Quora Answer: Which Commonly-Given Financial Advice is Misleading?

The following is my answer to a Quora question: “Which commonly-given financial advice is misleading?” 

One of the themes I find on my such answers is this idea that people can do without financial consultants.  Whilst I agree that there are a lot of less than competent financial consultants, that does not mean we can do without them.  Rather, it is important to find the right sort of financial consultant, and a good financial consultant. 

The rest of this answer is specific to Singapore, and how the market functions.  I understand that financial services consultancy does not work the same everywhere, and I am in no position to speak about other places.  In Singapore, the licensing requirements to be a registered financial consultant, and be on MAS’ Registrar of Certified Financial Advisors is very stringent.  Maintaining that license involves fulfilling certain hours in product knowledge, ethics, and changes to the law.  The passing mark for all these papers is at least 80%.  Additionally, there is a Balanced Scorecard Framework to ensure there is no lapse in these standards.  The highest penalty is the loss of license and jail, in addition to fines and penalties. 

That aside, we must understand that financial consultants, whether representing banks, insurers or other financial institutions, specialise.  This is also reflected in their license.  It is, thus, important to find the right sort of financial consultant.  A financial consultant who knows hospitalisation plans intimately, may not be as knowledgeable in investment products, for example. 

Finding the right sort of financial consultant to build a good portfolio is the most important part of the process of liability protection.  You cannot do it by yourself, no matter how some people imagine they can do it, unless you are qualified in that field.  In the same way, an investment banker or forensic accountant cannot possibly be an expert on insurance.  Whilst this is all finance, they are different fields of finance. 

What sets a good financial consultant apart from the crowd is found in the level of service after the purchase of the financial product.  There is no use, for example, in buying an investment product if you do not know how to take advantage of the market, or buying an insurance policy without understanding what you can or cannot claim. 

Another consideration is to buy the right sort of product from the right type of financial institution.  For example, you can buy insurance from a bank, but MAS rules preclude banks from selling insurance, so banks tie up with an insurer.  This means you are paying two levels of distribution cost: the bank and the insurer.  You save from buying from the insurer direct.  In the same vein, if your need is purely investment, it makes no sense to buy an investment-linked product, and pay the unit deducting mortality charges from the insurer. 

If you are buying an investment-linked product, it is important to consider the management fee structure of the underlying fund.  Some insurers are large enough to manage their own fund, so that is one level of management fee.  Some insurers outsource everything, but still charge a substantial management fee so there are two levels of management fees, eating into your gains: the insurer that sold the bundled product, and the fund manager itself.