What Happened To Trust?

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Decades ago, the line of a pop song read: I.T.A.L.Y. means I trust and love you.

You don’t hear many women or men singing this “sentimental nonsense” anymore, lamentably.  For trust, like love, is a many splendoured thing.

Sadly, we see more distrust than trust in recent years and the recent news of the Ponzi Scheme used by Paul Madoff to swindle thousands of clients of billions of dollars does not help.

Back home, we hear of Raffles Education painfully writing off $34.6 million of its investment in Oriental Century which had inflated sales and cash balances and diverted money elsewhere.

Arising from this and other fraud cases, investors have begun to doubt whether claimed cash balances are really there, not only in S-chips but other companies, too.

The talk in most circles focuses on whether such cases of fraud could have been prevented and zeros in on what directors, especially independent directors, should have done to live up to their fiduciary duties.

Several big cases of fraud in theUSAalso brought into question the thoroughness of external auditors and their independence.  One case some years ago brought into question the independence of an insurance brokerage of world renown.  While it is necessary to put in place “checks and balances”, and hold directors and auditors accountable, we must recognise that fraud happens because of man’s greed, dishonesty, and thievery – three of the “thou shalt nots” of the Ten Commandments.

The axiom that business is built on trust should not be forgotten.  When there is no trust, there is no trade.  We have heard of “In God we trust, others pay cash”.  How sad it will be if we retrogress to this state.  The use of credit has enabled business to thrive as it is convenient, but it is ultimately based on trust.  The credit crunch which has caused much business to seize up in the recent months is due mainly to fear that money lent out will not be paid and is hard to recover.


Banks which had been bastions of financial stability and were trusted institutions have come under question for not heeding their own advice to be prudent.  Many have gone into the fee business and product selling, and got themselves into sticky situations of being accused of mis-selling and misrepresentation and having to make good.  The Lehman Brothers’ failure brought product pushing to the surface after many years when the banks had it good and cornered 30 per cent of the insurance and investment market.  Many customers had trusted them more than agents or advisers, but now have realised that they ought to be more careful.  When anyone or any institution is driven by profits, there is a basic conflict of interest with customer’s interest, and customers must beware.

The customers must also recognise the fact that legally, bank employees represent the interest of the banks and not their interests, just like insurance agents represent the interest of their insurance companies and not the interest of the customers.  The only ones who legally represent the customers’ interest are the independent advisers or brokers.  Even then, care must be taken to select the ones who can be trusted, for they are only human.

How many “independent” advisers or brokers are truly independent?  How many are truly objective and fair in their advice and product recommendation?  Or are they influenced by some extra commissions given either overtly or covertly by one or two insurance companies?  How many are influenced by the higher fees which they can get by persuading customers to “buy and sell” their unit trusts more frequently?

The notorious churning of customers’ investments by certain companies and advisers using CPF funds with rebates to customers has led to thousands of customers losing substantial amounts of their hard-earned CPF money.  These customers may be gullible but were certainly taken advantage off by unscrupulous agents and advisers.  The point is that customers must be careful to pick their advisers and appoint only those who can be trusted.

Now, who can be trusted?  That is the question.

What Is Fair?

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All citizens and residents in Singapore must have celebrated when the Straits Times carried the news that MAS would be introducing the FAIR DEALING GUIDELINES by the end of March 2009.

The essence of the Fair Dealing Guidelines is that the Board and Senior Management of Financial Institutions should bear primary responsibility for embedding a culture of dealing with their customers fairly. This means that there should be five fair dealing outcomes:

(a)    Customers have confidence that they deal with FIs where fair dealing is central to the corporate culture

(b)   FIs offer products and services that are suitable for the customer segments they target

(c)    FIs appoint competent Representatives who provide customers with advice that meet their financial objectives and suit their personal circumstance

(d)   Customers receive clear, relevant and timely information to make informed financial decisions and

(e)   FIs handle customer complaints promptly and in a consistent manner

The key words are “fair”, “suitable”, “competent”, “informed”, “prompt” and “consistent”.

We have to see whether these words are going to be defined further and more specific examples given.

It is also interesting to see how the Financial Institutions are going to implement these “Guidelines” which is another word which lends itself to wide differences in interpretations. For most people, guidelines are unfortunately just guidelines and they carry on with what they have been doing. Guidelines obviously are founded on moral and ethical principles of what constitute fairness to customers. But what is fair?

The idiom “fair and square” points to the idea of equality and equity. “Tit for tat” and “an eye for an eye” point to justice.

The six Americans who were charged $491 for a meal by Tanglin Best BBQ Seafood on 17th March 2009 at Newton Hawker Centre complained of being “overcharged”. At the centre of the complaint was the bill for the prawns which came to $239 – about $30 a piece.

The National Environment Agency found the complaint justifiable and slapped a three month shutdown for the stall, and a layoff of the worker for one year.

But what if the stall worker had mentioned the price and the tourists had agreed to it?

In this instance, both issues were present – the price charged was high and the price was not made known. But what if the Best BBQ Seafood prawns is really the best? It is obvious that besides the size (quantitative) factor, there are also qualitative factors like service, quality of the food and taste.

