Sometime ago I met an individual who wanted to consult me on his investment portfolio. One of the bond that he bought from a bank had defaulted. He was concerned that more bonds in his portfolio will default.
The bond that defaulted consist of only a negligible portion of his portfolio (approximately less than 1.5%). Mathematically there is no cause of concern. But upon more fact finding, I found him to be extremely conservative. If we live in an ideal world, fixed deposit is the only suitable product. Unfortunately, we live in a fallen world. That is where I was called upon to review the entire portfolio.
After the initial preliminary meeting, the prospect agreed to engage me and the fees were also agreed upon.
I immediately started work on it by first analyzing the existing portfolio.
When I was about to finish the work, I received a message from the client to halt all work. Apparently he had second thought and decided to engage another financial adviser whom he thought was more competent. The financial adviser was also someone he knew. The client did not think I was good enough because I needed about 15 hours for the entire financial planning process. But based on highlight, I guess the client was unwilling to pay for my fees because my fee is based on hourly rate. I guess someone quoted him a lower fee or perhaps entirely free of charge.
I did not even have the chance to present my findings. I was totally cut off like this. I also forgot to ask for a deposit before starting work. It is my custom to ask for a deposit but for this case, I totally forgot about it. Effectively, my client defaulted on paying me my consultation fee.
I was so furious over this. But after having thought about it, I should have realized that this was coming. There were signs that this case was going to waste my time. The following were warning signs:
- The prospect was financially illiterate. This was evidenced by the fact that a loss of mere 1.5% of the portfolio triggered so much concern.
- The prospect gave a majority of the portfolio to be discretionary managed by the relationship manager. When an investor gives discretionary control to relationship manager, it implies the investor is totally clueless as to what was happening. It is like giving the keys of one’s house to a thief.
- The prospect was a 2nd generation high networth. 2nd generation high networth are those whose wealth were mainly from inheritance or gifts or a windfall. As long as the wealth of a person comes from sources except by his own effort, I consider such a person as 2nd generation high networth. As I mentioned previously in my blog, 2nd generation high networth has no asset allocation skill and they are my worst clients.
Since I wasn’t paid for my fee, I will publish the results of my findings.
Based on my assessment, the client had a conservative risk profile. The only suitable investment products are short duration investment grade bonds and annuities. Investment properties may not be suitable due to the high liquidity risk.
The following was the existing portfolio’s asset allocation:
Nearly 85% of the portfolio was invested in high risk investments. A very large portion was in junk bonds. As for the investment grade bonds, those were of long duration bonds. Hence, 100% of the entire portfolio was deemed unsuitable by me to be beyond his risk profile.
Not shown above was also a Universal Life with premium financing. When I asked him the reason for buying a Universal Life, he could not answer except to say it was recommended by a friend. When I asked him whether did anyone ever explain how Universal Life can be used, he said nobody explained to him.
As it can be seen that this is a typical rubbish type of asset allocation that a 2nd generation has. Regardless of risk profile, it is always the same rubbish.
I did not complete my recommendations since I was unceremoniously ordered to stop work but I was already thinking of short duration Singapore Government Securities (SGS). I did start to research on the true liquidity of the SGS as I feared that the huge portfolio size will end up moving the SGS yield curve! I did toy with the idea of helping him apply for SGS new issue using Internet Banking but I was not sure whether this was permitted since the transaction amount was going to be very large. When I was asking around for SGS’s true liquidity, my industry peers laughed and mocked at me because the primary market for SGS does not pay commission at all. The only way to get a reasonable yield from SGS is from new issue – which means I cannot charge a sales charge. But I do not need to charge a sales charge since I am paid based on hourly rate.
Unfortunately, the client thought that I would take too long to work on the case and probably did not wish to pay for my fee. It is likely the ‘free adviser’ that he was going to engage will recommend another new set of rubbish portfolio and laughed all the way to the bank. Imagine if the free adviser gets 1% in commission for a SGD 100m portfolio, that is equivalent to a whopping $1 milllion in commission! As for Wilfred Ling, his fee was supposed to be a pathetic $3750 and at the end of the day did not even get a single cent!
The last time someone refused to pay me my consultation fee was also a high networth individual.
Frankly speaking, I am no longer keen to review rubbish portfolio.
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