FundSupermart, 2002

THE ART OF THE BUSINESS

JOSEPH CHONG, MANAGING DIRECTOR AND CO-FOUNDER OF NEW INDEPENDENT, SAYS HE HAS GOT A HANDLE ON THE FINANCIAL PLANNING BUSINESS AND THAT IS WHY WE SHOULD GO TO HIS COMPANY AND NO OTHER.

"WHEN YOU WANT TO BUILD A HOUSE, you employ an architect and you just pay the architect fees. It's stupid to stinge on (the) architect's fees because you'll get a half-hearted architect who'll design a bad house. In the end, you would have put in millions of dollars to build a home and you'll have something that looks like an eyesore. Same thing for financial planning." During our one-hour chat, Joseph Chong has likened financial planning to architecture, a Hollywood movie and even an appendectomy. His natural ability for similes and metaphors must have gained him favor with the local press, establishing him as an unofficial spokesperson for the financial services industry in Singapore. Joseph Chong is certainly no stranger to industry players and followers.

When Chong is not giving interviews or contributing to the forum pages, he manages New Independent, a financial planning company that he co-founded. New Independent is a reincarnation of sorts of First Independent, Chong's first entrepreneurial foray. First Independent was a joint venture with Lum Chang Securities, now part of DBS Vickers, and was acquired by DBS Vickers a year into its existence. Chong was reticent on the subject of his maiden company Choosing to take the philosophical tack, he revealed only that, "This is life, there's nothing you can do to replay what you've done and correct it ... But one year as an entrepreneur is equal to 5 years in corporate life." Attempts to probe further stonewalled. "I could tell you but I've got to shoot you after that."

Deciding that no job was worth dying for, I wisely moved on to his years as an engineer before he crossed over into the finance industry. Chong was, as he put it, "a bonded servant of the government of Singapore" and he served his tenure chiefly in the Ministry of Defence, capping his final years there by helping to set up a research unit in what was then called the Defence Science Technology. He caused quite a stir when he finally decided to leave the ministry. "People thought I did it in a moment of madness because I was one of the youngest heads ... But I had a good offer to join the fund management industry and I took it up. Maybe it's mid-life crisis!"

Mid-life crisis or astute planning, Chong got the job at UOB Asset Management (UOBAM) by proving that he could be as good as the next fund manager, if not better. He did that by showing actual results of a "small little portfolio" that he had been managing for his family. "I think they liked my picks. The existing portfolio looked very much like what they had inside their own portfolios." At UOBAM, Chong was Portfolio Manager of the award winning United Global Capital Fund. After his stint as fund manager, Chong moved to UOB's consumer banking division and took on financial planning. It was then that he "had meeting of minds" with Lum Chang Securities and eventually left UOB to start First Independent.

Although his first venture did not quite turn out the way he would have preferred, he remains optimistic about his second. "I'm a small little boat, and these are very large ships out there; the difference is that the wind is in my direction. They are sailing in the opposite direction of the wind (but) I've the wind on my quarter. If you look at who can travel faster, it's going to be pretty obvious. Overtime, I'll just create more mileage between us and them."

MAGGIE NG: I'LL JUST BEGIN WITH TODAY'S NEWS ABOUI THE FA LICENSING STARTING ON 1 OCT. WHAT IS YOUR REACTION TO THAT?
JOSEPH CHONG: Well, I think there have been a number of delays but it's finally here. I think credit must be given to the MAS for giving the final push. But I think it'll be a whole new ball game after 1 Oct. The analogy is very much like the movie 'Deep Impact'. Before something like that hits you, you don't feel it, you don't see it; you won't know what it is basically. First of all, it opens a whole new range of competitors for the incumbents, but at the same time, the days of getting uncertified people to hawk unit trusts are over. MAS is quite clear that you can't do as what you've done previously. You've got to comply, the people will all have to pass exams, no exemptions ...I don't know how the banks are going to handle it. How are they going to check on compliance? With 20 odd branches, how can the center check what's going on at Jurong East? So it's (the Financial Advisers Act) going to have a whole new impact and one year from now, if we do speak again, you'll probably ask me very different questions. In one year's time, it will become very clear what the consequences of the asteroid impact will be.

