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For those who’ve been following me for a while, you’ll know that I really think that most Financial Advisors in Singapore have never really moved on from being anything more than insurance salespeople.

This latest post over at Investment Moats show what’s wrong with the Financial Planning industry. While the data collected by Kyith is by no means comprehensive and only shows what has happened many years ago, I highly doubt that the Financial Planners in Singapore today operate very differently from the late 90s/early 00s and I’ll explain why.

Don’t get me wrong

Before I go and point out the issues I see, I want to state upfront that this is by no means targeting the people who have chosen this profession or in any way about any particular financial planner. I personally know a few and they range from very experienced ones to rookies in the field and by and large, they are not bad people.

I also think that insurance is a necessary expense to protect against low probability but high impact events. The problem with the Financial Planning industry is how the industry evolved from dealing primarily with insurance to one that moved into advising their clients on all areas of their finances.

Proof is in the pudding

Source: Investment Moats

If you look at the examples compiled by Investment Moats, you’ll see that most of the plans (which look like endowment plans) are basically plans where people pay a regular premium in return for an amount that gets returned at the of the life of the policy.

In short, it’s a forced savings account that only matures some years down the road.

A cursory look at the returns per year (XIRR) shows that investing in any one of those plans returns any where from 2-4+ % which is my opinion is pretty weak if you think about the fact that interest rates have been much higher in the past.

The worst part of all this is not that the plans delivered as they promised. In fact, if you go back to the 2000s, I’m pretty sure the plans were being marketed with non-guaranteed returns that were much higher, probably in the 5 – 6.5% p.a. range.

A test for all financial planners

I’ve spoken about how the agency problem is a big one for financial planners in Singapore. Furthermore, the barriers to entry into the industry is low and once they are in, the focus on most training is in terms of sales and not actual financial literacy.

If you look at the returns of the above savings plans, you should probably realise that savers could do better by putting their money in the CPF SA*. Using the same parameters given in the example in Kyith’s article, I came up with a figure of $34,569.07 if the yearly premium of $1,228.80 paid over 20 years was compounded at 5% per year.

Compare that with the $28,317.13 received by the policy holder in Kyith’s story.

Therefore, my test is this:

If presented with a plan by your financial planner, ask them how many of their plans have actually paid the non-guaranteed rate or more and to show you the data.

Given the low-interest rate environments, if any of the plans presented show you non-guaranteed returns close to 5% p.a., you should run and hide.

And if they show you returns of less than that, then why bother since CPF presently gives you that returns but without the additional corporate risk and fees?**

If you have a financial planner that is willing to say, “hey, you can get protection from me, but when it comes to savings, my products aren’t exactly going to be the best bang for your buck.”, then do let me know.

Notes:
*Less chance of default, almost equally long period where money gets socked away.

**I’m sure some of them will point out that the lower returns are due to the plans having some form of insurance as well. But if so, then why not just sell the insurance separately without the savings plan.