AN OPTION that allows people to waive their rights to financial advice when making investments ought to be modified or scrapped, say some industry experts.
They believe the clause - called Option 4 - makes it far too easy for financial institutions to dodge their responsibility to give retail investors sound advice.
'In giving financial advice, we must try to rise to a higher level of practice, assume responsibility and ensure what we sell is appropriate and benefits the investor.' Mr Salim, on upholding the profession ... more
It is also seen as a culprit in the ongoing structured products fiasco, where many investors were sold products clearly unsuitable for their investment profile.
The president of the Association of Financial Advisers Singapore, Mr M. Salim, has said the existing Option 4 needs to be re-assessed. 'That concept of 'no advice' should not be something that advisers are so quick to offer investors.
'In fact, they should reserve making that offer to the investor unless it's explicitly requested during the KYC process.'
KYC - or know your customer - is a mandatory practice administered by financial advisers. It aims to detail a person's investment objectives, financial situation and personal needs so the right products can be recommended to suit his profile.
Many retail investors who bought failed products such as Lehman Minibonds and DBS High Notes 5 claimed that the risks were never explained to them by the people and institutions that sold them.
An adviser who sells an unsuitable product to an investor, or who carries on the sale process even when he knows the person does not understand what he is getting himself into, could be in breach of the Financial Advisers Act (FAA).
'However, one thing that relinquishes the adviser's liability in such cases would be if he had gotten the investor to sign on Option 4 during the KYC process,' said Mr Salim.
The process involves advisers, including relationship managers or personal financial consultants, offering four different options of 'advice' to an investor.
Option 1 includes a complete fact-finding process and needs-analysis before products can be recommended.
The second option is less stringent and involves a 'partial' fact-find, while Option 3 investors only want advice on a specific product.
The fourth option is 'no advice'.
'Option 4 is really when a client comes and says, 'I want to invest in this product but I don't want your advice',' said Mr Salim. 'Anything other than that should be an Option 3, 2 or 1, but if the adviser still puts it as Option 4, then it would be wrong and that happens.'
Industry veteran Stanley Jeremiah, now a council member of the Singapore Insurance Institute, agreed. He said: 'The 'no advice' has been used by financial advisers to avoid liability or responsibility.
'If the adviser tells the investors, 'If you want to save time, just agree to no advice, otherwise you have to fill up all this information', chances are the investors will do as the adviser tells them to.'
Mr David Gerald, chief executive of the Securities Investors Association of Singapore, said advisers also expose themselves to greater risk of complaints if they inappropriately convince investors to choose Option 4. 'An investor can sign to say he does not want advice but when he loses money, he may raise many issues, such as saying, 'I'm not well-educated and I don't understand the prospectus; I trusted the adviser because he represents a well-established institution'.
'So it is always better for the adviser to get the investor to understand the risks and get him to acknowledge that he has been advised,' he said.
Mr Leong Sze Hian, president of the Society of Financial Service Professionals, said there are other ways of looking at the relevance of Option 4. 'No advice may be applicable for investors who want to decide for themselves, such as an existing investor making a regular top-up, so no advice may then be appropriate.'
'And 'no advice' also does not mean that it's a way out for representatives to protect themselves.
It may also lead to advisers giving their recommendations in such a way as to protect themselves because they must give advice - such as only recommending low-risk products - to match an investor's profile.'
Instead of removing Option 4, Mr Jeremiah suggested monitoring individual sales and putting disincentives for advisers who report high Option 4 sales.
Mr Salim said advisers also have to recognise that they play a key role in the sale process. 'In giving financial advice, we must - even if there's no requirement to hold additional responsibilities - try to rise to a higher level of practice, assume responsibility and ensure what we sell is appropriate and benefits the investor.'
But he noted that investors also need to take some responsibility.
'They can't just accept the words of advisers. They have to do their own due diligence, read about the product, understand it and know if they need the product,' he said. 'They must not be afraid to ask questions regarding their money.
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