Sunday, 8 July 2012

Importance of Financial Literacy

MAS had published the finding from a recent Mystery Shopping survey, where mystery shoppers posed as ordinary customers and made 500 trips to financial institutions, seeking financial advises from representatives at 11 banks and four insurance companies. 

Hey are the key findings from the survey:
(i) Fact-find
Fact-find was carried out in the bulk of the visits but the extent of information collected from the shoppers was inadequate.  Most representatives obtained information on the shoppers’ personal particulars and employment but other pertinent information such as the shoppers’ investment experience, financial objectives, risk preferences and financial situation were less frequently gathered.  Failure to conduct a comprehensive fact-find impedes the ability of representatives to make suitable recommendations.  

(ii) Product Disclosure
Most representatives disclosed basic information about the products recommended.  These include explanation on whether the product is meant for protection, savings or investment.  However, disclosures on risk factors, amount and frequency of fees and charges, warnings, exclusions and caveats, as well as the free-look period were omitted in a significant number of advisory sessions.  Inadequate disclosures may result in consumers making poor investment decisions due to lack of understanding of the product’s features and risks.

(iii) Product Suitability
The top three categories of products recommended were endowment insurance policies, unit trusts and investment-linked life policies.  Almost a third of the product recommendations were assessed by the industry panel as unsuitable.  The main reasons cited were that the products recommended did not match the shoppers’ financial objective or their stated investment horizon.

In general, I believe that there will always be some form of conflict in interests between the financial well-being of the clients and his/her financial advisers. Of the top 3 categories of products recommended, all of them were high commission products. The failure to conduct a comprehensive fact-find also suggests the lack of incentives to put customer's interest first.

Do note that I'm not advocating one to shun from financial advisers completely - many people either lack the time, interest or the ability to plan for themselves financially. However, it is essential to build basic financial literacy in order to determine if your financial adviser is genuinely taking care of your interest or is he/she just going after your commissions. One can start by answering the questions found in part (i) yourselves:
  • What is your financial objectives? Is it for marriage, purchasing of houses, or retirement?
  • What is your risk tolerance? How will you take it if you lose X% of your capital? 
  • What is your Time horizon? Do you need the money in 5/10/15 years time? 
These are the questions that you need to be able to answer yourself before you approach any financial advisers. After all, if you yourself do know know what you want, then nobody else does. And you may use these questions as a gauge to measure the quality of advises by asking yourself: Does what the financial adviser recommends fit my profile?

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