Perhaps the reason I have a college education is because of that summer in high school I worked as a waitress at a low-end restaurant chain, and as part of the orientation they played us a video about washing our hands, so as not to spread germs.
The germs were actual stars of this animated classic. I can vaguely recall that Salmonella was a pink amoeba-ish blob and introduced himself with: "Hi, my name's Sal!"
It was clearly time to hit the books.
This episode came to mind recently when I jumped onto the Securities and Futures Commission website (www.sfc.hk) to gather some tips on dealing with financial advisers. I clicked on a "Know Your Broker" link, which turned out to be a video - a dramatisation of some schmuck signing over his money to an unlicensed "broker", and losing it.
To watch this stuff rather makes one feel like one is in a special remedial class for slow-learning investors. And anyway, I doubt most people have time to view the 20 or 30 so videos on the site - especially as the download time for each is pretty long.
This is too bad, because a lot of us have little knowledge of finance, yet need to manage our money. That is why we would like to seek out financial advice, but we are often afraid, because financial advisers have been known to railroad people into bad investments (minibonds ring a bell).
So, cutting to the quick, and without the benefit of video links, below are a number of general tips for dealing with financial advisers.
Don't be rude: I know people in this business, and it is hard on them to be treated with suspicion. Not every financial adviser is a Bernie Madoff. The fact is, most know a lot about their subject, and are on the up and up.
Still, there are some bad fish in this sea. One example is the Hong Kong financial adviser who was jailed recently for eight years after filching the savings of friends and acquaintances, including his father-in-law. So one does need to (politely) do some background checks.
Check the checklist: First of all, get on the SFC website and type in the adviser's name under the "Name Search" function on the Public Register of Licensed Persons section of the SFC website (www.sfc.hk). Of course, this is no guarantee - hedge fund manager Charles Schmitt, who was convicted of fraud for mishandling investor monies before he was nabbed by colleagues in 2004, was fully licensed by the SFC.
But it helps, as does ascertaining whether the broker has person indemnity insurance - this is insurance against claims for breaching duties in their professional capacity. In other words, if they do make mistakes, the fact that they are insured against it raises the odds of getting paid back.
Find out the fees: Here is one major problem with the financial advisory industry: you, the customer, are cheap. People generally do not like to pay upfront fees for taking advice on finances. As a result, the whole industry is established around the basis of "free advice".
The problem is, these people have to make a living. They make their living on commissions for selling investment products. Which means they have a financial incentive to sell funds that pay the best commissions.
Now perhaps in some cases the funds that pay the best commissions just happen to be the best funds. But anecdotal evidence would tell you that some of the most shocking funds have come with high commissions.
Who knows what "the right" commission is? For a typical mutual fund, the fund manager themselves often take 2 per cent a year, and then of course the broker needs his cut. Hedge funds used to take 2 per cent management fees plus 20 per cent of the take of any profits (the 2/20) formula, but they have had to come up with much more competitive fees to attract capital following the financial crisis. The trend on fees is that they are going down, not up. The best way to find out is to shop around. Find out what the commission is and then politely say, "Thank you for your information, I will check around to see what other advisers are offering and get back to you".
I am told insurance-linked funds tend to be loaded with some pretty plump commissions.
Find out about lock-up periods and penalties for earlier withdrawal: Again, shop around for the best deals. Personally, I try to avoid lock-ups altogether.
Find out the risk profile: This is not an easy job. If one reads the fine print on the prospectus of the "Lehman Mini-Bonds", there were in fact warnings. But verbally, brokers allegedly pushed this as safe - would the US let Lehman fail? Obviously few read the fine print.
About five years ago, there was a fund flogged as the "Circus Capital Protected Growth Fund". The words "Capital Protected Growth" would give you the impression, wouldn't it, that this was low-risk? In fact, these funds took huge foreign-exchange risk, which led to stunning drops in the value of the funds - the SFC actually went after these guys for misleading investors, and the Hong Kong marketer of the fund, Towry Law, agreed to compensate up to 80 per cent of the original amount invested.
The main themes here are: be suspicious of very high returns - you need high risk to get high return; be careful of any swapping into foreign exchange - this can magnify risk. Highly leveraged bets, or derivatives trading, should only be done with money that can be lost - not with the nest egg!
Don't be fooled by the jargon: This occurred to me when buying a house in the US last year.
They all use this jargon - they call fees "points" for instance (representing the fees as a percentage of the total purchase) - and it makes you feel dumb.
Never be afraid to ask them to explain every bit of jargon. And if they cannot do it well - then they probably are not the sharpest tools in the box, and you might want to find someone else.
Check out the SFC website: There is some interesting data on issues including warrants, derivatives and investment skills ranging from basic to professional. Just avoid those blasted videos - unless you have a lot of time on your hands.
SCMP Article:
Veronica O'Connell, 23rd May 2010