Does it have something to do with tricky sales tactics or do we just not understand the financial products we are offered?
In the Business Times this month, the Financial Industry Disputes Resolution Centre (Fidrec) reported an increases in a number of complaints. This is a worrying trend, and the main area of complaints - policy payouts, premiums, fees, etc. - shows that Singaporeans are getting financial products we don’t fully understand.
Complaints Have Gone From Sales Tactics to Product Issues
Some telling issues from the Fidrec report are that:
“The number of complaints filed against licensed financial advisers and insurance intermediaries made the greatest improvement, falling 76.6 per cent to 43 for the year.”
In spite of that, complaints have risen year-on-year, from 554 in financial year 2013/14 to 630 in financial year 2014/15. And for the first time in 10 years, the bulk of complaints (53.7%) were related to “pricing policies, disputes on liability and claim amount awarded, policy values and investment returns.”
Previously, the main source of complaints had to do with market conduct (e.g. aggressive selling).
What this means is that the problem is no longer tricky sales tactics. The problem is financial literacy. Singaporeans are buying financial products that most of them do not fully understand. Here’s why.
1. Buying for Purely Social Reasons
Many Singaporeans still get financial products for social reasons. For example, they might buy an insurance policy because their aunt is selling it, or they might join a high-risk ponzi scheme because their friends are a part of it. These decisions are based on social trust rather than hard financial facts.
Besides the possibility of buying a bad product, we are also inclined to get careless and trust that our friend or relative has everything under control. This often has disastrous circumstances.
For example, the Straits Times recently reported on a woman who bought an insurance policy from a friend, only to face a $S75,000 payout for S$320,000 worth of cancer treatment. The woman had previously trusted her friend to properly upgrade her plan.
As such, she signed the forms without reading them (she was not literate in English). The forms turned out to be a false declaration, as her friend had neglected to declare a pre-existing medical condition (diabetes). Had the insurer not chosen to be lenient, this could have led to her permanent financial ruin.
So in order to protect yourself, never buy out of purely social reasons. Always approach financial products with a business mindset, however familiar the seller is to you. Remain wary of signing anything.
2. Buying Complex Products to Look or Feel Savvy
This mainly applies to products that require a capital market license, but it happens in insurance too.
Complex products, such as quant funds, can make some investors feel sophisticated. It looks impressive when you tell friends about algorithmic trading, and how your fund’s based on Chaikin money flows. In insurance, some people pick complex policies (e.g. Investment Linked Policies with emerging market sub-funds) for the same reasons.
We’re not claiming that these products are inherently bad - some of them do outperform their mainstream counterparts. However, due to their complexity, many investors do not fully understand how they work, or the real degree of risk involved.
During the mini-bonds saga, many Singaporeans were unaware that their investment was used to provide a form of “insurance” for Lehman Brothers. As such, around 10,000 investors in Singapore lost a large chunk of their money when Lehman Brothers collapsed.
It’s a lesson that complex products are not necessarily clever products, and you should never invest in something you cannot fully understand.
3. “One Size Fits All” Mentality
This is the belief that, if a particular investment or savings plan works for someone you know, it will work for you too.
In reality, everyone’s financial needs are different. For example, a 25 year old may need a more aggressive approach to investment - this ensures he or she can afford a house or a first child at around the age of 30. However, a 70 year old retiree may no longer have an income source, and does not need to take on so much risk to make the same amount.
Likewise, it may be a good idea for a multi-millionaire to diversify, and put some money into alternatives like stamps and antiques. The same strategy would be disastrous (or impossible) for a typical Singaporean earning S$3,700 a month.
Each person should consult a financial advisor for their own investment “roadmap”, because parroting others is a recipe for disaster. Remember that the person you imitate may be able to survive financial setbacks that you can’t, or may be far less ambitious in their retirement plans.
4. Simple Impatience
Many people end up with bad products because they can’t be bothered to compare. It is a hassle to talk to seven or eight different banks, or to spend hours conversing with different insurers.
This problem was understandable in the 1980s or 1990s, when the financial industry was opaque. Today, it’s no longer an excuse. The internet can provide instant comparison between products. SingSaver.com.sg’s comparison tools, for example, draws up comparisons between the cheapest loans and best credit cards instantly.
The Monetary Authority of Singapore (MAS) watchlist also provides regular updates on unregulated products. All the information we need is right in our smartphones.
However, we are not inclined to check out mainly out of impatience. So rethink the situation: consider that 10 minutes of comparison can save you a lifetime of financial hardship.
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