Seth’s Blog on Finance

Not so Obvious Reasons to Start Planning Sooner Rather Than Later

There are quite a few obvious and oft-repeated reasons why people should start financial planning now: insurance premiums increase when one decides to get it at an older age; health problems may set in making it more difficult to get insurance coverage; investing early allows one to enjoy the full magnitude of the compounding effect amongst other reasons.

These are actually rather minor concerns to me.

What is the absolute difference in premiums when one is 25 versus when one is 26, 27 or even 28? It is not very much actually. Delaying one’s investing by some time also do not make very significant difference. Of course, horror stories about bad things happening to even young people can be an effective way of getting people to sign on the dotted line, but to me, I think a few other factors are more pertinent.

Products tend to worsen!

The first would be that corporate decisions made by profit-seeking entities like insurance companies can affect one’s financial affairs. Over the years, insurance companies have been applying various tweaks to their policies. Some are for the better, which can be retroactively applied to benefit older policyholders. For example, improvements to integrated Medishield policies are mostly applied to existing policyholders.

Other tweaks are for the worse and usually not applied to older policyholders due to the existing contractual agreement in place. For instance, the definitions of critical illnesses were less strict for some (really) old policies, which leaves “wriggle room” for a claimant to prove his claim. Now, the definitions are standardised with arguably stricter wording. Also, premiums for critical illnesses are now all but non-guaranteed, meaning that insurers can adjust the premiums according to the claims experience. This is also true for disability income insurance policies which used to offer guaranteed premiums which older policyholders continue to enjoy.

Great products have either been replaced by more lucrative ones, or have its features stripped down to protect the company’s bottom-line. Disability income insurance, for example, used to be offered by a mere three companies. A few corporate decisions later – only two of this very essential form of insurance is left, features have been reduced and one has a very bad contractual clause. Will we see the remaining one viable policy neutered in the interest of profits? I am not sure and I hope not, but one thing we can all believe in is that financial institutions will always seek to maximise their profits.

Dearth of competent and ethical advisers

The second reason would be that financial advisers would become increasingly occupied with existing clients and have no time for new ones. I am referring to competent and ethical financial advisers who know that they have to stop taking in new clients once they have reached a certain number in order to provide continual and good service to their clients. With majority of the industry’s practitioners in tied agency and another bulk of it in banks, this type of adviser is a lot harder to find than one thinks. I doubt many people aspire to be this kind of adviser.

Look at how the industry is recruiting. Be it tied agencies, banks, independent or non-independent financial advisory firms, the focus is on income, incentive trips and job perks. Ethics is only paid passing lip service, and competency refers to one’s salesmanship and closing success. The thing is – this is completely natural. People work for money and tend to want to maximise their incomes. One of the first few things people discuss with their friends when they get a new job is probably how much the salary is. However, the self-selecting process of promising high remuneration to new entrants to this industry will just mean that people come onboard with the intention to earn top dollars, and this will more likely than not be at the expense of their clients. In the first place, due to a lack of competency and being given skewed training, they will not even think that whatever they are doing is ethically dubious or harmful to the people who have entrusted them with their financial affairs.

When one cannot find a proper financial adviser, he will then have to “deal with the devil” by engaging a product pusher or perhaps resorting to Do-It-Yourself. Both can end disastrously.

Yesterday you said tomorrow

Last but not least, one cannot underestimate the chronic nature of procrastination. It is like a snooze button that is repeatedly pressed in the morning when one lazes in bed. Putting off doing things can mean that something is not done until it is too late. It makes little difference if you do it at age 26 rather than 25, but some people wait until 30, 40 or perhaps 50 to realise they have not done something that they should have done.

It also makes little difference if you do it later rather than now, until the “difference” happens – I have had such a few encounters whereby two different individuals paid thousands of dollars in hospitalisation expenses because they were considering taking up a basic hospitalisation plan. I also have had a young person scoff at the idea of insurance I was proposing until a short few months later where the person is now uninsurable. Such “horror stories” are told because they happen.

Thinking of getting it done does nothing for your financial health, but may just adversely affect your mental health. Worrying over an uncompleted thing does nothing. Get it done right, and be done with it. Peace of mind is perhaps one of the most invaluable outcomes of proper financial planning.