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Watch out for errant Financial Adviser
By Aw Choon Hui, GYC Financial Advisory Pte Ltd

For those who seek to realize their future financial goals with professional advice, engaging the right financial adviser is perhaps a decision which requires a fair bit of deliberation. This is because your adviser will likely influence all important financial decisions that you will make in time to come, helping you to determine your financial goals, aspirations as well as to achieve financial independence ultimately. Your moneyis at stake, and it definitely pays to choose wisely!

Sounds too good to be true? In reality, there are many reasons why that 'ideal' financial adviser is like no one you have met. Here is why?

It is not easy to be a financial adviser. First, you need to pass the relevant licensing exams by the Monetary Authority of Singapore. To get your licence renewed annually, you will have to fulfill at least 30 hours in Continuing Professional Development (CPD). If you also want to advise on General Insurance, you have to fulfill additional CPD hours in general insurance.

This is just the minimum. In order to properly advise the client on his investments, the adviser also needs to spend time understanding what is happening in the global financial markets and how various events and policies can affect a client's investments.

Furthermore, clients expect their financial adviser to be an insurance specialist, investment analyst, economist, and a loan, estate planning and tax specialist all in one. The firm expects the adviser to be all that, plus a super-salesman, and yet compliant with all the prevailing rules and regulations. So, is it any surprise that it is hard to find a 'perfect' adviser?

Before you think that all is doom and gloom, and view all financial advisers as out to rip you off, there are many in the industry who come close to reaching the ideal, and earnestly take the interests of the client to heart. They are a credit to the profession, and it is your job as a prospective client to suss them out. Allow me to share with you some objective and subjective considerations:

1. The financial adviser's operating framework
An often overlooked considerations is the importance of the firm which an adviser is representing. The firm sets the operating framework and provides guidance for the financial adviser to carry out his business. They determine the investment process, select best-of-breed funds, decide on house positions in times of market uncertainty, do product analysis, etc. All this substantially aids the adviser in being more productive, effective and professional when advising his clients. Another critical aspect that the firm provides is setting the correct corporate culture and business values for the financial adviser to imbibe as part of his psyche.

However, there is a price to pay. To set up a financial advisory firm that is able to provide such value-added services to the financial adviser and ultimately to the client, requires higher overheads - for the hiring of qualified staff, administrators, consultants, etc. It is thus unfortunate that a number of firms have opted for the easy way out, i.e., to let their financial advisers do their own thing. Because of time constraints and their lack of expertise, the adviser would seek out third party sources and fund managers (who may have their own agenda and sales targets) to decide which funds to recommend their clients.

So, it is important to ask the financial adviser about his firm's capability in formulating investment strategies and processes, selection of funds and basis for product recommendations. The prescence of a customer servicing unit also becomes important to the client when their financial adviser decides to quit. The reassignment of a new servicing adviser then becomes secondary as the investment approach remains the same.

2. Financial strength of the financial advisory firm
Would it not be logical for a financial advisory firm to be financially viable? Ask for the firm's financial standing. Their profit & loss statement needs to be positive so that they can continue burning cash year after year and still be viable. Fairly common sense, but most clients often forget to question this aspect.

3. Investment track record of the financial adviser and his firm
Financial advisory firms worth their salt should have proper investment processes, the ability to select good funds and the track record to prove it. Ask the financial advisory firm on how their clients' investment accounts have been performing over the past few years. What is the average return?

We believe that the investment strategy and process are paramount, and not just the selection of funds per se. Getting it right would help clients be less affected in a servere market downturn and yet be positioned to enjoy the upside in a rising market. This knowledge and process surely cannot be resident in any one person and a financial adviser will need competent people with specialised skills to implement their strategy. The selection of funds itself is also a rigorious process and not just based on an individual's intuition on where the market might be going.

How about the financial adviser himself? How have his own investments been doing? If he is going to manage your hard-earned money, surely he should practise what he is preaching. How long has he been investing in the financial markets and what are his personal investment returns? What insurance policies does he have? It is amazig how some clients can be so willing to leave their money to a person who has little or poor investment experience. It stands to reason that a person who is successful in managing and investing his own money will also be able to manage someone else's money successfully.

4. Other attributes
Personal attributes such as integrity, trustworthiness, dependability, personal expertise, etc. Are important attributes of your ideal adviser.

Why is it so important? For example, an adviser who recommends an investment-linked policy that invests into a high-risk fund (e.g. Technology, commodities, etc.) to a 60-year old pre-retiree who has a low risk tolerance. By capitalising on his emotions of greed and fear, he makes the sale by telling him the high returns he can expect, but conceals the risk inherent with such funds as well as the escalating cost of insurance associated with the product.

Why do financial advisers misrepresent information? Someone once said that if he were to tell the whole truth, his clients would unlikely purchase the product. So he chooses to omit 'a little' information related to the investment. Other forms of information that advisers sometimes omit are fees, sales commissions charged and the non-guarantee of returns on the product. This is what you will get from an adviser who has no integrity. Unfortunately, it is not always easy to spot character flaws. Taht is why you must always read what you sign, ask questions and take time to understand what you are buying.

Does the law protect you? The Financial Advisers Act and Regulations require all recommendations to have a reasonable basis, and for proper disclosure to be done. In addition, the MAS has recently announced the setting up of a public registry that allows consumers to check on their advisers. It will contain their personal particulars, what they are licensed to practise, and their complaince records. This database is expected to be ready in 2008.

In summary, a good adviser is like your coach, giving objective advice, guarding you against your emotions of fear and greed, and helping you remain focussed on your investment objectives. Ideally, he should also be like your best friend - knowing your dreams and aspirations, watches out for your financial health, and helps you achieve your financial goals, so as to help you realise your dreams ultimately.

By: Aw Choon Hui, Deputy CEO of GYC Financial Advisory Pte Ltd. This article was first published in iFast Financial magazine, iFast Insight.