- What can happen to Sembawang Music Centre will happen to financial advisers

What can happen to Sembawang Music Centre will happen to financial advisers

Written by Wilfred Ling

Wednesday, 04 November 2009

In the news is Sembawang Music Centre. It is going through liquidation and bankruptcy. The reasons as reported in the press were: rising cost of rental, general decline in the industry and the emergence of close substitutes such as online music and video downloads. The decline in the industry was evidenced by Tower Records closing in 2006 while HMV is currently downgrading to a smaller 12,000 square feet from its 17,000 square feet space.

I find the financial industry to be over saturated and is in for a major decline as well. These are the reasons:

It is said that there are 15,000 financial advisers in Singapore. In 2008, the number of Singapore residents aged 15 and above is 81.6% of 3.6247 million Singapore residents (including permanent residents). So there are 81.6% x 3.6247 = 2.958 million adult residents. This means there is one financial adviser to every 197 residents. But it is so easy to accumulate thousands of clients if a financial adviser worked for 10 years. It will be more comfortable to have one adviser to 1000 residents. So the industry must consolidate.
Since the start of the Financial Advisers Act, many advisers earned the bulk of their commissions by selling unit trusts and ILPs. They were lucky because of the bull run. But later on after the stock market crash in 2008, many advisers were who mere speculator lost their clients. In fact, it is a well-know fact that there are some evidence to show that DIY investors investing on their own through on-line portals were better in timing the market than financial advisers! Therefore, advisers who were faking to be investment gurus could no longer fake further.
Increasing competition from the largest competitor in Singapore. All financial adviser knows that the biggest competitor is none other than the Singapore Government. The Singapore Government runs the largest financial institute in Singapore called the CPF Board which offers a large range of services including: retirement planning (through Minimum Sum Scheme), housing financing (together with HDB), education financing, medical financing through medisave and medishield), long term care (eldershield), term insurance (Dependent Protection Scheme) and mortgage insurance (Home Protection Scheme). CPF Board also acts like a bank because it is able to take in deposits in the form of CPF-Ordinary Account, Special Account and Medisave. The irony is that it is not regulated by MAS and neither is it licensed to give financial advice! It also has no banking license! Recently, it is going to become the largest annuity operator in Singapore through CPF Life by making the scheme compulsory eventually. To me this effectively killing off all privately run annuity providers.
Financial advisers openly offer free gifts to entice customers to buy financial products. Sometime, the free gift is worth 100% of the product so as to provide the opportunity for the financial adviser to upsell other products. If an adviser is giving away an insurance product FREE of charge for the first year premium, how is anyone else going to compete? Give cash rebate in additional to offering a FREE insurance? Can anyone imagine a surgeon offering FREE liposuction to attract customers (so that he can upsell and offer plastic surgery)? It is unimaginable but this is EXACTLY what is happening in Singapore.
Rising cost. Besides rental increases, financial advisory firms are facing new cost. This is the cost of compliance. I heard of one FA firm requiring the adviser to fill up 30 pages of documentation just to sell one silly shield plan. Goodness. Not only is this environmentally unfriendly but a waste of human resources and highly unproductive. I thought someone say that Singapore must compete based on cheaper, faster and better? Filling up 30 pages of forms for a shield plan is expensive (because the commission is worth some plates of chicken rice only), slow and lousy.
Close substitutes. You can now can financial advice from the Internet. Plenty of them by doing a Google search. You can also find many “experts” in forums and blogs. Clients think they are smart by following these “experts’ but readers are dumb not knowing that many blogs and websites employ Search Engine Optimization (SEO) techniques to get traffic in order for the web operator to monetize through Google Ads and equivalent. Much of the contents were made for SEO purpose and the poor readers don’t know. This is similar to having pirated Music and Video downloads made available. It just kill off the legitimate one.
Multiple channels. Many of financial advisers’ business partners are also their competitors. It is an open secret that financial advisers are worried their business partners will take over their own clients. But this is reality – that many institutions distribute their products across different channels. The most poor things are tied-agents whom they think their principal will never distribute using other channels. They are very wrong. A now classic example is NTUC Income which got its own agents. However, right now it distributes its products with banking channel, agents and almost all IFA firms. But the IFA’s usual partners are also doing likewise. For example, IFAST is now distributing its unit trusts via IFAs, online portal via fundsupermart and banking channels. Very soon, everybody will be distributing their products through every channel in the market. This makes business sense since for a institution, the more number of people selling it the better. But for the financial adviser – it means what you have, I have. What I have – you have. If I don’t have, I can co-broke with another person who have. Financial advisers’ products are no more exclusive. IFAs can no longer say they can carry many people’s products since everybody is carrying everybody’s products. Similarly, it doesn’t not make sense for a tied-agent to co-broke everytime. They might as well become an IFA or quit the industry altogether.

So what should a newbie financial adviser do? Here are my advice:

Do not pretend to know a lot about investment. If you look at those active funds, majority underperform the index despite employing smart analysts. So don’t worry, these analysts also don’t know what’s happening. If you admit you don’t know much about investment, you are likely to do much better than those active managed funds. It has been said that if a monkey would to throw darts at a wall of companies, the monkey will do better than smart analysts.
So, what can you do if CPF Board is your largest and most powerful competitor? No worries, fortunately CPF’s rules have come so convoluted that no man-in-the-street can really gasps what’s happening. It is my belief many people just “flow along” the rules thinking that if it is compulsory – they don’t need to exercise their brain power. You can empower CPF members to understand the rules and advice them on how to maximize their wealth by navigating these hard to understand rules. Almost every CPF scheme is complex and difficult to understand. You are lucky that CPF’s website is not SEO optimized after they revamped their website into use autogenerated cryptic URLs for their FAQs and so people cannot use Google’s search facility to get information. Here is a tip on a complex rule: Do you know where to get an official document on Home Protection Scheme (HPS)? Hint: The ‘policy document’ is inside the CPF Act and this insurance is totally unlike a mortgage insurance.
Since you cannot compete when other financial advisers are giving free gifts that is 100% of the price of the product, you do not need to compete. You can always provide value-add service to your clients by researching for the best bargain in town including finding out which financial advisers are giving free gifts and free insurance cover and also highest fixed deposits. Is this sending the sheep to the lion’s den? If your client trust you, than no. If you client is easily persuaded to buy something else from the other person, then such a client is not worth keeping anyway.
What do you do when you are faced with competition from fake advisers (via blogs and forums) and as well as your own principal because it is distributing products in other channels which compete against yourself? Simple – don’t position yourself as a product salesman and you avoid product competition altogether. There is one “product” which is unique that nobody else can distribute – which is your own brain power. If a client sees you as an adviser, they are actually wanting to tap your brain. Your brain is unique. There is no similar competition. The good news is that most advisers’ brains are brain-dead (opps… don’t mean to be rude but with constant focus on selling, it is not easy to have a brain that is still functional).
OK, what are you going to do with that silly 30 pages of KYC just to sell one silly shield plan? The good news is that the Financial Advisers Act regulates tightly the process of selling insurance and investment products. So if you are going to ask your client to buy the product from the other advisers offering FREE insurance, the other guy is going to need to fill up 30 pages of silly forms.

Thus, financial advisers can survive in the consolidation which I am predicting if they employ a (1) simple investment plan for their clients (called Monkey selection), (2) help clients navigate difficult to understand government rules especially CPF rules, (3) help clients source for the best deal including where to get free gifts and products and (4) do not position yourself as a door salesman but as an adviser with a brain (5) Get the FREE insurance salesman to fill up the 30 pages silly form.

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