I just heard an one hour interview Bloomberg interview with Jim Rogers. While most of what he said isn’t new, he made an interesting comment with regard to why he thinks the US government shouldn’t bail-out anyone and allow the institutions to fail. He said that there are good and bad banks and brokerages. If the government bail-out, it will create moral hazards. The good banks and brokerages have been waiting for this opportunity to take the market share from the bad. By taking money from the good banks (how? I guess via taxpayer monies) and giving money to bail-out the bad, the government is saying to the bad now take the money from the good and start to compete with the good.

Interesting insight although we already knew of this for sometime about moral hazards. I ponder over this and I wondered about it with regard to the way the system works in Singapore. In Singapore (and perhaps in most part of the world), the bad financial advisers have been selling toxic waste. Actually many of these aren’t toxic waste but it had been based on high commissions and unsuitable products to their clients. Besides the usual minibombs, equity linked notes (ELN), high risk unit trusts and hedge funds with no track records are being sold. I am not against selling these per se but the manner it is sold horrifies me. For example, it is common for an RM to sell a $200,000 thematic unit trust without any portfolio construction. I still remained very sore about this incident in which I lost a case because that client was more keen from his RM after listening to a salespitch. He just sank in $200,000 into just one product. When I explained to him that my method is asset allocation, he didn’t really understand very well although he said that I was the only adviser who attempted to do a full fact find to ensure the recommendation is suitable. I remained sore to this date because I did a proper job but get no reward. That RM used a standard saleskit (which I also had because the fund manager gave it) and managed to close so easily. I am sure many advisers who are struggling to do the right thing will recognize similar situations as mine.

So what has it to do with Jim Rogers’ comment on moral hazard? In this system, the sweet-talking with the gift of the gap adviser will earn more money than the adviser who does not have the gift of the gap. In this formula, competency and knowledge does not come into the picture. While clients will obviously benefit from the adviser who is competent, it is impossible for the client to really know who is competent and who is not. The only way is to judge based on external factors such as presentation skills. That is why many advisers go through very long hours of training on presentation skills and personal glooming. So during good times, the salesman-style adviser will earn lots of money. The institutions that promote salesman-style will earn lots of money. Exotic products will be created by these institutions due to large fire power. Clients who meet these sweet-talking advisers that can offer exotics were attracted to them. In the meantime, other advisers without much gift of the gap found it hard to compete since competency has never been in the equation when clients select their advisers. It has always being external factors. Another external factor is branding. Large institutions invest a lot of money in branding while small institutions have no budget for branding. In this industry, I have to stress again competency has never been in the equation if the earning good sales money is required.

HOWEVER, when times are bad like now and when those structured notes and exotic products become toxic chemical waste, the entire industry is pulled down. Clients become confused and thinks that all advisers are out to con their money. By right, the “good” advisers and firms should be taking market share from the bad. This is not the case. As a result, they become defensive and distrusts all advisers. Seeing protestors at Hong Lim for four Saturdays make people think that the world is being destroyed by unethical advisers selling toxic waste to the old and vulnerable (and educated and vulnerable too!).  Due to this blanket kind of thinking, all advisers – whether they are good or bad – got pull down by such sentiment.

Here is a quote from my client and I found it to be true but discouraging, “Your IFA profession is spoiled by all those cowboy insurance agents.” While the current problems are not related to “insurance” matters, the point is the same that the FA profession is spoiled by bad hats.

Today I was reminded by my managing director in our weekly Monday meeting that we are reminded that IFA requires a higher standard when we dealt with the client. While exempt financial advisers (in the banks, insurance companies and stock brokerage firms) represent the interest of their firm, IFA represents the interest of the client legally.

I pondered over this…. Actually I used to be very proud of this being able to represent the client while many others cannot. However, I know of stories of IFAs doing things that are horrifying such as churning clients’ account, mis-selling products and using sub-agents to increase sales. It will soon be a matter of time that there will be some horrifying mis-selling incident that will blow up resulting in four continuously protest at Speaker’s Corner. I know MAS isn’t doing enough to stop this and so the problems will escalate to a breaking point soon. At this point, I must admit that I am quite ashamed these are happening. I really wish some association with no vested interest can improve the professionalism of the industry. Perhaps the first thing is to raise the minimum academic qualifications. The second thing that can be done is to bad commissions. And the third thing to do is to perhaps to undo the American style of running business by being more pro-clients, than pro-shareholders.