A few days ago, my friend forwarded me this post on my very own subreddit. It is a post about a Financial Advisor Representative who is currently working as an advisor, talking about the problems of the very own industry he work in. He details his motivations, how he operated, how his peers operated and why things are the way it is.
“Kyith, if your company is looking for advisors, maybe this is the one. He seems legit. This is the kind of advisor I wish I have in my company.”
“Instead of investment linked policy-loving jokers who act like they know the investment world.”
I kind of know where this conversation is going at this point LOL.
I am not the only one amongst my friends and acquaintance working in the FA industry. Write enough of investment articles and I made friends along the way with people in finance, fund management, the folk working in some REITs and even people supporting other FA firms.
And they tell me the WTF stories that help adjust my lens. I will tell myself… Kyith… if you happen to get into a conversation and the person has a representative from there, either you don’t be lazy and review your friend’s situation or you ask your friend to be more careful.
My friend works in the area of providing investment servicing for the advisers of an advisory firm. So he has a good lens about the motivation of advisers in their preference to advise their clients.
And its ILP, ILP, ILP (Investment-Linked Policies).
My friend would regularly be asked: “Why don’t you guys support insurance platforms?”
I grow to understand how the place I work at look at investments, and their recommendation to be very different from others so I asked: “What does support insurance platforms mean?”
“This means why we don’t support the platforms like Manulife or Tokio Marine where common ILP resides on!”
Think most of the advisory firms have their version of model portfolios, which are the inhouse portfolio made up of funds, exchange-traded funds (ETFs) that express the investment team’s investment philosophy, be it strategic, tactical or WTF stupid.
This advisory firm also has their own model portfolios but it seems… the portfolios are not so popular among their own advisers.
I know the answer but sometimes I know my role in the conversation is to let my friend vent about the absurdity that he sees daily in his work life.
“Our job is to focus on our portfolios. Our portfolios can trigger a periodic rebalancing and we can go risk-on, risk-off depending on the conditions. With that said, there is a strategic part to our portfolio.”
“But our advisers die die want us to create something impossible with the limited funds that are on the ILP platforms.”
They will just let my friend know ILPs are the best and they want the team to do the same magic despite the limitations of the funds available.
This should tell you something about expressing your investment ideas with investment-linked policy already.
To structure an ideal portfolio that express an investor’s investment philosophy, you need the funds. Very often, we have to make do with something less desirable because we do not have access to a fund that meets our needs. For example, the Amundi Index Global Aggregate Bond A12HS (C) SGD was such a game-changer fund for me personally because it is a global bond index, low cost (0.1% p.a.), intermediate maturity and duration, hedged to SGD and available for retail investors. I can understand if this does not sound a big deal to you but in the time I been in this industry, I cannot find something like this ever, which checked off all boxes and this is what it is needed.
There can be many funds on an insurance ILP platform but I differ to my friend when he says they are limited because it might be difficult to put together a well rounded portfolio for clients. You can’t rebalance automatically centrally between the funds to the original allocation and maybe we just cannot have so many funds that is required to do both strategic and tactical.
I ask my friend: “So did your model portfolios perform better?”
“Better.”
Then, I wonder WHY they don’t recommend wrap accounts on these model portfolios.
They Really Like Their Income Funds.
“I don’t have faith in financial advisers.”
“They only do sales and sell whatever that they were told like the Allianz Income and Growth.
They die die want the fund cause it gives a 7% dividend yield.
They want to hear nothing of the fact that the fund underperform it’s benchmark or it’s peers.
They think that collecting the 7% would cover everything up. We measure the returns of our model portfolio by total returns but their brains are not oriented towards that.
They think a 7% total returns contains only capital gains that the returns is not a 7% coupon.
Allianz Income and Growth fund is usually sold in these ILP. It is too damning fxxking popular.”
