Sunday, 8 July 2012

Importance of Financial Literacy

Recently MAS had released its Mystery Shopping survey, where people posed as ordinary customers and made 500 trips, seeking financial advices from representatives of 11 banks and four insurance companies. 

Hey are the key findings of 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 clients and his/her financial advisers. Of the top 3 categories of products recommended, all of them are associated with higher commissions for the financial advisers. The failure to conduct a comprehensive fact finding also suggest the lack of incentives to put customer's interest as priority.

Do note that I'm not advocating one to shun from financial advisers completely as most people will either lack the time, interest or the ability to plan for themselves financially. However, it is of paramount importance to be financial literate in order to determine if your financial adviser is genuinely taking care of your interest or he/she is just hungry from 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 find out that you have lose 20% 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 advices given to you by asking yourself: Does what the financial adviser recommends fit my profile?


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