A Very Quiet Month. Changes in the SG Financial Advisory Industry

The month of March have been peaceful indeed. After all the excitement we had in the second half of 2011, it is back to the monotone and quiet March to May Period. There is a saying in the investment world," Sell in May and go away." Seems like May has come early indeed. Other than some small political news that can potentially ignite into something big, there are little surprises on the economic front.  I do welcome the lull in the financial market. I doubt anybody can take the kind of "excitement" of the Euro Crisis for a prolonged period of health. The stress will have an increased mortality risk on all the traders and fund managers. Jokes aside, here are some of the newsworthy information:

1) Iran still refuses all the demands by the western powers and the sanctions imposed by them is now in full force. The Israelis are polishing their swords in preparation of a strike on Iran's Nuclear installations. President Obama is trying to solve the crisis through diplomatic solution and trying to avoid getting into another costly and unpopular military engagement. The sanctions against Iran will not work very well as Emerging markets like China continue to import oil from Iran to feed the growing energy needs of their nations. A Israeli strike will see a big correction in the market and a good opportunity to enter the stock market.

2) On the European front, things have been quiet recently. Spain has raised concerns that it might need more funding in the near future. That created a slight furor in the financial markets but that is nothing new based on the experience of the 3 year old European financial crisis. This could create further implications in the future.

3) Oil prices continued their climb due to the worries in the middle east (as usual) but the volatility seems to have died down quite a bit in March. Gold prices and general commodities prices are weaker as the US Federal Reserve that they will reserve judgments if the US economy needs anymore stimulation, given that there are some improvements in country. This affected commodity prices as the odds of higher inflation due to monetary loosening become lower.

4) US Economic indicators still continue to improve, although currently at a slower pace as compared to a few months ago. New data indicated that US consumers are starting to spend again, and is on the way to pick up the slack from a slowing China economy. However, it is doubtful that the US consumers can regain their "power spending" in the near future given that many Americans are still stuck with properties that are negative equity.

Most of you should have transited to the new portfolio with an emphasis on US equity market and a 20% allocation into Singapore Bonds. The worst hit for the month are the commodity funds. They suffered a huge hammering due the Federal Reserve's "wait and see" attitude. There should not be too much concern on this front as inflationary pressure will kick in at some point of time as the world economy recovers more strongly. Most of the Asian equities suffered a slight correction after the major run-up in Jan and Feb. The US stock market continues to outperform the rest of the world and I expect that to continue until the US investors are sufficiently confident enough to move some of their funds out to emerging markets again. The average portfolio is down by -0.18%. The outperformance by the US equities is dragged down by the exposure to the resource funds. I expect a gradual correction in the near future should the world is still at peace. The rush of hot money infused by the optimism of the recovery of the US market seems to have died down and investors will start to take profits when they see that the market do not rally further.

Upheaval in the Financial Advisory Industry

The bigger concern that will affect you in the near future will be the potential changes that will be introduced to better professionalize the financial advisory industry. This is good news for us as I believe that the FA industry is already held at a higher standard than the banking and insurance industry and the implementation of such changes will further improve the confidence of consumers towards financial advisers. I have to admit that even within the FA industry, I have seen firsthand on how advisers are asked or tempted to promote products which offer higher commissions. I have come across managers who trained advisers based on "don't ask, don't tell" philosophy. Meaning if the prospective client do not ask about a cheaper alternatives, the adviser will not highlight these products. Without the fee system which is now be reviewed by MAS, good advisors either will suffer a sub par income or quit in discouragement. Just to give an illustration, the cost of the cheapest investment platform will take 10 years to catch up to the commission paid to the most expensive investment platform in terms of wrap fees. That means the good adviser will earn 1/10 that of a more profit oriented adviser in the short run. Most consumer-oriented advisers will not survive that 10 years to reap the fruits of their good intentions. That probably will go against the conventional wisdom that "Doing good will be rewarded". Doesn't seem to apply in the financial advisory industry. What's more, clients do not work with multiple advisers at the same time, so, the good adviser will more than not, be under appreciated by the clients and may even be criticized, when things, which is beyond the control of the adviser, goes wrong.

Should the fees only system be implemented, good advisers can now be compensated equally as compared to the average advisers as they are now paid on the time spent on giving good advice, rather than trying to figure out which product has a higher commission. There are some pitfalls to the fees only system. UK, which is one of the first nation in the world to implement the fees only system, will expect 30-40% of the advisers to leave the industry. This is good for the existing advisers but bad for job creation. Advisers will also gravitate towards better off families as they are probably more willing to pay fees. This is not unlike that of a law or medicine industry where the wealthy gets the best doctors and treatments. However, there are still government subsidized support for the lower income should they require such services. However, there are no such support for the financial industry. Unless the government creates an organization that subsidizes the fees for the lower income, the people who need financial advice the most, will find themselves stranded with no advisers willing to assist them.

In my personal opinion, I feel that moving towards a fee based system will benefit the consumers and consumers-oriented advisers in the long run. However, measures must be put in place so that the lower income families can still have access to such services in the future. It will be interesting to see how the measures will be rowed out and I will say "Good Luck" to those advisers who have been profit driven rather than consumer-oriented. You will find them protesting the loudest during any discussions on transiting to the fee based method.

As usual, the top performing fund and worst performing fund in the IFAST universe are placed on top and bottom for comparison.