I should know about this fund! I wrote about it some years ago [Tearing Down the 8.6% Dividend Yielding Allianz GI Income and Growth Fund.] and you can see some of the hate I get just because I deconstruct the fund thoroughly enough. Actually, I think they don’t know the meaning of “tear down” and think that I am saying negative things about the fund but if you read the article, it is what it is.
I think the investment and recommendation framework of some is basically “Sell Allianz Income and Growth” and you can understand how threatening that article was to their livelihood. The ironic thing is… I remember my friend forwarding me how some FA actually shared my article thinking I said good things about the fund!
The Lack of (Any) Investment Evaluation Framework
“You know what is the worst thing Kyith? Despite us telling them our misgivings about these funds, they expect our help to help them come up with reasons when things go south!“
Basket, I put the heading until very nice but I will let my friend explain more.
“I hear before advisers saying ‘the returns of the fund is more than enough to cover the dividend payout as indicated in the factsheet’. I was like are you fxxking kidding me?”
My friend was rather incredulous about the lack of second-level thinking, a healthy dose of skepticism and their ability to do more research than just accept the facts.
“They can only process stories and don’t want to ask the details. I don’t think they provide much value-add to their clients. The first thing they ask is: Can buy or not?”
“They would take the words we say as the gospel truth and memorize if this fund can buy or not and tell that to the client. They would never even bother to research on the fund model or style. At the very least, they should try their best to do some research and understand it!”
“The best part is also when we add good funds into our model portfolio after we find it, the advisers complain their clients just copy that fund and buy into it!”
Last Words
The difference between recommending a wrap account versus an ILP structure is the renumeration to the advisers. An adviser earns the fee, be it wrap fee or trailer fee (from the high expense ratio fund) over time. Whereas in an ILP, the adviser earns majority of the lifetime advise fee upfront in the first 5 years.
If you are working with higher net worth with investable assets, then having wrap fee and trailer fees would move the needle to put enough in your coffers so that you can spend on your expenses. However, if you are scavenging to find anyone that would listen to you, it can be challenging to explain, convince in the first place. Like my friend explain, newbie advisers don’t have a mental investment framework, sometimes I don’t know if the experienced ones have one, aside from product recommendation. If you manage to close but the person start off with very little, it also doesn’t move the needle for you.
Whereas the model where you earn majority of the lifetime advise fee upfront is more viable to them.
That is the critical reason for the ILP compare to recommending a model portfolio.
What is recommended in the ILP tends to be based on what returns well and the reality is most of the people understand income yield and have a high affinity towards income yield.
It is not just the advisers recommending funds like Allianz Income and Growth but that… most of us have an affinity towards it due to the passive income culture. It is easier to sell something that others understand right?
My friend in a way, is also judging the advisers as a potential client. Through this potential client lens, he is perplexed by an absolute lack of thought process in investments and planning.
I think we should treat what he says as an example of how a more sophisticated prospect look at the things you say. As we try to corporatize our advise (at Providend), sometimes I wonder if my colleagues follow a scripted investment explanation, or do they reflect upon the spirit behind the investment explanation. Sometimes, investment stuff can be rather cheem to advisers with different degree of understanding. I think scripted pitch, response is necessary because ultimately we want our prospects/clients to understand what we want to communicate about the investments. And you have people like myself who tend to overtalk and just makes things worse.
But if you never felt vulnerable about not able to detect that you don’t really know deeper what it is about, then one day you are going to be put on the spot for not knowing. The bar to be a decent adviser may not be that high, but the more informed investors can easily conclude you don’t really know much.
Let this be a lesson if you are trying your best to be a good adviser.
For the rest, good luck to you all. Hope your advisers does not exhibit the stuff my friend talked about.
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Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.
Readers also follow Kyith to learn how to plan well for Financial Security and Financial Independence.
Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.
You can view Kyith’s current portfolio here, which uses his Free Google Stock Portfolio Tracker.
His investment broker of choice is Interactive Brokers, which allows him to invest in securities from different exchanges all over the world, at very low commission rates, without custodian fees, near spot currency rates.
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