MN: BUT AT THE MOMENT, ONLY PEOPLE IN THE INDUSTRY ARE FEELING THE IMPACT. A LOT OF CONSUMERS DON'T EVEN KNOW WHAT THE FAA IS ALL ABOUT. HOW SOON DO YOU THINK PEOPLE ON THE GROUND WILL START FEELING IT?
JC: Recently, there were some studies commissioned by some insurance companies as well as banks that were published. They were supposedly in favour of the banks or insurance agents versus the IFAs. I think one was done by a labour-linked insurance company, which showed that most people still prefer insurance agents to do their insurance plans for them. The ratio wasn't so exceptional, it was like 4 (banks/insurance agents) to 2 (IFAs) or 2 to 1. But it you look at the number of IFAs in the market compared to the number of insurance agents, the ratio is 20 to 1. So you have a disproportionate mind share. Doesn't that tell you something? That even before things have started, we already have a mind share! Now, I would think that that's a report that is actually very damning for the banks.

MN: BUT THESE IFAs WAS THAT YOU ARE TALKING ABOUT ARE ONLY SELLING INSURANCE AT THE MOMENT, ISN'T IT?
JC: Yah, they are very tiny, only some of them are doing investment but already their impact is disproportionate.

MN: HOW DO YOU ACCOUNT FOR THAT MIND SHARE?
JC: I don't know... maybe because we have done a good job and word has spread around. Let's put it this way, we don't pay the press to give us publicity but it's a well-known fact that some of us speak our minds and we say things, which make sense. People read the newspapers, they know that this is the way going forward.

MN: WE'VE TALKED ABOUT THE POSITIVE DEVELOPMENTS, BUT WHAT DO YOU THINK ARE THE HURDLES AHEAD?
JC: One of the major hurdles has been crossed and that is legislation. That's the key to capital and management expertise flowing to the IFAs. If legislation is very clear, this would get people moving again but before that, why take the risk of moving to become an IFA if legislation is not clear! Secondly, it's the flow of talent into the industry. I've got people from the fund management industry asking me:' Can we do this business?' They don't want to move right now until it's clear, you see. I guess these people would be competitors to us but overall, it's good for the industry. Of course, going forward, for the IFA market to bloom, you need capital to flow. Not much because it's not a capital intensive business, but you need to upgrade, train, expand and all that.

MN: WHAT SORT OF SERVICES CAN WE EXPECT FROM NEW INDEPENDENT AFTER YOU'VE OBTAINED YOUR LICENSE?
JC: Everything except foreign currency trading, futures trading and we'll of course not collect deposits or lend money because we can't. All sorts of investments, all sorts of insurances including general insurance, liability management which is your loan restructuring, then of course with our partners outside, tax and estate planning¡K

MN: I THINK MANY PEOPLE WILL BE INTERESTED IN HOW YOU WILL BE CHARGING FOR YOUR SERVICES.
JC: You know for us, we believe in giving the clients the freedom of choice, not only in terms of product range but also in the solutions that we provide. You can either pay us full fees and we rebate all the commissions that we can legally rebate back to you, or a structure whereby clients pay a fee and any commissions that are generated through the recommendations are paid to us. If you have a full fee structure it'll be very expensive for the clients, so sometimes clients may start off with a full fee structure and convert into fees and commissions. But of course, for every type of service we have a template of fees. The choice is the client's.

MN: WHAT ABOUT A STRUCTURE OF PURE COMMISSIONS INVOLVING NO FEES?
JC: Well, that can happen also because some clients do not need any advice, they just want to implement at the cheapest possible costs. So we function as a broker in that sense.

MN: BUT DO YOU THINK FEES WILL PUT PEOPLE OFF?
JC: No, I don't think so. Lawyers have been collecting fees for years; accountants have been collecting fees for years. I don't think that there's a problem. In fact, we're actually doing sub-contract work for lawyers, advising lawyers on divorce cases and we charge an hourly fee.

