A reader sent me a link to the following article by Larry Haverkamp in Dr Money (Dr Money is a column in the Electric New Paper in Singapore):
In this article, Larry raised some points that probably reflects the state of financial awareness in Singapore. Ask any FA or IFA for advice and if you are not sharp, you could end up being recommended products that are biased on the basis of more commissions to the FA. Here are some of the points in the article:
# 1 MoneySense (MS): Why is this product suitable for me?
Doctor Money’s question (Doc): Does this product help me OR does it merely help the financial adviser meet his product quotas?
Many advisers face a conflict. They quickly exhaust their monthly quota for selling low-margin products like unit trusts and single-premium ILPs (investment-linked products).
After that, in order to earn a living, they need to sell expensive, high-margin products like whole-life, endowment and structured investments.
If this is what they want you to buy, ask about their product quotas.
# 2 MS: What type of product is it? Is it a life insurance policy, unit trust or structured product? Is it for savings, investment or insurance?
Doc: Financial products typically make it difficult to learn their costs.
For insurance, ask how many months of premiums are required for you to pay the distribution costs (commissions)?
How does this compare to charges by the other 10 life insurers?
# 3 MS: What benefit does it offer? Which are guaranteed and which are not?
Doc: Take whole-life and endowment including education policies (WLEE). These popular products look safe.
You will never see a loss on the policy statements your insurance company sends you.
But distribution costs are high and it can take up to 20 years to break even, so you’ll lose money if you redeem before year 20. Isn’t that high risk?
# 6 MS: What are the various fees and charges?
Doc: Unit trusts and ILPs reveal their management fees. But WLEE policies do not. How are policyholders to know if they are being over-charged?
Advanced question: How does the insurer split shared costs – like overheads – between the policyholders’ and the shareholders’ funds? How can a policyholder know if the split is fair?
# 7 MS: Is the financial adviser regulated by the Monetary Authority of Singapore?
Doc: Even regulated advisers have conflicts of interest. Ask yours to rank the products he sells according to commissions earned. Make sure he includes trailer fees. Ask him to reveal his product quotas too.
This article reminds me of the online Singapore-based unit trust forum where, in my opinion, a certain IFA and his protege (to a certain extend), are strong peddlers of certain whole life policies and bashers of term policies (to implement buy-term-invest-the-rest).
Surely, whole life and term policies have their places for different people, but if you have IFAs, who are supposed to act in the client’s interest, expressed the implied opinion that term policies are categorically never recommended for anyone (unless specifically requested by the client himself/herself), something is very wrong. The article by Dr Money certainly sounds a cautionary note for people to keep their eyes open, look past the sweet talk and free gifts, and ask a lot of questions when buying financial products, whether it is from an “IFA” or not.