Smart Investor, August, 2002

Take My Advice

You can have products and premiums coming out of your ears but unless you understand what they all do and how they fit together, your best-laid plans could go to waste. Sitting down for a long, hard think with an independent adviser could help straighten things out. Nicholas Briggs pulls up a chair with Joseph Chong, managing director of New Independent, and finds out more.

Joseph Chong is not particularly impressed with the quality of financial planning advice offered to Singaporeans. "If you are a financial planner," he asks, "who do you represent? What does it say in all the handbooks and codes of ethics? As a tied agent, legally speaking, you represent your principal but how can you legally represent your principal and at the same time do financial planning?"

That, of course, is the central paradox upon which retail banks and large insurance brokers rest. Both sell a lot of products, but they do not necessarily sell them as part of a plan. The Financial Advisers Act (FAA) will force them to find out more about their customers' needs and circumstances, as well as disclosing their interest in certain products and services, but if you want independent advice from an agent who isn't tied to their employer you will have to look elsewhere.

Can't get no satisfaction

Still, the FAA is a step in the right direction. "By imposing certain disclosure standards, the MAS is doing the right thing," believes Mr Chong. "If you keep your standards low, no one has any incentive to achieve and the public will always be dissatisfied." Co-founder of the First Independent financial advisers firm, it was Mr Chong's own dissatisfaction with "product-push masquerading as financial planning" that led him to start out on his own two years ago. When First Independent was bought in 2001, there followed New Independent.

Visit the firm's office on Tanjong Pagar Road and Mr Chong, along with executive director Jason Teoh and principal officer Jason Goh, will tell you that a financial plan comes at a price. "We tell our clients that if you really want a proper plan then it costs you money," confirms Mr Chong. "It's a very time-consuming thing - they see some of our plans and we show them what we can achieve."

"We don't product push," he states unequivocally. "Product sales come about as the result of plans." Those plans incorporate an assessment of the client's financial goals, their risk appetite and, crucially, their existing holdings and policies. It is rare to come across a person who has not given their financial future a thought beyond how to pay next month's telephone bill - most Singaporeans have tried to plan ahead but have taken wrong turns. "Singaporeans are generally under insured or, rather, wrongly insured - they pay a lot of insurance premiums but they don't realise what they've bought," Mr Chong observes. "Many of them think they have bought a protection product when they've actually bought an endowment product - they confuse whole-life with term and are unclear as to what constitutes critical illness."

Comparing insurance products and assessing their suitability is a time-consuming exercise, even before you attempt to envisage how easily various coverage schemes will fit in with your other financial commitments. "If you go to an insurance agent from company A they will tell you one thing, company B, another. The advice that comes back, however, will always be this: buy more. With us it's different. You pay us a fee because we look at what is right for you. We teach clients to understand the products that they have bought from different companies."

Don't take your eye off the prize

Understanding financial products, what they offer and how they affect your risk profile, is clearly of paramount importance when planning your future, but it is easy to be distracted. If you have ever let `free' gifts and fast talking cloud your judgment, you are by no means alone. "Many Singaporeans have bought unit trusts in the last four or five years, using their CPF savings or cash, on the basis of a promotion. Either you can get a discount or a PDA. What has a PDA got to do with your future?"

"We find many, many portfolios consisting of funds bought on promotion," Mr Chong reiterates. "There's no advisory, no structuring, no consideration of what other assets a client has outside their portfolio. That isn't financial planning, that's just selling. I think some institutions are lucky that Singaporeans are not very litigious." The best way to avoid court action is, of course, to pay close attention to a customer's requirements and present products in a transparent way, ensuring that the client remains well-informed or, at the very least, making sure that they are aware of any risks being taken with their money.

"You have to analyse the situation and create a solution for the client," believes Mr Chong. "We focus on getting our advice right. Under the FAA we are required to have a certain level of indemnity insurance - $500,000 - but our intent is to make sure that's never called. If you talk to any of our financial advisers here, their financial planning approach is consistent throughout the house. Everybody speaks with the same voice and uses the same techniques."

One approach that New Independent's team can't use quite yet is the NI Wrap, which combines a number of investment tools into one strategy. "The NI Wrap is ready, but we can't move," Mr Chong says. "The rocket is ready, the moon is there, but we can't fire!" That's because current legislation insists on a division between those who operate under an investment licence and those, like New Independent, who chose the direct life assurance licence. The NI Wrap is essentially a fund management tool that will be offered to clients just as soon as the FAA is implemented. Then, financial advisers will be able to act as `incidental' fund managers, offering customers access to unit trusts, hedge funds and the like, while also being able to charge a fee. "It's very important for us to have independent access to a wide range of products and services because we don't have everything in house," says Mr Chong. "That gives us the maximum flexibility to design the most accurate and objective financial solutions for our clients, not to push more products. This is the aim of financial planning."

Finding products is not a problem, though in the past smaller product manufacturers and foreign firms have found it difficult to penetrate a web of tied agents and the distribution networks that they dominate. "For us, as an independent financial adviser [IFA], it doesn't really matter if you're a new manufacturer or not- if your product is good, we will show our client and recommend it," Mr Chong assures.

Thinking big

But even if the FAA does not significantly alter New Independent's product list, it will certainly affect their progress. "The FAA will allow people like ourselves [IFAs] to blossom. After the Act, you can bet that this firm is going to continue growing. On a core basis we are already cash flow positive. Our business has grown almost 70% from April to May, and it doubled from March to April. We appear to be growing at a rate of 50% to 60% every month."

Clearly, there is money to be made, for advisers and their clients alike, but not every firm will prosper. "I think initially the financial advisory market will be fragmented, but by the end of five years it will consolidate to around five or six large players," Mr Chong predicts. "There will be no middle - they will get crushed. They don't have the scale to operate a large operation and at the same time they don't have the flexibility. We hope to be one of the large ones."

In keeping with that plan, five years from now Mr Chong hopes that New Independent will have some 200 to 250 advisers, rather more than the 15 advisers and five corporate support staff at the firm now. "That should enable us to float by then. We think that in five years' time a lot of people will start throwing in the towel, so we need to be able to acquire, whether through cash or through stocks. The plan is three-fold: the acquisition of currency; the incentivisation of management; and allowing shareholders to exit if they choose to."

Plans for expansion are by no means limited to Singapore, as Mr Chong already has his eye on China. "We expect that in five to ten years' time the Chinese market will open up to allow insurance brokers and independent financial advisers to operate." If New Independent is to continue its progress and become an international firm, its advisers will have to be on their toes, but Mr Chong is confident. "Financial advice is a moving target. Our software is getting better and better, and our business model is improving every day, so as banks and large insurance brokers catch up we move ahead again." Change, it seems, will come. "We evolve very rapidly and remain nimble. We don't bother with intelligence operations to see what the others are doing because the competition is with ourselves."