MN: BUT AT THE MOMENT DO YOU SEE MORE OF THE HIGH NET WORTH CLIENTS BEING MORE RECEPTIVE TO FEES THAN OTHER SEGMENTS OF THE MARKET?
JC: The definition of what high net worth means of course is essential. I think one has to look at it in perspective. I will look at it more on the need basis. If a person has not much net worth but the issue has very dire consequences for him if he doesn't do it right, he would come to a financial adviser and we charge a fee for that. It could be a situation whereby you bought, say a mobile phone for $50, a second-hand one and it so happened that it is faulty. For $50, will you go to court? Even if you're very rich you will not go to court unless you've money to burn and you have an axe to grind. It's the same thing with financial planning. Generally, it's the people with a bit more money that the consequences are more severe if they don't do it right. The segment of the population who has not much to plan for or prefers for the government to plan for them because they are unable to do it themselves, or can't afford it, then there's no market there.

MN: BUT FOR SO MANY YEARS PEOPLE HAVE BEEN DEALING WITH INSURANCE AGENTS, NOT THAT I HAVE STATISTICAL SUPPORT BUT MOST PEOPLE'S FINANCIAL PLANNING PROBABLY STOP AT INSURANCE. AND THEY ARE NOT ACCUSTOMED TO PAYING THEIR INSURANCE AGENTS FEES. DO YOU FORSEE...
JC: Well, we earned $8,000 in fees last month from a few clients.

MN: IS THAT GOOD OR BAD OR ... WHAT?
JC: That's a normal month. Let's put it this way. If you need your appendix taken out, will you go to someone who charges you nothing? But you must use this type of surgical equipment, you must use this type of drugs from this company only. Or you go to a doctor who has a wide choice and says: `Look, the surgery costs money, costs my time and I will choose the best for you.' What will you choose? It's the same thing! We can explain to the clients the value that we provide, that this should be the way it should be done but the market is such because of tied agency force, banks and other financial institutions. When they do a financial plan, it's for the sole purpose of determining how much money they can take from you! But actually, financial planning is not that, it's all about trying to create value for your clients! It's about how to create value from what the clients have, how to pluck the low hanging fruit.

MN: SO THAT SETS YOU APART FROM...
JC: All the rest!

MN: BUT I HAVE ALSO HEARD FROM THE REST, THINGS LIKE 'WE PUT OUR CLIENTS' INTERESTS FIRST, 'WE CAN CREATE VALUE', BECAUSE THAT IS YOUR SELLING POINT, ISN'T IT! BUT HOW DO I KNOW WHO CAN REALLY DO IT?
JC: But how do they create their value? By selling you more insurance? Here I'm telling you very concrete examples of how we create value. For that matter if you have 2 loans, an investment property loan and a home loan, how do you optimize taxation with that? You can! We've done it before; we've done it many times. We shuffle the assets for the clients and they pay us a fee. The tax goes down, we get our fees, he's very happy! What we do is that we put money in the pockets of the clients first. That's what financial planning is all about - you try and put money in the client's pockets before you start anything else.

MN: WHAT ARE THE THINGS THAT CONSUMERS SHOULD LOOK OUT FOR IN CHOOSING A FINANCIAL PLANNER FOR THEMSELVES?
JC: My advice is that your first choice should be somebody who's independent, who's not tied to any bank or financial institution. The reason is because, let's face it, if you go to any bank and if that bank has sold you a mortgage, do you think the bank will ever tell you how to restructure it? Or for that matter if you've taken a big loan from the bank to buy a property, will the bank ever teach you how to minimize the impact of bankruptcy? We have one case pending right now whereby the client has actually guaranteed somebody else's business; he is very high net worth. Now he's worried because the business is not doing well! If he goes to the bank, they won't tell him how to do it. But we are telling him how to do it - how to construct something that if everything goes wrong, the bank only gets a little bit but not everything. I need to clarify one thing. Independence does not necessarily make a good financial adviser. But it is one of the necessary ingredients for that to be sustainable in the long run. Then you need to look at the person's track record and of course the company, which the person is with. It's important that you have a track record. And then of course, in the end, you have to look at the adviser. The adviser has got to be competent. Basically, he has to have all the right regulatory qualifications, at the same time you need to find out how many plans he has done. And how many of these have been paying him fees? If people pay fees they are serious - plan done, plan paid for, plan implemented.

