06 November 2011

Read This before Buying any Financial or Investment Products

A recent read of The Millionaire Teacher: Nine Rules of Wealth You Should Have Learned in School got me thinking on the prevalent conflict of interest in the financial industry selling you financial products in Malaysia. The author, Andrew Hallam ultimately delivers a smack down to financial agents who is selling you hideously expensive financial products, earning them fat commissions at the expense of your real investment return.

Layeth the smacketh down - ala The Rock

But that's how product sales in financial industry operates, like it or not.

Why is this so important in Malaysia?
Because the managed funds available are almost all front-loaded. This means you pay the financial agent and their investment companies upfront before earning a single cent.

The main selling point of any financial product is laser focused on their potential gain, but most people only see one side of the coin; they don't realize higher potential return equates higher risk. 

There is no free lunch in the world.

Statistically speaking, we end up buying financial products and solutions from someone we like or trust anyway. 

This is not wrong.

But it just isn't right if we base it solely on this factor.

Your financial agents
Financial agents in Malaysia are divided into 3 types:
  1. Tied financial agents - agents attached to an institution agency force. Example, insurance personnel, Public Mutual unit trust consultant, your bank's friendly personal financial advisor. Product focused. Fully commission-based compensation.
  2. Independent financial advisers(IFA) - personnel providing comprehensive financial solutions, which includes value-added advisory service (investment needs analysis, tailored financial plan, wills writing, retirement planning) and financial products (insurance, investment ). Nominal fees compensation; largely commission-based compensation.
  3. Financial coach/counsellor - personnel providing high degree of personal interaction and involvement to assist a client in financial awareness and profiling in order to achieve financial independence. Fully fees-based compensation. 
Conflict of interest severity rating: #1(High)  #2(Medium)  #3(Low/Nil)

#3 is the hardest to pull off, and far and between. The successful person that comes to mind is Carol Yip, whom money seminar I attended earlier this year. Carol calls herself, a Money Activist whose organization provides unconventional financial advisory services, keynote presentations, training and workshops that are designed with the application of human psychology into money matters. Basically, no products sale.
#2 is still in its infancy stage in Malaysia; Singapore- there are aplenty. Fin Freedom and Standard Financial Planner (SFP) come to mind. Full time advisers in this category will take a comprehensive evaluation on your financial position and your financial goals, identify the gaps and finally propose one or more financial solutions (consist of multiple financial products tailored to your needs) to help you achieve your goals. Emphasis on long term engagement with the client. 
#1 is what your uncle, your ex colleague, the cute lady next door and even college students are involved in, mostly part time basis. Chances are, throw a stone from your apartment's balcony and it is very likely you will hit a  tied agent below. Malaysia Market is simply saturated with tied agents. Some may find that being a tied agent complements their main income quite well, while others may find it highly lucrative to the extent of going full time. Bear in mind that part time agents normally can't be expected to serve you diligently.

The paradox of "having your best financial interest in mind"

#2 and #1 will never have your best interest in mind.
Especially #1.

It's not their fault.
It's not their money.
It's yours.
It's your responsibility, not theirs. 
No one will ever have your best financial interest in mind better than yourself. Period.

If you walk into a bank, and asked the full-of-smile financial advisor to recommend you the investment product with the highest potential return, who is to blame if you realize you are being charged a 10% fees over your 6% investment return?
Answer: Your own ignorance

Can you guarantee your agent is going to serve you diligently after the sales even if you don't buy additional products?
Answer: No

Then why pay 6% upfront commission while you just need to pay 2% commission via online platform (FundSupermart) to invest in the same unit trust?
Answer: Because you don't know how, don't know what you want, don't have time, don't care and don't want to ask.

I am 200% sure this is not the attitude you adopt in your professional career, so why be so when it comes to your own money.

Provided you still care about your wealth and future. You do, right?

#2 versus #1
I am not lashing out at #1 - tied agents. 

