Seth’s Blog on Finance

Financial Advice and Financial Products

Which do you think is more important – the quality of financial products, or the calibre of your financial adviser and correspondingly the substance of his financial advice?

The obvious answer would be that both are important and go hand in hand together, but the reality is that people put too much emphasis on one over the other.

It is common for people to better relate to financial products, being more concerned with which stock they should purchase next, or which insurance policy has the most bells and whistles. The industry knows this very well, and hence they position themselves accordingly. Their marketing efforts are focused on elaborating on the features of their products, they solicit business with product-centric roadshows (coupled with free gifts), and of course, they remunerate agents with commissions made from product transactions.

While it is definitely necessary for any product to be evaluated before purchase, a financial product’s features are meaningless without considering its suitability for the buyer in question. For example, a hospitalisation policy can have the most competitive features and price in the market, but it may not be the most suitable for a person due to factors like certain medical issues. In fact, hospitalisation policies seem straightforward but can be one of the most complex forms of insurance to deal with. One may well purchase a generally good product but still be worse off for it because the product is not the most suitable for his specific circumstances.

The problem with focussing too much on product features is compounded when most of these agents are experts in sales rather than being experts in the products, much less financial advisers. They highlight the benefits and downplay the downsides in order to make a successful sale. A person who believes he is getting the best deal may have just been hoodwinked into a misinformed purchase.

On the other extreme, there are those who underweight the importance of good financial products and claim that the adviser is the most important. Tied agents representing a single insurance company are most fond of this tenuous assertion, which is not surprising as they have a severe limitation on the range of financial solutions they are able to offer. It is a weak argument since good financial solutions and a capable adviser are not mutually exclusive. Such a claim also begets the question – How does one call himself a good financial adviser when he is unable to deliver quality financial solutions?

To me, the quality of financial advice and financial products are analogous to the ability of a doctor and the quality of his medical supplies and surgical equipment. Even when presented with a well-stocked cabinet of modern medicine, it would be dangerous for laypeople to self-medicate. Along the same line, one better run far far away from anyone who claims to be a good surgeon, but has missing tools in his operating theatre and wields a blunt, perhaps even rusty, scalpel.