MN: BACK TO INDEPENDENCE, THERE SEEMS TO BE QUITE A FEW DEFINITIONS OF THE WORD IN THE MARKET AND MAS HAS COME OUT WITH THE OFFICIAL ONE, WHICH IS A BIT VAGUE. WHAT DO YOU THINK OF THE MAS DEFINITION?
JC: We're actually in full agreement with the way MAS has done the regulations on independence. They leave it intentionally vague because you don't want to have a prescriptive approach because prescriptive approaches tend to tempt the ingenuity of people to get around regulations. Recently, MAS came out to say that they're not regulating the words `financial planning' but they're regulating 'Independence'. You know what some insurance agents have done? They've got a card, their company names are there, and they add in the words, 'Independent Financial Planner'.

MN: ARE THEY ALLOWED TO DO THAT?
JC: Yes, until recently when MAS came out and said that this is going against the spirit of the term 'independence'. If you're a tied agent you can't use 'independent' or any other such moniker! So what happens is that they pass the plans to the clients, the clients think that they are independent but how come the products are all from the same company? But they are already in the door! The clients have been deceived, so to speak! So if you have a prescriptive approach, people will go around it! If you have a broad framework first, this gives them (MAS) the leeway to see who's within the framework and who's not within the framework.

MN: I SUPPOSE THE ONUS THEN FALLS ON YOU TO PROVE YOUR INDEPENDENCE.
JC: Yes, and we are prepared to do that.

MN: WHAT ARE THE PROCESSES THAT YOU HAVE PUT IN PLACE FOR THAT?
JC: First of all, we give clients a choice on how they want to pay us. We can't force clients to pay us a fee only because it'll be counter-productive. So we tell them what the fee structure is and we also make it very clear to the clients if we do get commissions, how we are being compensated. The other thing is we're very open with the clients. How much business we do with each product manufacturer; you want to know? Here. You want to know how independent we are. Here.

MN: HAVE YOU EVER REJECTED A CASE?
JC: Yes, we have. In cases where we believe that there could be some implications on ourselves because we notice that there're obvious tax evasions, we will not get involved. It's a grey area. As financial advisers, are we supposed to report this to the authorities or not? What if it isn't and the client turns around and sues us? And if we accept the case, we would be implicated, entangled in that. Our market is not really high net worth market, clients with more than 10 million net worth. We tend to avoid this type of clients, because they would have been very spoilt by the private banking market. This type of clients, there are about 10 private bankers chasing after one client. There have been some cases where we didn't take an upfront fee and we were made to do a lot of work with the carrot of a few million dollars dangled before us. In the end we got nothing, not even a thank you! In fact, one client made us bid on our own portfolio against ourselves. He said, 'Look, you're charging this much, my private banker said he can charge me cheaper on the same portfolio.' Damn it, it's our portfolio! Of course, it was painful but we chose not to bid on it. 'But don't ever show up at our office again', I told the client. I don't think that's very ethical. That's why we think that people who give valuable advice, who don't charge an upfront fee for it, are committing suicide. Somebody else will come in and just undercut you on your advice! Implementation is easy, it's a no-brainer! The key is how do you get that solution and somebody has to pay for it! Otherwise, how do people survive!

MN: HOW DO YOU PREVENT THAT FROM HAPPENING AGAIN?
JC: Our pricing and fee structure takes care of that. Unfortunately, I find it very difficult to divulge everything because I'll be educating our competitors. But we have been taught some hard lessons on this. If you want ongoing service you pay ongoing fees, if you want one-off advice we can give you one-off advice and we can price it. If you want to buy a product without any advice, there's also another price for it. Otherwise you die in this business! You're dead!

MN: WHAT DO YOU THINK OF THOSE COMPANIES THAT ARE NOT CHARGING FEES?
JC: Well, they won't last long. A lot of people are confused about this fee thing and we're very happy that people are confused. In fact, the more confused the market is the better it is! I'm not saying that we've got it completely right but we've got a good handle on the fee issue.

MN: WHERE DO YOU SEE YOUR COMPANY IN 5 YEARS' TIME?
JC: In 5 years' time we would have grown enough to be floated. I've no hang-ups about floating the company because I don't have 51% of the company, only 40% and I don't intend to pass it down to my daughter. She can make her own way in life. I think flotation is important because it serves to incentivise management and staff. No point giving people shares of a private company, it has to be a public company. I think that we can actually use the stock as acquisition currency. If you have a good business model, you can translate it and it can go wherever you want it to go.

BY MAGGIE NG.