about their business models although none of them are identical in their approach, I could fully understand where they are coming from:

I was at Takashimaya and found a road-show by an insurer. There was two large banners which say “Free Financial Health” checkup and another learn how to “Win Takashimaya vouchers” When I see that, I find it there is really lack of taste. There is also no sense of professionalism and pride. Although I respect the advisers who are trying to earn a decent living, I really feel sad for them to have to go so low just to get sales. In the meantime, MAS isn't doing much about all these and in fact is currently having some legal issues on their own. The following are my ideas of an ideal industry:

As I surveyed the newspaper, I found many seminars – some free while others are fee paying. Of interest are those related to financial matter. It is quite common to see advertisement promising that individuals can become millionaires. I find it quite distasteful. An acquaintance rebutted me yesterday for judging such.

UK is moving towards fee-paying advice and banning commissions. I have mentioned this in my numerious blog such as these:

http://www.wilfredling.com/content/view/511/9/

http://www.wilfredling.com/content/view/507/43/

The article appear in Telegraph UK can be viewed here: http://www.telegraph.co.uk/finance/personalfinance/consumertips/3518909/End-of-free-financial-advice.html

 This is great news for UK. I have mentioned many many times that there is no such thing as free advice. Very few people beleived me and is willing to pay (at times knowingly) $10000 or $50000 in commissions but refuse to pay just $2000 in fee. Why? I believe that there is no way the industry can self-regulate and move to a fee-paying model unless regulator steps in. As the demand in the market for fee-paying advice is low and the demand for commission-based advice remains high, it will take an external force to move towards a fee-paying industry. Occassionally I'll receive emails from others saying that I am crazy and unrealistic in expecting people to pay for advice. I refuse to entertain such discouraging email. Once or twice a month, I receive fee-paying cases. Some FA firms also do fee-paying cases. It is just that the demand is very low. I hope MAS can take their rightful leadership role to ban commissions altogether.

There is a posting at Tan Kin Lian blog written HERE by an insider about the conflict of interest of a bank and the customer (to be fair, the conflict is applicable to FA firm and tied agents):

Occasionally I get calls from people (and my own clients) who are keen to become an IFA. Usually they have no prior experience in this industry and they aspire to be a financial professional. When they asked me what it takes to be a financial adviser, I will tell them that they need to moderate their expectation. While they desire good intention to be a true professional, I have to tell them what clients really expect in this market place. Clients embrace salesmanship style but reject professionals. I have blog many times on this area. They were shocked when I say that. I do not wish to paint a rosy picture for these new advisers and they must be prepared that clients in Singapore (especially) are immature. Some of them will be discouraged and hence decide not to join the financial industry when I told them that there is 90% chance that they will become another salesman.

Financial products itself should not be “sold.” It is unfortunately that the industry adopted the philosophy of salesmanship in its approach to the relationship between financial adviser and the client. These are some terms used that reflect this:

CIMB-GK Securities, DMG and Partners, Kim Eng, OCBC Securities, Phillip Securities and UOB Kay Hian announced that they may be compensating the “vulnerable” group of investors who have lost their money in structured notes linked to the Lehman Brothers.  This follows after similar move by DBS Bank, Hong Leong Finance and Maybank.

While many investors are happy about the outcome, there are many important lessons to learn. The mistake isn’t about investing in these dangerous products but rather the greatest mistake will be not learning from it. These are some lessons to learn:

Many people who engage financial advisers on investments have some unrealistic expectations. How well a portfolio can perform depends 99% on the investor himself. So regardless of how good a financial adviser is, if the investor does not do a proper job, it is guaranteed that the portfolio will lose money on a long run. The following are some of my thoughts speaking from real life experience with clients:

There is a current court case in which two sisters are fighting over their inheritance. This was reported by Straits Times "CJ: Be diligent when making wills for elderly" dated 11 August 2010 in which Ms Caroline Chee, 48, and her elder sister Muriel, 54, had each produced a will by their late mother, Madam Goh Hun Keong, who died in 2004 at the age of 83. The lower court and the Court of Appeal agreed that the latest Will is not valid because the testator was no longer of mental capacity to write a new Will. But gist of the report was that Chief Justice is calling for lawyers to be more diligent in Will writing. Why did he do that?

I sent this letter to the Straits Times forum on 10 August 2010 but was rejected as they did not publish it. Perhaps it is just too boring. This is related to a blog article I wrote: Robust sales in life insurance? Really?.

Dear Editor,

I refer to the Straits Times article “Life insurers hit $2.6b in new sales” dated 6 August 2010. There are two abnormalities.

Very often insurance agents and financial advisers would state in their name cards that they are members of the MDRT. You can also see it in the newspaper when photographs of MDRT members are splashed in full page. So what is MDRT? Are they millionaires?

In a recent high court case of Soh Eng Beng (as executor and trustee of the Estate of Soh Kim Poo, deceased) v Soh Eng Koon was a case with regard to an ambiguous clause in a Will. The judge has to decide the exact meaning of the clause. But as I read the case, my opinion is that it could simply be a genuine human error which all humans are not immune. Anyway I will not dwell on the human error but the process in which the Will was written. According to the link above, I gather that the Will under dispute was written in the following circumstances: