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Do You Empower Clients to Take Control of their Finances?

By Taylor Liao, CFP, Chinese Taipei

I just bought my first Apple product, the iPad mini two weeks ago. I haven’t had many experiences with Apple devices, so the iPad mini really impressed me with how user-friendly it was and how easy it was to use. Every time I think of Apple, I think of Simon Sinek’s Golden Circle concept.

Simon Sinek: The Golden Circle

Simon’s TED talk reminds me to go back to the basics of financial planning. His speech is about leadership – people follow leaders because of their great ideas about making progress or making a difference. While Apple’s competitors were busy explaining in detail how their product was better, Apple was saying that they wanted to challenge the environment and make a user-friendly computer. Apple always focuses on their “why” and communicates with people their ideas behind designing good devices. They don’t compete in the hardware space – they just focus on making a great device that is easy-to-use.

Deceptive Marketing

In order to help clients achieve their goals, we expect them to control their spending and not purchase unnecessary products. The reality of the situation is that the client receives confusing information from product providers, insurance salespeople, etc. When the bank interest rate came to a historically low rate of 1%, the short term insurance product 2-6 years’ endowment policy became expensive and unattractive to clients. Insurers switched to US currency policy immediately and started to sell these products everywhere.

When the insurance company developed these products, they focused on the “what” – “our return is 3% better than the local currency interest rate.” What they forgot to mention was that the client would have a risk of reverse exchange in the future. Product providers spend a lot of money advertising their products in the media and it causes confusion among the public about financial management.

A good example of this is the shopping network on television. This channel is meant to tempt buyers and they appeal to peoples’ weakness – having instant satisfaction from owning something new. The sales strategy used on the shopping network helps eliminate guilt from spending a lot of money. For example, if you purchase a camera worth $800, the price the shopping network uses is 24 payments of $33.30 with no interest rate. 24 payments of $33 appears so small that everyone can afford it. The buyer thinks it would be easy to pay for and so they make an immediate phone call to order the camera and pay with their credit card. Another piece of information that is left out is if the buyer can’t afford one of the payments, they will be charged a 20% annual interest rate. This situation can spiral out of control quickly.

Endowment Policies

When a salesperson sells an endowment policy as a deposit in a bank, he/she is miss-selling the product. They will claim that the actuarial assumption interest rate of the policy is equal to the interest rate of the savings account. With a savings account, you can withdraw money at any time, and you only lose the potential interest that would have been gained if the money weren’t withdrawn. With an endowment policy, the money is bundled for 2-6 years. Clients are usually misinformed that they can withdraw money from an endowment at any time, just like from a savings account. They can withdraw money but they will receive a penalty when they do so.

Deceptive marketing fools clients and as a result clients have a hard time reaching their financial goals. A client of mine told me that she had bought many endowment policies, explaining that the salesperson had told her that they would be useful for her retirement plan. The insurance benefits that she would receive after twenty years of payments were hardly a retirement annuity. The first year, she would get paid, and the next year she would receive nothing.

I am not saying an endowment is an inappropriate tool for a retirement plan, but if you put all your money in this low return policy, instead of other investment tools, you could be missing out on returns that are two or three times higher than the actuarial assumption interest rate of the endowment. An endowment requires a very high principle to meet retirement goals. The best way to reach these goals is to go back to the basics. In other words, insurance is for risk management coverage, not for investments or savings.

Insurance Policies

When talking to clients about the difference between a financial planner and a product salesperson, I always tell them to be careful when choosing insurance products. From the cash flow point of view, the liquidity risk should be considered carefully because you can’t withdraw your money whenever you want. Another drawback is the risk of the sustainability of the insurance company; we have more than 30 insurance companies in Taiwan. With such a small island of only 21 million people, that’s too many. With this much competition, it seems obvious that some of the companies will go bankrupt in the near future. Imagine what would happen if you had a retirement policy with a company and you are expecting annuity payments to support your retirement and then they went bankrupt.

By utilizing the theory of Sinek’s Golden Circle, I try to communicate the “why” at the start of the client relationship. This initial conversation covers 
why he/she needs a financial plan and what the difference between finding a financial planning solution and simply purchasing financial products. Product providers develop and sell products – the needs of the client are not their concern. Their goal at the end of the day is to package products and sell them. I encourage clients to change their attitudes; for such a long time, financial services clients have not been treated fairly and they need to make a change and put themselves first.

The Role of Financial Planners

Our role as financial planners is to help them take back control of their finances and financial products. They need to understand that their needs come first when working with us. We should help them clarify what their needs and goals are and emphasize that financial products are just tools to achieve these goals. Ideally, we want our clients to get to the point where they can speak up when talking to a product provider and say, “No, I don’t want that product; I know what I really need and I can decide by myself.”

If clients want to keep a balanced financial status, they should learn to say no to market attractions. If they don’t learn this skill, they will spend too much money and lose control of their finances. To accomplish this skill, it is important to have a clear expectation of what they want in their future. A comprehensive financial plan is necessary to help identify goals and corresponding tools to help achieve those goals.

Once clients have a clear road map of their future, they will be able to make the right decisions when working with product providers and choosing from a variety of products.

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