Investing

Don't Trust Your Financial Advisor? Here Are 4 Alternatives to Consider

Recent findings indicate that most Singaporean's do not trust financial advisors or the financial services industry as a whole. If you are skeptical of advisors you may be interested in taking ownership of your investments through a number of alternatives.

A recent survey by the CFA Institute indicates that only 10% of Singapore's individual investors believed that their financial advisor always put their customers' best interest first. Furthermore, less than half (47%) of individual investors trust the financial services industry as a whole. This may be due to the commission based compensation system with high fees that incentivizes advisors to promote making trades rather than to focus on generating returns for their clients. However, there are legitimate alternatives for growing wealth without the help of a professional financial advisor. Below, we discuss some investment strategies for Singapore's skeptical investors.

Follow the "Crowd"

In investing, literally following the crowd can be a dangerous tactic. However, crowdfunding can be a great way of increasing your wealth while still maintaining your own unique and diversified portfolio, especially if you are interested in investment opportunities that are not available through most financial advisors. There are several crowdfunding platforms in Singapore that give individual investors the opportunity to invest in local SMEs and startups. These platforms provide individuals access to deals, previously available exclusively to banks or private equity firms, with the potential for very high returns (15 - 30% p.a.) and minimum initial investments as low as S$50.

Graph showing the Minimum investment per financing campaign requirement of five major P2P platforms in Singapore. Funding Societies has the lowest required investment per campaign of S$50

For example, Funding Societies is a platform that should intrigue even the most cynical investors, as its own management co-invests in the every deal that it offers to investors. This suggests that the platform has aligned its interests with investors, addressing a major concern highlighted in the CFA Institute survey. Its fee is also quite low at 18% of interest earned. Like any investment, crowdfunding campaigns should be carefully analysed. Investors should examine the strategic, financial and risk profile of each company that they are considering. It is also wise to diversify investments among crowdfunding campaigns in order to spread out risk.

Robots Are Cheaper Than Humans

Robo advisors offer another promising investment mechanism. These automated investing platforms are able to offer customisable investment strategies with cheaper fees than traditional advisors. For example, some robo advisors in Singapore charge 0.2%-1% compared to 2.5%-5% charged by the traditional advisors. Additionally, robo advisors tend to offer solid annualised returns of 4%-7% While the CFA Institute survey indicated that robo advisors are still trusted less globally (22%) than private wealth managers (44%) or financial planners (43%), it is likely that consumers will come to appreciate them as an alternative to financial advisors as these platforms become more commonplace. Robo advisors are still quite new; the very first platforms launched in 2008 during the financial crisis, and the majority of Singapore's robo advisors were started in the last few years.

Take Matters into Your Own Hands and Open a Brokerage Account

Individual investors that are not interested in paying for advice and are capable of doing their own research should consider opening an online brokerage account. Globally, 84% of the CFA Institute's respondents identified full disclosure of fees and other costs as one of their top requirements for trusting an investment firm; however, only 48% were satisfied with their firm's disclosure of these fees. Brokerage accounts also charge fees, but some online brokerages, such as SAXO Capital Markets, charge much lower fees than others and fully disclose all of their costs associated with trading securities on their platform. While it takes time and effort to learn about investing basics, opening a brokerage account gives individuals the opportunity to apply their own research and circumvent advisor fees.

Fees for Trades of Less than S$50,000

Leave the Research to the Professionals, Without Paying for It

Exchange-traded funds (ETFs) are funds of pooled investor money that are professionally-invested in a group of securities. ETFs are designed to offer investors with a diversified method for tracking a certain industry. Additionally, ETFs do not require investors to pay fees, and can be easily purchased through an online brokerage account with its usual trading commissions. ETFs can be a low-cost way to invest in the stock market without doing too much research. However, you should still do some level of research to help you select which industry (i.e. tech stocks in Asia) or asset class (i.e. gold) that you want exposure in, since returns can vary significantly from one ETF to another.

William Hofmann

William is a Senior Research Analyst at ValuePenguin Singapore, focusing on banking and SMEs. He previously was an Economic Consultant at Industrial Economics Inc.