In the case of financial services and products like the Lehman Brothers and Minibonds saga, what must be missing before something is judged mis e.g. misspelling and misrepresentation?

Is single product pushing misspelling because the Representative does not inform the customer of other available products in the market? I think so. But what if the company’s Representative is a tied agent and does not know or does not bother to know about the other products available? I think the practice of tying an agent or Representative down to only one firm is unfair to the Representative in the first place, and more so to the customers.

Wouldn’t outlawing tied agencies go to the root of solving the problem of wrong products or uncompetitive products? In the UK, every customer has to be made aware that he/she can consult an Independent Financial Adviser before committing to a purchase. Shouldn’t this be done here also if the tied agency or single company representation is not prohibited?

In some States in the USA, besides the option to become independent brokers, agents are also allowed to be General Agents to represent many insurance companies.

How much information should a customer be given and understand correctly for him/her to make an “informed” decision?

The consultation paper on proposals to strengthen the regulation of the sale and marketing of Unit trusts, life policies, debentures and structured deposits mentions a few important measures:

(1)    Product issuers to prepare a short, user-friendly Product Highlights sheet in addition to the prospectus, benefit illustrations etc.

(2)    Requirement of advice for “complex investment products” (those with derivatives) and health warnings (to understand the product before buying)

(3)    Representatives obtaining “enhanced quality of information from customers” to achieve right analysis and give suitable recommendations

All communications have to be understood by the customers in a language known to him/her in particular. The customers have to understand the risk nature of the product and how they will meet their financial objectives.

What is a “suitable” product for the customer segments?

The Financial Institution is required to do due diligence in coming up with suitable products.

Who is to judge whether the product is suitable and on what criteria?

The bridge between the customer and the Financial Institution is the Representative. If the Representative has access to many products, he/she can do the matching of customer needs and products.

If the Representative does not have choices, he will be forced to adopt a one size fits all approach and product pushing.

The key to ensuring that products are suitable and competitive is to have an open architecture where all product providers make their products available to all Distributors and Representatives who would then be depended upon under Professional liability rules to meet customers’ needs. When this is achieved, the only issue left would then be to ensure that Representatives are competent. If they are all licensed and/or the same strict regulations for compliance and CPD are enforced, then it would be easier to raise standards of their competence.

The centre of attraction in the Fair Dealing Guidelines is Senior Management which is correct. It is Senior Management who set the standards of Representatives’ competence, suitability of products and professional sales practice and customer service.

It will be interesting to see what action really can be taken against any Board member or Senior Manager who is found wanting.

Life’s Questions

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The title of a corporate coffee table magazine of a large pharmaceutical company attracted my attention the other day.


A good seventy five per cent of the magazine carried close-up shots of people – from baby to youth, to the middle-age and the old – with pithy questions which captured their concerns about health issues e.g. Will I make it? Is there time?

The closing twenty five per cent of the magazine tastefully listed how the firm and its products provided the answers to the questions.

Questions always come first before answers.

I am reminded of the famous words on stickers and tee-shirts in the 1970s – Jesus is the answer, and the equally infamous rejoinder – what is the question?

I believe Jesus is indeed the answer to life’s many perplexing questions, but the point is that we should start by asking the questions before looking for answers.

The best answer to the wrong question will bring no marks – many over-excited students have found this out in major examinations.

In the university of life, we must ask the right questions or we can end up pouring blood, sweat and tears finding answers to what may end up as trivial questions – the proverbial gaining the whole world and losing your own soul.

Many motorists in familiar territory pay more attention to the speedometer than the compass or GPS. But venture abroad to unfamiliar ground and the compass or GPS takes higher priority. You will only arrive faster at the wrong destination if you pay attention to the speedometer and neglect the compass.

I am reminded of an advice given when I started out in life – you can be sincere but sincerely wrong. Like the man who painstakingly climbed up the ladder to find that it was leaning against the wrong wall.

So the order of things is asking the right questions first and then finding the right answers.

One of the most helpful books I have read is the Book of Questions. It was about questions of general application to life. Another more recent book I read is entitled “The Race” by the current Bishop of the Methodist church in Singapore, which asked what is the right race in life and provided answers.

I like to focus here on asking the right questions in the area of financial planning, investments, insurance etc.

Too many people don’t think of asking the right questions and end up getting all the wrong answers – ill fitting advice and unsuitable and uncompetitive products which didn’t really solve their problems (questions).

The top 10 questions I would ask are:

1)      Who is the best person (adviser) who would consider my interest first and can be trusted to help ask the right questions and find the right and best answers to my financial needs?

2)      What are the things that can happen in my life now or in the near future which will be catastrophic to me and my family?

3)      Which is my single greatest need if I don’t come back from work to my family today?

4)      How much do I need to save for my children’s education?

5)      How much do I need to save for my retirement?

6)      What do I need to do to remain employable and to do well in my work and career?

7)      What should I do in the area of investments?

8)      What do I have to do in the area of legal liabilities exposure?

9)      What must I do to manage my tax matters better?

10)   Have I taken care of the matters which will arise should I die?

Finding the answers to these questions is not difficult. The key is finding the answer to the first one.

Find the right adviser and he has the answers to all the other questions.

Now who is the best adviser?

That is the Question.