FPSB recently conducted a global survey among 19 markets. A total of 19,092 adults took part. Among those surveyed in Singapore, it was found that:
- Only 1/3 have a written comprehensive financial plan.
- The top two priorities are: owning your own home (60%) and free from debt (58%).
- Only 4% were willing to pay fees for financial planning services in excess of S$1,500. Majority (68%) were only willing to pay S$500 or less.
Only 1/3 have a written comprehensive financial plan
Many people do not have a written financial plan. In fact, I suspect a large portion of these 1/3 also do not really know what is a comprehensive financial plan because of the following misconceptions:
- Buying insurance does not constitute a financial plan.
- Buying some unit trusts does not constitute a financial plan.
- Having a CPF or an SRS account is not a financial plan either.
- Learning about fundamental analysis and technical analysis do not constitute financial planning.
- Attending financial talks especially those “free” talks isn’t making any financial plan too.
Quite the contrary, purchasing an insurance, investment, opening an SRS account and following what the speakers have to say in those “free” talks can be detrimental to one’s financial health because there was no financial plan in the first place. So what in the world is a financial plan?
A written Financial Plan is a map. The map indicates where the person is now. It also shows where the destination is. To get from where the person is now, a journey is required and the map shows the road to that destination. During the journey, there will be difficulties and challenges. The map shows the potential obstacles along the way and also show the possible route(s) which has the highest level of success in reaching that destination.
This map is the financial plan. The “destination” can be defined by the client. If the client does not know where the destination is, the financial planner can give some most common destinations as suggestions. This “destination” is known as the “Objective” of the financial plan. Before the journey can begin, it is important to identify where the client is right now. Not knowing where the client is right now in the map would cause the client to travel in the wrong direction.
Very often, people just buy products and attend talks without even knowing where they are in the map. The result of doing so will cause the person to travel in routes to the unknown. The worst part is, majority will fail because financial literacy in Singapore is very poor (only 11% surveyed said they were knowledgeable about finance and financial matters).
A financial plan must include home ownership and debt reduction
This is the part that is often neglected by many financial advisers. The top two priorities are home ownership (60%) and to be debt free (58%). Do note that risk management is ranked lower at 53%.
Many financial advisers would give a template financial plan printed by their firm. These “free” templates normally are often skewed to sell insurance and investment products. But there are a whole lot of other considerations which the client is unaware from these templates. Such templates have the following issues:
- Neglecting the strategies for home ownership and becoming debt free.
- The need to receive advice for which the solutions do not pay any commissions (e.g. helping the client to get a home and reducing the household debt do not pay any commission).
- No two clients are the same. Everybody is unique. Everyone has a different appetite for risk and everybody has a different objective in life. Thus, a “template” plan cannot address the uniqueness of a human being;
Majority wants free advice
The survey showed that 68% were willing to pay a maximum financial planning fee of S$500. Note that this is the maximum. It could be that 67% are not even willing to pay a single cent! In any case, this survey result is much better than the one conducted by MAS in 2012 in which 80% are not willing to pay a fee for advice.
But what is amazing is that most consumers actually pay a much larger amount in commissions. A simple illustration shows that the average commission you pay is $10,555.
Another reason why a financial plan cannot be free is because of the need to review. Since nothing is cast hard in stone, the financial planner has to spent time reviewing the plan on a periodic basis. If the financial plan is free, it implies that the planner has to sell another product each time he or she meets the client for such a review.
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