Speech by En. Johari Low delivered at the Wealth Management Seminar - The Guru Speaks organised by MFPC on the 20th August 2005

First, some waffling

Good afternoon, ladies and gentlemen.

Before I start, I need to correct the misperception that this label of wealth management guru might give you. You see, in my view, a wealth management guru is an expert at creating wealth and, by inference, should be wealthy. And since I am neither wealthy nor do I have the knack of creating wealth, this label cannot refer to me.

The other thing I have to clarify is - I am not even much of a practitioner. I am not a financial planner by vocation, past or present, and I tend to mess up my own finances. All the planning I did for most of my working life went down the drain in 1997.

But don't roll your eyes just yet. I am surrounded by people in the wealth management business. So I do have a bit of understanding about the dynamics of the financial services industry. Both as a purveyor and as a consumer.

The purpose of my talk today is to give you an honest perspective. It may not be to your liking. Still, I shall not be deterred. Sometimes, we have to tell the emperor he is not wearing any clothes.

Okay, enough of waffling.

Then, some baffling

The first thing is - let's not get overawed by highfalutin names. They were invented by consultants to charge higher fees. If consultants had their way, a tea lady would be called a beverage engineer. All these new fangled stuff are really old concepts wrapped in new packaging.

What is financial planning?

If you ask me, wealth management simply means give me your money to manage and don't ask too many questions.

As for financial planning, we all do it in some way, don't we? When I was a kid, I remember getting 10 sen as my daily allowance. Curry puff was 5 sen then, nasi lemak 10 sen and the ice cream soda was 15 sen. So in order to get the drink, I would eat curry puff for three days. That is financial planning.

What's the fuss?

So what is all this fuss about financial planning?

We do it all the time. Businesses and their accountants do it all the time.

The difference is most of us do not do it for the long term and most of us (us here meaning the public) do not have the skills or the knowledge or the time to do a good job.

People are not very bothered about working out their finances because it is such a headache. Most of us don't plan except for the day, or for the month, or for the year, let alone to retirement. So as we get closer to retirement, we panic and open restaurants or something. (Most of us start off with thoughts of conquering the world and then by and by we are happy just to own a restaurant.)

Why bother? Many have said to me, why bother with financial planning so far ahead? Earnings are uncertain, stock market is fickle, inflation is ever present, and every time there is some saving, a lumpy expense suddenly appears. Today, I have work. Tomorrow, there is a new owner and I am out of a job.

All the more you should plan ahead, I tell them. The more uncertain the environment and the future, the more there should be planning, I tell them. At least to know what are the chances of you becoming a pauper or a grumpy old man with lots of money.

By doing financial planning, I say, at least I will know how far out I am from my financial goals. And if it looks like I am never going to make it, at least I can plan early to be a philosopher.

In my humble opinion, the fuss is because the market for financial planning can be very big. At least on paper. I am told that EPF investors exceed 5 million. And I can almost count real financial planners with my fingers.

All you have to do is strike a bit of fear into them, right?

Tell them that 60% of the world's elderly live in developing countries and most have nothing or very little to retire on. Especially the Asian countries that have trended to 1 child families. They now experience what is called the 4-2-1 syndrome (the inverted pyramid) - 1 working baby boomer trying to cope with two retired parents and four grandparents who don't seem able to die. (According to EPF, most retirees use up their money within ten years and then have to rely on their children.)

Tell them that inflation is relentless. Our inflation rate has been creeping up to 3% and this measurement includes several key price-controlled items, e.g. fuel. What if these price-controlled items went out (outside) of control?

And investment income has been poor in the last two years, as anyone in equities will tell you.

So there is potentially a huge market out there. Financial planners should salivate.

But is it that simple? Just tell them to plan and they will run to it?

No. The market evolves. It does not leapfrog (unless the government gives some tax incentives).

People need a lot of education. The funny thing is the rich are more into financial planning while the not so rich - those who need it more - are not into it. Why? Because the rich have a greater fear of dropping their living standards as they get older.

And then, there are various parts of the financial planning jigsaw puzzle that don't quite fit, as we shall see later.

Customers' needs evolving

Here is my version of how the market has evolved.

In the good old days, the market bought from friends - people they trusted.

Then came advertising, and brand selection became a major consideration. Less bought on friendship, more on brand perception - brands they trusted.

Then the market became particular about product features. What is on offer? What extra goodies? Markets became more fussy, products became less fuzzy.

No longer satisfied with one-brand menu offerings, the market has started shopping. This is like the days when the electrical boys each had their own shops or tied dealers throughout the country. And then found that by and by the customer wanted multiple brand choices. The same thing is now happening with car dealers. More choice, more competitive pricing.

What does the market want now?

The market doesn't quite know what it wants yet or how to say it (it knows what it does not want, which is pushing). But I think what it wants, increasingly, will be structure selection. What asset structure or portfolio mix would best fit a person's profile? People are increasingly bewildered by the plethora of products, hybrids and offers out there. They need someone to help them sort it out. Who has the time nowadays to keep track of the more than 300 unit trust funds and almost a thousand listed counters, not to mention the barrage of new instruments such as REITs and ETFs? So it seems safe to say that more and more of the market will be wanting to consider alternative financial structures.

What is next?

Who knows, but judging from trends in developed countries, the market will evolve to a full service financial planning. Perhaps, eventually, a substantial portion of the market will be doing their own financial planning with some help from the financial planner as a point of reference. A sort of self-service.

What is the market expecting of you?

And what is expected of you from the market?

As the market evolves, the customer will want (is already getting), more product information, through the variety of distribution channels opening up (such as direct mail and of course the Internet).

The customer will expect you to know what is out there, not just those products you are familiar with, not just those products that your company deals with, but what are available elsewhere. Perhaps, even what are available in overseas markets, now that our funds flow has been liberalised and the ringgit depegged.

But that is not all. The customer will want your advice on risk management and asset allocation strategies. In other words, he will need your help to balance between his fears and his aspirations. With perhaps, some knowledge of investment techniques and trends as well.

Like it or not, if you are going to win the confidence of tomorrow's customer, you will need to broaden your knowledge to cover a bit more on accounting and finance, investment management, estate planning, even tax planning. You need to know how to apply such knowledge in practical terms and, perhaps, if you want to stay ahead, you need to be savvy about the use of technology.

In short, you are being asked to transform yourself from a single sports athlete to a multi-sports athlete. One could say from a mono-gameist to a poly-gameist.

How the market evolves further depends on how the industry adjusts to change. The two are interdependent on each other because financial planning services are so new and there are a lot of uncharted areas where commonality is not attained yet.

The market needs to be educated. The industry needs to be upgraded.

So let us now take a look at how the industry has adjusted.

How has industry changed?

I think it is fair to say that the financial services industry, in the context of market-orientation, has been behind other consumer product industries. Marketing programmes, such as cross-selling and product bundling, after sales services and customer loyalty programmes have long been staple features of consumer product companies but have only become focal points of financial institutions in the last five years or so.

Why is this so? I don't know but I could hazard some guesses - that financial services players have generally been slower to become market-oriented because they are used to waiting for customers to call on them; because dealing with money needs a more dignified style, than the loud and brash marketing ways of say selling burgers; and because more emphasis is on compliance rather than customer care.

It appears the same way with financial planning.

This is not to say the front liners are inferior to sales and marketing people in other industries. On the contrary, I have met some of the best sales people of any industry in this industry. I truly believe that some of you could sell ice to Eskimos. It just seems to me that the support from the top has been too slow and niggardly. The foreign banks, which do not have a wide reach, seem to be taking the lead in this game.

We do not have good CRM (customer relationship management). We do not have good financial planning tools. Either they are too sophisticated, not user-friendly enough or too expensive.

It looks to me that we are still behind, compared to some of our neighbours. Singapore has got their Financial Advisers Act and Hong Kong followed last year, but we haven't quite got our act together (pardon the pun).

Don't get me wrong. There is a legislative framework already. And we have come a long way in providing the training and accreditation. But not in commitment.

For example, I am told personal financial products sold by financial planners make up more than 50% of all sales in Hong Kong. Here I believe it is less than 5%. I am also told that there are about 4000 practising financial planners in Hong Kong and some 700 in Singapore. We, I am told, have barely 100. And if we look at who among these are really financial planners (not just glamorous product pushers), the number could be even less.

The only area where we are ahead is in estate planning. Organised will-writing and trust services for the masses started ten years ago, ahead of even developed countries.

The gaps

So why are we behind in financial planning? What are the things that are pulling us back?

Hang on, you say. We are no longer snake oil salesmen you know. We have advanced. We have accredited courses and qualifications. We have IUTAs. We have new formats. Why, we even have new cards that say comprehensive financial planners. Okay, here's where I tread on sensitive ground.

Well, as has often been seen in this country, and as our own Prime Minister has lamented - first world infrastructure, third world mentality. We Malaysians seem preoccupied with form (besides making the longest satay etc.) - nice buildings, dirty drains, dirty toilets.

Yes, we have followed the form. Authorities provide the regulatory framework to steer agents to upgrade themselves. Agents enrol for courses and take exams to qualify as financial planners.

But is this enough? If you think so, it is like saying we can fly an aeroplane after studying the manual.

Are we kidding ourselves with form rather than substance?

Let me ask - how many of us actually fill in the needs analysis form with the customers' needs in mind, inconvenient though it may be? Or do we fill the form merely to comply with rules; and have large chunks where the word ‘waived' is written.

And how many of us actually help the customer make out an asset inventory? The starting point of financial planning is determining the actual financial position of the client so that income, outgoings and cash flows can be projected and various financial options considered. Perhaps some of us start off with blank pieces of paper and help the client project ahead, not holistically but only those parts that the client feel like disclosing. Others among us may try to engage the client in sophisticated modelling that the market is not ready for yet.

How many of us actually do financial planning for ourselves? If we are not doing it for ourselves, how do we expect to convince others of the need?

Could the truth be that we take the easy way out? Put the form in but leave out the troublesome part, which is educating the public.

If the sales force is reluctant to adapt, so are the service providers. Understandably so. Their primary objective is to push for sale of their own products. So they tend to be overly protective about their distribution channels. And why shouldn't they? After all, they bear the cost of maintaining the sales force. Their fear is that exposure to financial planning and other people's products will distract the sales force from their focus and this will in turn affect the bottom line. Even within the same group, some can get paranoid about cross-selling. Never mind that ushering to a limited range of products is not what the customer wants today.

Similarly, many sales leaders are reluctant for their down-liners to be exposed for fear that focus will be lost and thus affecting their overriding.

In the earlier years of promoting Rockwills, the idea of getting the sales force to learn about estate planning was met with a lot of resistance both from vendor companies and sales leaders. It is only recently that companies and leaders have opened up a bit. Well, I always say that the market decides what it wants and if you don't do it, someone else will.

Judging from the development so far, I feel that while there are financial planning houses that proclaim their independence and advise clients on selection of third party products, such entities are very small and not sufficiently backed up in resources. Most of these are entities owned by individuals who have limited capital and reach. Institutional financial service providers have so far ignored them, for now anyway, preferring to concentrate on wealth management services to high net worth individuals (which by the way is another glorified form of product pushing rather than actual financial planning), or bancassurance (non-mobile sort of packaged advice, which is a significant threat to you nevertheless).

We now come to the institutional infrastructure.

