9 common mistakes in financial planning

When I engage a person in financial planning, a common reply I get is usually "I have already" When I eventually get to review what they "have already", I found these common problems. Listed based on how common I found them.

1) The financial plan is very much centered around insurance. This is common as most financial advisers are actually the traditional insurance agent, and will spend most of the time talking about your insurance needs. While insurance is important, your plan will be unbalanced if it focuses primarily on your insurance needs. This is the most common mistake I encountered.

2) The first step in financial planning is actually appropriate income allocation, asset allocation, and review of your financial ratios. And this is rarely if ever done! We need to make sure our income is allocated not just for current expenses, but for a better future, in terms of insurance and investment. Allocation to insurance should be generally minimized, since it's an expense, and allocation to investment maximized if you can afford it. Financial ratios are important to assess your financial health, such as solvency ratio, saving ratio, debt-to-asset ratio, debt servicing ratio, and investment to asset ratios. A thorough review of ratios will help identify any misallocation of income or assets. This is rarely done.

3) Investment using ILP instead of pure investment. Again, this is because most financial advisers are traditional insurance agents, and ILP is all that they will sell. While ILP is not exactly an evil product, it comes with higher costs and loss of liquidity, which is generally a disadvantage to a pure investment program. Unfortunately most insurance agents only know ILP, and most people exposure to a "financial adviser" is a traditional insurance agent.

4) Investment using a long-only strategy, rather than products that are un-correlated to the market. In the past, retail investors only had access to very basic long-only retail funds, which will lose money when the overall market crashed. Over time, things have improved in Singapore, with some hedge funds now made available to retail investors (traditionally available only to the high networth, AKA AI). However, most people are unaware and have not taken advantage of this.

5) Investing your CPF SA. CPF SA provides a 4% risk-free return. It is something very attractive and almost unbeatable. People who have been sold investments using their CPF SA almost all lose money (or make less than 4%pa). Thankfully, this is getting less these days as there is no more fee chargeable for CPF investment, so no incentive for a "financial adviser" to sell.

6) Taking either too much risk or too little risk when investing for retirement. This mistake is also quite common. I have come across retiree who are unsuitable to take risks (given their age), but regularly punt in the stock market hoping for a quick profit, but sometimes losing their pants. I have also met young people, who is able to take more risk, but due to their risk-adverse nature, put most of their money in cash.

7) Not done with their estate planning. Estate planning is actually part of financial planning. Maybe 99% of financial advisers do not provide this service. People sometimes consult lawyers to draft their will, but lawyers are not financial advisers, so they can draft the will but sometimes without comprehensive financial consideration. It's actually quite hard to find a qualified estate planner in Singapore.

8) Being underinsured because they prefer a whole life policy with cash value. Many prefer whole life insurance policies because they accumulate cash value, so generally they will get their money back even if there is no claim. It's better than buying a term policy which feels like money down the drain. While this is not false, whole-life policies are very costly, and if a person only buys whole-life policy, they are likely to be very underinsured. For example, for a 40 years old male, the premium for a $1,000,000 term policy is less than $1,000/year, way cheaper than a whole life policy. Insurance is primarily for the purpose of risk management, and it should not be confused with investment. Insurance is for protection, just like your telco subscription is for your communication, both don't come with cash value, and it should be ok.

9) Most people understand and agree that it's important to have a will written since we all will leave this place one day, and don't want to leave behind a mess. But yet most people have not written one! The obvious reason is due to lack of urgency, we think we can do it next time. A will is important to ensure the right people inherit the right asset and value, ensure available liquidity (since all assets will be frozen upon death), reduce cost and delay of the court process (probate), and make sure our aged parents will continue to be supported (they will not if you are married and have children). There are many other reasons.

There are more mistakes, I will know when I see them. I just list those common ones that I regularly encounter.

I provide advice centered around investment and estate planning. Not that I don't believe in insurance, but because my clients are usually rather mature (>45 years old to 60s) they usually buy all the insurance they need to buy and are more concerned about building their nest egg to enjoy a comfortable retirement. You can message me for a short discussion if you think you need someone to help you fix some of the problems above, accumulate your retirement nest egg, and pass it on to your next generation.

Book a 15-30 mins slot with me here https://calendly.com/tansiaklim/discovery-call