Seth’s Blog on Finance

When Boyfriends Give Bad Financial Advice

I’ve had a few friends who went through breakups with their significant others over the past year, and incidentally, two of them had boyfriends who are in the financial advisory industry. Coincidentally, both are from the same Licensed Financial Advisory (LFA) firm. While better than tied insurance agents because of their capacity to recommend a good and proper financial portfolio, I regard this company (like many others, actually) to be a sales-focussed firm. They even made the newspaper for certain dubious business practices.

I have always been curious about the kind of recommendations my friends’ boyfriends would give them, and I have not had the opportunity to find out until their break ups. I was shocked but perhaps not entirely surprised to see that both had poorly constructed financial portfolios. One of them was underinsured and encumbered by the monthly premium obligation. The other was quite adequately insured but at a high cost, and her investment portfolio consisted largely of endowment and investment-linked policies that had very high charges compared to the alternatives I can think of. She too could not keep up her premium obligations despite having a relatively well-paying job. Both of them eventually lapsed some policies as they could not keep up with the high financial obligations.

Competency, ethics and independence

I think this post that I wrote some two years ago highlights the problem with the financial advisory industry we have. These two advisers may not be truly Independent (they belong to a non-independent financial adviser firm) but they have access to a wide range of financial solutions like I do, and considering that they were offering advice to their significant others, I can only conclude that it’s their lack of competency to blame since one would imagine their hearts were in the right place and they meant no malice to their loved ones.

As much as I criticise tied insurance agents, I believe this also serves as a good reminder that just because someone is from a Licensed Financial Adviser firm that can carry multiple insurance companies’ products hardly means his recommendations would be sound. They may show you competitive quotes for certain product classes they recommend — a step up from tied agents at least — but it is meaningless if their recommendations and advice are not appropriate in the first place.

I think these two cases also help to affirm a theory I have about the industry at large: not everyone is a crook wanting to maximise his own compensation at his clients’ expense, but most are seriously misguided to the point they unknowingly shortchange people they care about. Unsurprisingly so, if you ask me, considering the type of training they are likely to receive from their principal companies and managers — entities invariably concerned about the bottom-line more than anything else.

Speaking from my personal experience

I should know too well, having been a tied agent myself, making the same kind of bad recommendations to my own significant other and relatives back then, even ruining my father’s insurability. These were done out of concern for my loved ones since I knew that insurance was important. Yet, I could not offer them proper solutions due to being a tied agent and the heavily sales-based training which was little more than how to meet prospective clients and sell them products.

Fortunately for my clients and myself, I discovered this relatively early, quite a bit less than a year of actively soliciting clients in my ex-company, and was able to make a jump with minimal impact¹. I also learnt that while offering a similar range of products, not all LFA firms are equal. Many of them were actually set up by ex-tied agents who just wanted more products to sell. I took about six months to eventually decide on the firm² that would best serve my clients’ interests. I do think this is the least I can do for my clients, loved ones especially.

1. Still, it was a difficult decision to make back then because it was not easy giving up the recurring income and client base I have built during that period of time. I can only imagine how impossible some tied agents find it to leave their existing platform and do better for their clients when they have already spent years building up a substantial business. ↑
2. Unlike most firms, my firm of choice offered a remuneration scheme which did not lower an adviser’s compensation if his revenue is relatively low (as one may expect when recommending beneficial products to clients which are often generate low revenue) which encourages the recommendation of high-revenue products. Sadly, this is no longer offered to new entrants but I am fortunately still on it (grandfather clause). More importantly, my mentor is an actual financial planner who teaches me financial planning skills instead of providing sales training. ↑