The topic about financial education has been hot (at least among the financial bloggers) after Lionel’s article on our meet-up with the good folks at Monetary Authority of Singapore (MAS). It struck a chord with many, and the entire personal finance blogosphere responded in full force.
Many including LP, SGYI and Kenji shared their own experiences. Xeo Lye, Grandmaster of financial card game Wongamania broke down the entire personal finance journey into life stages. Chris Ng in his usual caustic manner flipped the finger at the establishment and urged all of us to achieve financial freedom so that we can do the same too.
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BigFatPurse have something to say too. We are not going to repeat the great points raised by these bloggers. We are going to talk about financial education as a new industry, and some of the trends which we have observed.
#1 – Low Financial Literacy
There are no official measurements of financial literacy but the general consensus is – the level of financial literacy in Singaporeans leaves a lot to be desired. My personal metric is that if you ask 10 people and more than 5 of them are not able to explain the key difference between a life insurance and an endowment plan, I think the general financial literacy is pretty low.
The other way to look at the level of financial literacy is to observe how people fall into scams. For example, we have numerous gold scams in the past, promising a monthly cash back when investors put their money in gold. Gold is a negative yielding asset which means it doesn’t give dividends nor interests and yet it incurs storage cost. How is it possible to generate cash flow by investing in gold? And the gold price quoted by these companies were significantly different from the market price, which can be easily compared on the internet.
Tightening the regulation is not an elegant solution because there is a limit before you stifle the business environment in Singapore. In fact, not many people are aware about the existence of a MAS watchlist of companies which they could refer to.
Financial education is required to raise the literacy so that less people would fall into scams.
#2 – Sales Incentives Often Drive the Wrong Behaviours
Given the low financial literacy level, most people are unable to plan their finances and would often entrust the financial planners to do so. You are lucky if your financial planner is ethical and competent. The mystery shopping conducted by MAS in 2011 and discovered that 1 out of 3 products sold was clearly unsuitable. This created a suite of changes that are undergoing now. The most recent one would be the compareFIRST website which aggregates various insurance companies, and directly sold to individuals without commissions, up to a certain limit.
The abuse of power can only happen because consumers do not understand what they are buying or investing in. There is no check and balance between the advisor and client. The risk profile assessment is ‘controlled’ by the advisor, which can be ‘aligned’ to the products that were sold.
Lastly, there is an incentive to abuse the power when the advisors are remunerated by commissions. Advisors need to earn a living and it isn’t easy to keep selling low-cost products which save clients money. They need to spend hours with a client per session and inevitably the pressure of putting bread on the table would force them to push certain products with higher commissions. A fair model would be to pay advisors salaries instead of commissions. But the insurance companies would not do that because it would mean less revenue and profits for them – the sales structure drives people to work harder naturally. The expense lies on the advisors who quit after they cannot earn their keep and of course, the clients.
#3 – Fee-based Financial Planning is Expensive for the Masses
Given the misaligned agenda between sales-driven advisors and clients, there were talks about fee-based advisors. These advisors are paid by time instead of the products they sell. It all sounded good but to make the time worthwhile for these advisors, they have to charge thousands for the consultation and a tailored financial plan as a deliverable.
Most people would find the fees too expensive and it only makes sense if you have a larger net worth to plan for. Paying $5,000 for managing your $100,000 net worth would mean you just lost 5% of your wealth.
Hence, fee-based advisors are only good for the rich.
#4 – Increasing Concerns About Lack Of Money In Expensive Singapore
Singaporeans are becoming more concerned about their retirement as CPF is a hot topic in the press and on social media. Our population is greying and things are getting more expensive. People are worried about the inability to maintain the standard of living during their golden years. Parents would not and probably could not rely on their children because the latter are also tied down with large financial commitments in the form of study loans, car, marriage, house and kids.
Having to worry about the lack of money is a very painful situation. This means many people are choosing jobs or career which can pay them the highest, but not necessary jobs they want to do, inadvertently trapping themselves in the rat race. It isn’t a surprise to see Singaporeans scored badly in some happiness surveys in the past.
#5 – Burgeoning of Low Cost Investment Products and Platforms
Technology has been disrupting many industries, creating more efficiency for the society. I can name a few local start-ups dealing with finance. Drwealth aims to equip individuals with the platform to plan and track their finances. MoolahSense and CapitalMatch enabled retail investors to participate in high-yield corporate bonds which have only been available to wealth banking clients in the past. Other companies like DIYinsurance and Government’s compareFIRST facilitate individuals to compare insurance online and purchase them at lower costs. Asset management companies have also created countless low cost index Exchange Traded Funds (ETFs) as good investment products.
However, all these are tools are not useful if individuals do not know how to utilise them.
#6 – The Call for Baseline Financial Literacy
For example, in order for do-it-yourself insurance to work, individuals need to understand the different types of insurances and their purposes. Understand their financial needs and how these tools can help them in one way or another. Financial products are not shampoos which my Grandma can buy and use. While these tools and platforms built by MAS and the various start-ups are moving in the right direction, we need the masses to be equipped with a baseline knowledge to maximise its utility.
And the most efficient way to ‘distribute’ financial knowledge is to run financial education courses. This one-to-many model is much more cost effective than the one-to-one financial advisory process.
How did BigFatPurse end up here
Most financial bloggers start writing in order to keep a journal of their experiences. Many of them have no intentions of blogging to make tons of money. Even lesser bloggers would think of blogging as contributing positively to the society.
That’s how it all began for the four of us here at BigFatPurse. I started BigFatPurse because I merely wanted to document the lessons I picked up from the markets. For Jon, writing has always been great fun. Alex got involved because it was a platform for him to utilise his internet marketing skills. Louis wanted to put his CFA to good use.
We saw that quality financial education is lacking, and we stepped up to fill the gap. We told ourselves that we would do no hype, no hard sell, and no outrageous promises. For every dollar we charge for our courses, we will deliver many times that in terms of value. And for every free information sessions and Pro Bono corporate talk that we conduct, we hope that we have made some small impact and motivated someone to take positive steps towards financial literacy.
Along the way we saw the progress we are making. More importantly, we saw the purpose and how we are actually contributing, in our own little way, to the greater good of the society. It further reinforced our stand that we are doing something right.
Where do we go from here
Financial education is currently conducted in some schools which is offered by companies. These programmes are limited to budgeting and tracking of finances. While these are important, a big gap still exists for the current group of adults who had no financial education in the past, and their financial needs have expanded beyond budgeting to insurance and investment.
To tackle that, MoneySense was set up in 2003 as a National Finance Education Program for Singaporeans. The Institute of Financial Literacy was set up in conjunction with Singapore Polytechnic in order to provide free and unbiased personal finance advice and education. However, our experience told us that few people have heard about such programmes.
One of the possible reasons is the way the information is disseminated. Finance is boring and most people would prefer to watch Korean drama than to read an article about financial planning. This is where financial bloggers have been contributing – strip down the seriousness of finance, highlight the key points, writing in a personal tone, akin to a coffee-shop talk about finance. It is definitely more palatable to the man on the street.
We love personal finance and we are entrepreneurs too. We saw this gap in our society and we took the risk to start this financial education business. If we are right, our business will make money, and the financial literacy level will increase as a result. And yes, financial industry would shrink if financial education ever succeed. More bankers and advisors would lose their jobs but I think it is inevitable.