There is institutional competition which creates confusion to the public. Just looking at possible qualifications offered by various bodies, there are at least six or seven - ChFC, RFP, CFP, FChFP, RFC, CFA, IFC .... Very disconcerting for newbies, some of whom decided to play safe by pursuing two or more of these qualifications.

This reminds me of the struggle in the accountants' world between the MIA and the MICPA. This has been going on for more than three decades. Conflicting directions, conflicting policies, each claiming to be representative. Mostly, this is to do with egos and power play. What a waste in resources for the nation!

And then the oversight of what goes on in the financial planning world is unfortunately dichotomised, being the responsibility of two authorities, namely, Bank Negara Malaysia and the Securities Commission. This is of course historical.

But like this, progress may be slower. Policy decisions may be by consensus only. It is as if there are two HR departments in one company, each handling a different business line.

It can be done but is this ideal? It could be then that sensitive issues which concern the future of the industry are skirted and not properly addressed. It could be there will be significant duplication of resources (e.g. in licensing work). It could be problematic if say, one takes a market-oriented approach and the other a control-oriented approach. In many other countries, oversight is by a single authority.

Isn't it strange that financial planners are expected not to think along product groupings but supervision is still along product groupings? The problem comes when more and more hybrids blur the distinction between each product group. Then, we would have to ask is the structure logical or relevant. Same as if supervision of restaurants is divided between food and drinks.

Again, this may be a sensitive point, but I would like to say it.

With due respect to the authorities, I feel that formulation and implementation of rules is sometimes done without enough consideration to market conditions.

For example, there is a push to disclose commission to the customer.
I am not sure the market is ready for this or whether we are doing this right. The bancassurance people are obliged to do this soon but not the others. Consumers may get used to disclosure but the basis for disclosing needs looking into - one has fixed salary whereas the other is commission-based, so the two are not comparable. And commissions could be disclosed as a linear rate over the product tenor rather than as an upfront figure.

By the way, we as consumers still have not seen the disclosure of APRs (or what is called the annualised percentage rate) for hire purchase and mortgage loans, something that I saw in UK as early as 1974.

My observation is that the architects and implementers of rules can sometimes be over-exuberant when it comes to ‘protecting the market'. Market should not mean consumers alone. It should encompass all those market mechanisms that help rather than stifle growth.

I have recently been on a nationwide road show and the feedback I get is that recent guidelines have caused demoralisation among sales people. Of course, one can say that sales people are emotional bags anyway, one minute down, next minute peppily up and running again.

But the income structure of the personal financial products industry has evolved such that over time compensation (and therefore motivation) has been shrinking. A recent estimation shows that a Hong Kong commissioned agent earns about ten times the average of the Malaysian counterpart. Even taking into account cost of living, the difference is still substantial.

From the sales people, it would seem that the authorities are setting rules that put their income under pressure while more costs are incurred to upgrade. Is it any wonder that total sales people in insurance and unit trust has hovered around 120000 since 1995? (In fact, number of insurance agents actually shrank - 94000 to 88000. And in years when growth was 20% or more.)

Of course, there is a compelling reason why authorities are doing this sort of thing. They want to drive the industry to global competitiveness and 2007 is just around the corner. But I think the tweaking of rules can be implemented with more empathy to the sales force. For example, recent commission tiering affects those who are into high value sales, the very ones we should encourage, not discourage. After all, sales people are the prime force for growth. And with growth come cost efficiency and investment in and development of knowledge, all of which ultimately benefit the consumer.

What can be done?

I don't have the answers but here is my take.

Everything starts with you. Change starts with you. To quote John Arkinson "If you don't take charge of your own life, somebody else will." Never mind what the authorities do. Never mind if your boss cannot see beyond his nose. You decide for yourself how you want to adapt.

Keep your mind open. Accept that the market is changing and demanding change. Accept that you won't be able to push products much longer.

Accept that customers don't belong to you. Accept that banks are going to encroach into your territory. They with deep pockets, enormous resources and extensive network. Plus they have a large captive customer base and more data on their customers than you have. Accept these things and you can adapt. Turn a blind eye and you turn into a dinosaur.

