I came back today in the afternoon. On the way back, a stewardess chatted with me about her career in flying, and her previous career in DBS. She told me it was much easier for her as a stewardess on short haul flights, which allows her to start work at 5am but be home to look after her kids by noon. In banking, she'd be working from 7 am till 7 pm, 5 and half days a week. I agreed with her totally because so far, my life is mostly work and no life. So much for work-life-balance. I wonder what's the meaning of life if we all work so hard to run the rat race, make a decent living and then retire at 65, only to find that you're too old to do the things you wanted to do, and your health is no longer there. For that reason, I aspire to be financially free and not be reliant on others to determine my fate at an early age.
I ran across an article about the 10 commandments of investing which I wish to share with you.
The first commandment is, "Learn, know and Understand YOURSELF"
http://sg.finance.yahoo.com/photos/the-ten-commandments-of-investing-slideshow/investment-steps-photo-1336460311.html
Many clients tell me that their risk profile is very high. They wish to have the highest possible returns, something like 50 - 60% per year. But they forget that the higher the return, the higher the risk. No adviser is able to totally avoid losses. In fact 80% of advisers will not be able to time the market such that your investments achieve better than benchmark, buy-and-hold returns. But when I ask "what losses you are willing to bear in a year", the answer is drastically different. Most clients cannot tolerate more than 10 - 15% losses in a year. Often, it is the wrong analysis of risk profile that causes clients' to dispute the performance of the advisers.
I also realise that it is better to be more conservative when dealing with clients' money than with my own. This is because clients care more about absolute returns than beating the benchmark. In a bear market, they don't care if you have lost 30% and the benchmark lost 50%. A loss is a loss to clients. Similarly, they also don't care during a bull run that the benchmark achieved 50% and you achieved only 30%. Most clients want stable returns.
Also, there's a syndrome that is predominant in all client-adviser relationships: clients often attribute good performance to themselves but blame the advisers when things go awry.
So to me, it's best to play it safer, not safe. If the client is rated "aggressive", I'd rather notch it down to a "moderate" portfolio.
Fourth commandment: "Find an Adviser"
Research about him. Trust, but verify. Once you trust, let go.
http://sg.finance.yahoo.com/photos/the-ten-commandments-of-investing-slideshow/investment-steps-photo-1336460251.html
Generally, you should find an adviser that is
1. Responsive: it is important, because if you have a sudden change of needs or want orders to be executed, you rely on such a person.
2. VERY EXPERIENCED (read: have gone through many cycles, which usually means over 35 years old), There is no substitute for experience. I lost a lot of money when I started investing at 25. It took me many years to earn back the losses but I've learned many hard lessons about investing since. If your adviser is young, no matter how well educated she is, or worse, she doesn't invest herself, whatever she knows about investing is just theory. Every situation is different and it requires a very mature, emotionally stable person to give proper guidance and make the right decisions.
3. Reads a lot about investments, and preferably is a Chartered Financial Analyst or a Master / Degree in Finance. Experience to me comes first. If an adviser made a lot of money himself, and has a method that's tried and tested, then a CFA or Academic qualifications is unimportant. Still, I'd prefer to be advised by someone with some formal education to show for. The reason is that very few advisers who are already great investors will be willing to be your financial planner. They'd probably be retired by now, running their own hedge fund or be working in a hedge fund house making $300k - $3m per year.
4. Track record is very important because it gives the client some historical performance of the adviser. It is important to segregate the performance of an adviser during bear markets, bull markets and over a 5 year period. This is important because different advisers have different styles. Some are downright reckless and their investments tend to be flying high in bull markets but crash out during bear markets. Some are just cash hoarders, or conservative bond investors regardless of the scenarios. A 5-year track record that often comprises a bull and bear market is a gauge of the adviser over the longer term and in any scenario.
Commandment 5: Resolve conflict of adviser versus fund house versus you:
Cheap is not necessarily good. Many clients in Asia want free advise. But nothing is free in this world and what you perceive you as free could end up costing you your fortune. It's like the medical profession. Doctors in Singapore sometimes prescribe too many drugs because a lot of their income comes from the medicine they sell you. The pharmaceutical companies love to sponsor doctors on trips abroad for pushing the medicine on you. The best thing about doctors is that they can also slap on you consultation fees. I've often been prescribed antibiotics for flu. In NZ, doctors don't sell you medicine. You have to get it from a pharmacy. So all you are charged is a consultation fee and it doesn't come cheap at all. I find that a more honest system. In NZ, if you have a flu, the doctor will just send you home to rest, which is all you need.
Advisers in Europe and the US charge a advisory fee based on the AUM. You can choose to invest with the adviser or you can choose to buy from the internet portal. In Asia, many clients are not as sophisticated. They like to listen for free and then bargain the transparent fees of the products. When they are sold a product that has no stated upfront fee, they assume that it's free when it could actually the most expensive financial product you'd ever invest.
The financial industry and clients need to move towards fee-based advice fast. Because conflict of interests occur when advise is given free. Have you ever attended free investment talks? They always advertise such talks as free, but in the end, the quality of the talk is either found wanting or the speakers end up wanting to sell you some expensive courses or products.
Please wisen up.
Commandment 7. Invest in the best fund houses and schemes:
It's true that only 40% of funds actually beat benchmarks. If you invest with a reputable bank or adviser with a good due diligence team, you can actually increase your odds to 70% of chance that you'd beat the benchmarks with the funds you invest. The problem is most Independent Financial Advisers (IFAs) are very lean firms. The advisers take the most of the commissions, leaving the firm with insufficient resources to hire a big enough due diligence team. This could ultimately cost investors valuable returns.
For banks, the problem is more of the agency problem stated in commandment 5.
All institutions suffer the same problem for commandment 4. Due to a lack of investment advisory talent, the advisers are not experienced or knowledgeable enough. If you invest with an IFA, you have to be very selective with the adviser because many may not have the investment knowledge or experience. Many evolved from the insurance industry. That is not to say that you cannot find good advisers in IFA firms.
In banks, the advisers are even younger, unless you are a private banking client. But you have the luxury of asking to be advised by more experienced specialists or advisers. They tend to have CFAs, Masters in Finance. The relationship manager will help you with the servicing of account (application of mortgages, transaction of trades, credit card applications, risk profiling etc.), so a different set of attributes is important, such as promptness, accuracy, being pleasant, being patient. It is often very difficult to find an adviser who is a guru and have the attributes of a good relationship manager. If you're lucky enough to be a high net worth individual (i.e. over 750k of net assets), it's better to be served by a team rather than by one adviser.
The financial industry in Singapore will evolve slowly, for the better. But in the meantime, clients should ask more questions, verify the facts, read the fine prints, and detect any conflict of interest situations that could cause your adviser to not give you the best advice.
