Investment Linked and the financial advisory Industry

Recently there have been some controversies and debates surrounded investment linked products and insurance as a whole. Propositions and oppositions have been fighting like no one else business and mainly the propositions are people who are in the financial advisory industry while as usual, the oppositions are the people who need financial planning and often, the vanguards of this battle are they one whose financial planning go haywire due to the incompetency of their financial advisors.

What is Investment linked policy? Simply put, it is a financial plan where one could have both insurance coverage and also investment at the same time. Invest what? Invest in unit trusts. Here is where lies the problem as the allocation of the investment funds, or premium become murky as investors and perhaps even the advisor do not know how much is being allocated to which and hence it spark off a wide range of issues regarding the financial advisory industry.

For an ILP, usually the first few years, returns can't be seen. As with most investments, you will need a have a period in order to get your capital beef up and earn returns or incur loses. However it doesn't boil down too well with the average Singaporean who do not have the slightest hint of what investment should be. TV program showing fast bucks do not help the situation either.

I have met with several clients who ask me whether can they put in less but generate alot, in a short span of time. They saw investment as the Singapore Mint which can produce notes at an astronomical speed.

But who can blame them as Schools, parents do not teach them the way to safeguard and let their money grow?

ILP work in a way that once premium is received, they are allocated immediately. It mean, they will be converted to units( and hence the name unit trust). The cost and the insurance coverage will be also converted to units after which the premium unit will deduct the cost unit and the remaining unit will be put to work.

The quotation of each plan shows 5 and 9% returns generated. However this is not guranteed. There is no short cut or magic involved. Even if you deposit in a bank, there is no guranteed that the interest rate will stays at the prevailing rate and not rise nor fall.

Some may argue that the fault lies with advisors who failed to mention or show the clients how do this work, how do the cost is being deducted, so on and so forth.

To this question, there are two side of the story. True some advisors are incompetent. They do not bother to keep abreast with the current affairs, especially with the financial news. They do not highlight the cost or do not even know how to calculate it even after being taught how to, to the clients. Worse, they spun fairylike tales to clients like telling them those 5 and 9% returns are guranteed. Yes, we should weed out these advisors.

However being said, i also discovered that it is just a vicious cycle. I tried once to explain to a bus driver, my friend's client actually, on what is a unit trust, how do it work, how is the cost calculated, only to have the bus driver confused and the deal just fall off. Me? I became a thousand year guilty guy who get a bit of sarcasm from my friend's boss.

You see, explaining to a group of people who don't even have the slightest idea of what is financial planning can be a big hurdle. For a start, they are already risk adverse psychologically. They treat all investments are losing money vehicle, especially in higher risk instruments such as stocks. So even before you start to spread your gospel of how the things work, they already have this mindset that it won't work for them and money is sure to be lost.

It is this mindset which prevent them from getting comfortable financially. It is also this group which the government are most worried about, seeing that they won't be retiring comfortably in their old age. And this is the group which the insurers and companies are trying to reach out to. And so, a vicious cycle just keep on repeating.

The delimma surfaced. If i become too technical, the client may be confused and everything just flopped. Yet this is my career, the source of my bread and butter. So should i just make things simple, just illustrate the benefits and forgo the cost and potential lost aspect? I badly need this deal you know. Go figure ladies and gentlemen.

Ever since CPF rates are fixed at 2.5%, government has been hinting and hinting that one need to plan for himself. We are not a welfare state, we can't expect the government to give handouts. And since that the government has been talking about personal financial planning, i speculated that the cut on CPF contribution are going to get more and more and the interest rate may be adjust to even lower than 2.5%( 2.5% is a requirement stated in some sort of law that it is the lowest and couldn't go anymore low in order to protect the people. But law can be change don't they?)

The situation could get worse.

Another aspect of things which i think can be improved is the image of financial advisors. You see them at the bus stop stopping you with surveys form. You treat them as if they are begging you. But if they don't do that, will you be the one to look for them instead? Absolutely not! Assuming that you know financial planning is vital. Yet Singaporean favourite excuse is " not enough time" Yes! You do not even have time to visit the toilet, so what make you have time to visit the financial planning companies?

So instead of you come forward, we come to you.

But having said, why do people are so afraid to visit the planners?

To me, i came up with a conclusion. Uneducated.

Schools never teach us. Worse, everybody say keep cash in your pocket or in your bank is the most sensible way.

You could see the obsession of Singaporean with cash. When ERS is announced, people queue up, to cash out their ERS.

$500 only, yet people are in a hurry to cash them out. If you cash them out and spend, i think its stupid. If you cash them out and deposit in bank, thats even more stupid.

You forgo the potential interest rate of 3 to 5% but rather earn a pittance of 0.125 to 0.25% in the bank. Isn't that stupid?

Last year, the ecoomy soar to 8.4%. As ERS interest is pegged to our GDP plus if i am not wrong, 3% more. So last year, the interest rate of ERS is 11.4%. 11.4% is about $50++. But if you put your ERS inside the bank, u earn only 0.25% which is i think, a few cents?

I think, in order to make people plan for their finances early. We should start educating them. Merely publish books like money sense and all that are no use, no one will listen. Start off in schools with the kids, after which they go home, they can teach their parents and so on.

After 5 to 10 years of successful education where everybody will know cash isn't king.

They won't be so scared when advisors approach them. And 15 years later, advisors need not to go into the streets and hawk their wares. Instead, people will come and look for them.

That should be the real and truthful image of financial advisors.