There are certainly good #1 out there, but most of the people I know have experience of being approached persistently by #1 (who happen to be a friend or colleague), closing the sale and never be heard again. Only to see their investment plunge in 2008. 

We reiterate this - #1s are trained extensively on the art of sale, not on having your best financial interest in mind. How to close a deal, how to deal with a resisting customer, motivation talks, etc. 

I am not saying that #1s are not competent in financial concepts or in analyzing client's financial needs. They can be just as competent, if not more, compared to #2. But I would still refer you as tied agent if your eligibility for commission vanishes once you switch agency.

Here's another story on #1. 

I spoke to one of my CFP classmate cum ex-colleague recently. He once witnessed that an advisor at a bank was advising an old couple into investing in equity fund. 
The couple has no idea what they are getting into - the risk involved, considering their age.

Senior writer of Personal Money, Celine Tan has this to say on her previous stint of being a unit trust consultant:
"Although it was 'lucrative', I felt lack of self-achievement as the client base was not totally mine (despite me putting all efforts to serve the clients)."

Even you are #1, there are people I know which will go to that extra mile to provide value added services/advices to their clients. This is how real good agents differentiate themselves from the pack.


Conversely, #2 would normally start with advisor fees, which sound alien to most people. But it could be worth every cents because if you are with an ethical FA, you will be made more aware of your financial position and needs before committing to any investment decisions. However, paying a fees just for advice is almost unheard of for many Malaysians, so this is not a viable business model to make a living. And as a client, you still need to make your own investment decision, after evaluating your options -which is a chore for most people.

It is normally harder to start as #2 unless one has a mentor or coach. Or one is an established figure already in the industry.

So now, you decide if it is worth to compensate #2 upfront for a financial plan which take your financial needs into account than the modus operandi of a #1.

Financial agents are not different from us, decent (hopefully!) people who's making a living.  He has to sell you products - he got a family to feed too!. Not to mention his sales quota, else he's out of job if he cannot achieve it in 2 years. 

But our own ignorance is certainly not bliss here.

So what can you responsibly do?
Get educated on personal financial concepts. Do your homework. Evaluate your financial needs and gaps. Then engage your financial agents. Show him or her what you got. Let them earn their commission, but always strive to minimize your investment cost before we even talk earning a return. Read the fine prints. Read between the lines. Believe me, whichever type of financial agents you choose to engage in the future, he or she would definitely have more respect for you. 


  1. You forget another number #4, which is the abundance of information gathered from the world wide web such as personal blogs, forums out there (your blog is one of them :p). I called number #4 as collective thoughts/wisdom. Since most blogs are just expression of the authors, no product selling, etc . The content info are more genuine as an effort to share information.

    Of course like any advice regardless of free or paid, always use some sound and wise judgement. Wisdom can be gained through knowledge, experience and exposure. Hence always learn and read alot.

    I agree that the independant financial adviser industry in Malaysia is relatively young. It is quite popular in Singapore as the average networth there is quite high..heck they have the highest ratio of millionaires in the world.


  2. Ha ha good one Kris, we are agents aye?
    I think it is a sun-rise industry, since the trend is, we lag Singapore about a decade or so. Even tied agents are slowly evolving, they can't be providing single-spectrum service only these days.

  3. I am not an agent though :P

    I just like to read and analyze stuff like a typical engineer :P

    We need to think out of the box even in the financial world. That is why I see a lot of engineers transition & venture into the finance industry as consultants, financial planner, brokers, etc or even into the business world.

    Maybe this shows that engineering world cannot be a lucrative job/career for the majority of people. As with any industry , the top of the pyramid is very small in number.

  4. Nice one! Is there a #5 one who is yourself? Btw,

    Btw Kris, there are quite number of engineers transition into the finance industry but they're generally still minority. :D

  5. @ChampDog, what category is #5? lol..

  6. ChampDog, perhaps, you mean we are all #4 as stated by Kris previously :D


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