IN my last column, I explained why the best approach to managing your personal finances in a holistic and comprehensive manner is to consult a financial adviser.
After reading the article, many people sought our views about financial advisory services they had received from various sources. They asked whether their unit trust agent or insurance agent, who claims to be a financial advisor, possessed the necessary knowledge and know-how.
As is often the case, an insurance agent who provides will-writing services or a unit trust agent who sells life insurance policies may refer to themselves as a “wealth planner”. You will often find that the executive at your local bank claims to be a “personal financial consultant”, even your ex-colleague who has a Certified Financial Planner (CFP) qualification now claims to be a “financial planner”.
In fact, you may have even attended a talk where the speaker remarks that he is an “independent financial advisor”. No wonder so many people are confused about whom to trust with their money. This is where I would like to put a stop to all the confusion and put a distinction to the advice freely provided by agents for financial products and the work of independent financial advisors (IFAs).
Most Malaysians are not familiar with the crucial role that IFAs can play in ensuring their financial freedom. Here, we expose FIVE common myths about the profession that prevent people from understanding why independent financial advice can make that crucial difference on the road to financial freedom.
Myth 1: Independent financial advisers only focus on investment advisory services.
Not true. An IFA should help you to address the full range of personal financing issues, which include income, expenses and debt planning, insurance planning, tax planning, retirement and EPF planning, children’s university funding planning, home purchase and property investment planning, estate planning and investment planning. An IFA should do all this in an integrated and holistic manner.
The chart clearly lays out all these essential areas that require your attention in order to achieve financial freedom.
An IFA must have the competency to identify your financial goals, analyse your current financial position, identify the gaps and develop strategies to achieve your financial goals. He should also have the necessary intellectual framework, advisory model and tools to complete the task.
An adviser who specialises in only one area of financial services may not be able to foresee how his solutions will affect your other financial goals. This is key!
Myth 2: A financial adviser who is licensed by the Securities Commission (SC) or Bank Negara is an IFA.
Not true. There are many licences offered by the SC and Bank Negara. Some financial advisers hold a licence to sell unit trust products only, whereas some hold a licence to sell life insurance products only. This group of people are not IFAs.
In Malaysia, an IFA should have three licences to qualify and hold that title. Any IFA who claims to offer financial planning services must hold a Capital Market Service Representative Licence for dealing in financial planning activities by the SC. This licence allows the IFA to provide financial planning services to an individual for a fee.
In addition, an IFA who claims to provide independent financial advisory services must hold a Financial Adviser Representative Licence by Bank Negara. This licence allows the IFA to analyse the financial planning needs of an individual and recommend the appropriate insurance products. He can source insurance products from various insurance companies.
An IFA who wants to recommend and source unit trust policies from multiple unit trust companies must hold a Corporate Unit Trust Adviser Licence provided by the SC.
IFAs who do not have all three licences will be unlikely to advise you both independently and comprehensively.
Myth 3: Financial adviser who holds CFP, Chartered Financial Consultants (ChFC) or Registered Financial Planners (RFP) professional qualification is an IFA.
Not true. A professional qualification is only one of the factors that determine whether an individual is a competent financial adviser. In Malaysia, more than 5,000 people hold the qualifications stated above, but most of them are not practising IFAs. Nor do they provide independent financial advisory service for a fee. Take a person who holds an ACCA qualification. He may choose to work as an administrative manager and not set up practice as an accountant.
Fewer than 100 of those who completed these professional qualifications proceed to apply for the required licences from the relevant regulators to practise as an IFA.
Myth 4: Only the wealthy need to use an IFA’s services.
Not true. It is a misconception that the middle class has relatively little wealth to manage, thus looking after one’s assets is considerably easier. The middle class people often tread a thin line between financial freedom and financial distress in view of their limited resources. In such a situation, it is critical that middle income earners obtain competent financial guidance to fully optimise their limited wealth.
The wealthy by comparison have many assets, thus managing them can be complicated, and often justifies the engagement of an IFA.
Myth 5: It is expensive to engage the services of an IFA
Not true. Many people think that IFAs charge tens of thousands of ringgit for their services. While some IFAs do charge such sums, there are many IFAs that ensure their services are affordable for middle income earners. In Malaysia, the fees charged by an IFA range from RM1,000 to RM20,000 a year depending on asset size.
My experience has found that a middle class family could easily lose more than RM1.5mil in making unnecessary financial mistakes. Therefore, the actual cost of making financial mistakes clearly outweighs the professional fees charged by IFAs.
As you can see, identifying the real independent financial advisers can be quite a painstaking task. However, it helps if you know how to ask the right questions.
l Yap Ming Hui (email@example.com) is a best-selling author, TV personality, columnist and coach on money optimisation. He heads Whitman Independent Advisors, a licensed independent financial advisory firm which has helped people to optimise their wealth and achieve financial freedom since 2000.