Accept that you have to leave your comfort zone and learn new tricks. Upgrade your knowledge and skills. Acquire new ones in this very wide field.

When we started estate planning ten years ago, we were ridiculed. Today, it is the fashion, offering an unique door-opener and vast opportunities for building life time relationships.

Learn to apply the practical side of financial planning. Set aside time to invest in knowledge, practical knowledge as well - sacrifice short term for long term gain. Don't expect instant gratification, manage your expectations. One of the universal laws in life is this - any investment will have a J curve, pain before gain.

Upgrade your service. Upgrading doesn't mean just getting more knowledge. Upgrade also means being professional in everything you do. Being professional means putting your client's interest before your own.

In the course of my career, I have bought sixteen policies and twelve unit trust investments for my family. These were bought through different agents at different times (seven of them, no less).

Not one of them had good after-sales service. Not one of them bothered to maintain a relationship with me. You cannot not maintain long term relationships if you want to do financial planning, which require regular review and updates over a long period of time.

Also, being in the estate planning business, I am aware that some agents have enrolled for estate planning training to learn about writing wills and then, on the basis of a short course, they figure they have become experts and can write or copy simple wills for their clients. To me, that is highly unprofessional. If they are not prepared to risk their reputation in investment products, why would they risk jeopardising the distribution of the estate to the client's family, for the sake of avoiding a small cost?

This is the mentality of a snake oil salesman. Sell and move on. Forget about after sales service. Be a snake oil salesman and the market will treat you as one.

So, I would urge you - upgrade yourself both in knowledge and professionally. You will gain the respect of your clients and the market will open up for you.

Update yourself. If baby boomers are computer-savvy, so must you be. Otherwise, your customer may have better access to financial information than you (through the Net), and make you feel stupid.

Stop trying to change the market. Go with the flow.

Don't make wealth creation promises, emphasise adding value through balanced advice.

Who does the education of the public? You do. Simply letting things drift along will not do. Better we educate the market than leave to the market's whims.

Take the development of the retail stock market. Cost to the consumer has come down substantially but there has not been much progress educating the retail investor. We still see a lot of retail investors getting hit by rogue counters. Enforcement is one part but the more important part of the equation is education. If enough retail investors make an educated choice, this is more effective than enforcement.

Similarly, we need to educate the public, especially the younger ones, about preferring financial planning to making blind choices.

If what I say is wrong, then why is it that less than 1% of you are actively involved in wealth distribution (or estate planning)? Isn't planning on how to carve out the estate, settlement of liabilities and business succession planning an integral part of financial planning?

The reason I hear most often about this reluctance to get involved is that it is too troublesome. It is too troublesome because it involves educating the public.

Watch out. Banks have a better reach of customers and can become centres of influence in financial planning services.

For companies and leaders, you too need to dance in tune. It is understandable that you do not want to see agents whose expenses you cover, go and sell other products that are of no benefit to you. But you too can't stop the tide. Strike a balance. Encourage the exposure and networking while setting performance benchmarks.

For regulators, may I suggest regulation be tempered with pragmatism. Understand the buttons that motivate people.

Imposition of arbitrary rules, without considering the practical side, can be self-defeating. People work around them. Forms get filled but the spirit is not followed. Companies cut benefits when cash surrender value is based on fair value. Sales get broken into two or more parcels when there is an income cap, and customers get misleading reasons as to why this is done. One customer segment benefits, another loses.

Is it really good for the market? I don't think so.

More interaction with industry players and getting a feel of the market from front-liners will go a long way as part of the dancing together.

As a fledgling industry, take the lead to decide your destiny. MFPC is a good start but it must be backed by the two supervising authorities, otherwise it would simply be a toothless tiger.

Ending

I have already said too much. Sorry if I stepped on some toes along the way. Thank you for listening.