You will be able to describe the advice process at a bank and what it costs you, directly or through the fund.
Wei Ling's bank has invited her to a portfolio review. Her relationship manager wants to talk about "rebalancing into opportunities", and the meeting is booked for Saturday morning. She has a vague sense that she pays for these meetings somehow, but no idea how much, or what she should expect in return.
This lesson is about what a bank adviser does, what the rules require of them, and how they get paid. It is not an argument for or against advice. Good advice can be worth far more than it costs. The point is to know what you are buying.
In Singapore, a person who gives financial advice on investment products to retail clients, on behalf of a bank or financial adviser firm, has to be an appointed representative. MAS keeps a public Register of Representatives. Each entry shows the person's firm and the activities they are allowed to carry out, such as advising on collective investment schemes.
Before the meeting, Wei Ling searches her relationship manager's name on the register. She finds him, sees which bank appointed him, and checks that advising on collective investment schemes is among his listed activities. It takes two minutes. If you cannot find someone, or the activities do not cover what they are advising you on, ask why before going further.
Proper advice opens with questions about you, and the product comes later. Before recommending anything, an adviser should carry out a needs analysis: your goals, how long until you need the money, your income and commitments, what you already hold, your experience with investments, and how much loss you could take, financially and emotionally. A recommendation should then follow from those answers, with reasons you can read.
So notice the order in which things happen at your meeting. If the conversation opens with a fund that is "doing very well", the order is backwards. You can ask to go through your goals first, and you can ask for the reasons for any recommendation in writing. Wei Ling decides that on Saturday she will bring her own one-line summary of her goals: growth for retirement, at least fifteen years away, with an emergency fund already set aside in cash.
Most bank-sold funds pay for advice in two ways, both of which you met in module 2. The first is the sales charge, taken from your money when you buy, as in lesson 2.1, One-off charges: buying, switching and selling. The second is the trailer fee, the share of the yearly management fee the manager passes to the bank for as long as you hold the fund, as in lesson 2.2, Yearly charges: management fee, expense ratio and trailer fee.
Neither appears as a bill for advice. The sales charge is on your confirmation as a deduction. The trailer fee is not on any statement you receive, because it comes out of the fund. So the cost of advice is real but easy to miss. On Wei Ling's fund, with the example figures from module 2, she paid a 2% sales charge on each purchase, and part of her 1.5% yearly management fee goes to the bank every year.
This way of paying also creates a pull. A seller paid on each sale earns more when you buy and switch more often, and earns more from funds that pay higher sales charges and trailer fees. That does not make any adviser dishonest, and many are careful to resist it. It does mean you should ask direct questions about fees and incentives, and expect direct answers.
Advice has value when it changes what you do for the better. That might mean stopping you from selling in a panic when markets fall, catching a gap in your insurance, setting up a plan you would not have made on your own, or telling you to leave a fund alone when you wanted to tinker. It has little value if it just puts a fund in front of you that you could have chosen yourself.
The test is what happens after the sale. Ask what the adviser will do for you next year and the year after. Will there be a yearly review? Will they tell you if the fund changes manager or strategy? Will they contact you when markets move sharply, or only when there is something new to sell? The trailer fee pays for that ongoing service, so it is reasonable to ask what it buys.
If, after asking, the answer is "not much", that is useful to know. Lesson 3.2, Fund platforms: lower charges, more of the work on you, looks at buying without advice, and lesson 3.4 compares the two on cost.
Wei Ling walks into Saturday's review with her goals on one line, her fund's charge sheet from lesson 2.4, List every charge on one fund, and a short list of questions. She has decided that she will not agree to any switch in the meeting itself, and will take any recommendation home to read.
Your own questions are the activity below: five of them, on fees, conflicts and what you get after the sale.
Write five questions you would ask a bank adviser about fees, conflicts and ongoing service before buying a fund.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).