I had a friend who sms me 2 days ago whether getting an ILP for investment is good. It seems that with the market flourishing, I have many friends coming to seek my advice on this.
They do have to realize before even talking about gains, they have to be clear about the objectives they wanna achieve. If its investment, what is it for? and how long they have to when they wanna take the money out. Simple questions but if you don’t ask, you may be buying something just on impulse.
One thing i realize is that the financial adviser recommending him stuff like that should have made sure he understands this before recommending ilp to him. I am not a certified financial planner, thus my advice to him is to assess how competent is this adviser. The Straits Times this Sunday came up with a list of questions to pose your agent. It does not encompass every aspect, but nevertheless its a good list.
Here is a checklist from Straits Times invest section on questions that you can pose a prospective insurance agent:
- What services can you provide?
Find out if the adviser offers cost-effective solutions from multiple product providers or if the products he recommends are restricted to one source. Some consumers feel safer with advisers and products from large well-known institutions. Others may want to deal with advisers that offer a wider choice of products.
- Who else could benefit from your recommendations?
An adviser who promotes insurance, unit trusts and stocks may have seperate tie-ups with the firms that supply these products.
He may also have other business relationships that should be disclosed to you. This includes income he receives for referring you to an insurance agent, an accountant or a lawyer in relation to recommendations that he makes to you.
- What are the risks and disclaimers?
Don’t hesitate to ask the adviser to highlight any risks, potential downside or restrictions that may apply to the product he is recommending.
Ms Wendy Lee, 40, suffered a rude shock when she realised, after her divorce, that she was unable to change the person who would be a beneficiary of her life insurance policy.
She was not told at the point of sale that an “irrevocable statutory trust” is created – under Section 73 of the Conveyancing & Law of Property Act – for the spouse and/or children when they are named as beneficiaries in a policy.
In simple terms, that means her ex-husband is entitled to the insurance proceeds because he was named as the beneficiary when the policy was taken out.
Even having a will does not change the situation.
- How do I pay for your services?
Payment can take several forms.
- Commissions paid by a third party for the sale of products. These are usually a percentage of the amount you invest in a product.
- Fees based on a percentage of the assets you invest.
- A combination of fees and commissions. Fees are charged for the amount of work done to develop financial advisory recommendations and commissions are received from any products sold. Some planners may offset a portion of the fees you pay if they receive commissions when you buy products they recommend.
- A salary paid by the firm for which the adviser works. The advisor’s employer receives a payment from you or others, either in the form of fees or commissions, in order to pay the planner’s salary.
- What commissions do you earn?
Don’t be afraid to ask the exact commission amount that the adviser will earn from the sale. For instance, the commission for a regular premium investment-linked plan can be as high as 50 percent in the first year, before dropping to 25 percent in the second year, 10 percent in the third year, and 5 percent each in the forth, fifth and sixth policy years. This means that if the annual premium is $50,000, the first-year commission earned by the adviser is a substantial $25,000.
For a single premium investment-linked plan, the one-time commission is typically a much smaller 2 percent to 3 percent.
In the case of hospitalization Shield plans, some generate first-year and renewal commissions of up to a 25% percent and net premiums of 15 percent for the adviser, as long as the plan stays in force.
- What experience do you have?
You have a right to be nosy. Find out the adviser’s experience and the number and types of firms which he has been associated with. Some experts advise consumers to choose an adviser with at least 3 years of experience in providing financial advice.
- What qualifications do you have?
Ask the adviser what qualifies him to offer financial advice and whether he holds or has held any financial planning designation.
If the answer is yes, check on his background with the respective organization.
- Can i have it in writing?
Ask the adviser to put in writing the services he has provided and the recommendations he has made. Keep this document for future reference.
At the end of the day, ask for a list of documents for recommending that product to you. These include:
- A summary of your financial information such as investment objectives, current financial situation and personal needs.
- Recommendations made by the adviser and the basis for making these recommendations.
- A copy of the benefit illustration and product summary for insurance products.
- A copy of the prospectus for unit trusts.
- The name of the firm he represents and the type of advisory service he is licensed to provide.
At the end of the day, after asking all these questions, there are still room where the adviser can play you out. Governance can only do this much but it is whether you are fated to meet such a good adviser.
I do have much to gripe about my current 2 advisers that i am being serviced but i will leave that to another day.
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