Commentary: Bad investment advice on Reddit? This is why we need financial advisers
Contrary to their reputation for pushy sales tactics, financial advisers help new investors cut through the noise, says an entrepreneur.
SINGAPORE: We’ve all been there before. An old friend reaches out for a quick coffee chat.
About 10 minutes into the conversation, you discover he or she is now a financial adviser, and the catch-up was really for pushing a product.
This sort of approach may have worked once but it won’t fly with a savvier, younger generation.
Equipped with a device and Internet connection, investors can now take financial control into their own hands. Robo advisers like Syfe and StashAway use algorithms to manage portfolios based on users’ goals and risk appetites, taking all the guesswork and grunt work out of investment.
Other platforms such as Endowus or MoneyOwl provide access to funds not typically available to retail investors, such as those managed by BlackRock, Dimensional and PIMCO. Moreover, only a low minimum investment amount is needed to get started.
Affordable products with no lock-in periods are du jour, from monthly insurance subscriptions available on TRIBE by Income, to investing sums as low as S$1 whenever you ride or order food with Grab through its AutoInvest plan.
Traditionally, the only wealth management clients could get was through their banking officer. But with an abundance of options online, do young investors need financial advisers?
THE DANGERS OF DIY INVESTING
As digital natives, young investors are more open to online investing platforms.
According to a survey conducted by United States-based Vanguard Digital Advisor, millennials in their late 20s to early 30s are twice as likely as baby boomers, ages 56 to 64, to consider using a robo adviser.
The rise of “finance influencers” on Instagram and even TikTok shows growing demand for advice online. Reddit forums are a popular source of crowdsourced information.
But those just starting their personal finance journey may not be well-versed enough to sift out the good advice from the bad.
For example, the infamous Reddit community r/wallstreetbets rallied members to invest in “memestocks” like AMC and GameStop in January. Stock valuations surged as a result, but then plummeted with the sell-off.
While some were fortunate to cash out in time to enjoy the gains of the price spike, people worldwide lost life savings. In Singapore, a viral Reddit thread describes how one investor lost approximately US$60,000 – two years of their salary – trading GameStop shares.
In response to such speculation, the Monetary Authority of Singapore and the Singapore Exchange Regulation on Feb 2 warned investors about “the risks related to trading in securities incited by online discussion forums and social media chat groups”.
FINANCIAL ADVISERS NEEDED MORE THAN EVER
The memestock rallies show how easily amateur investors can get swept up in hype.
In cases like those, financial advisers are a voice of reason. They can talk through potential upsides and risks with clients considering investing in popular but volatile assets like cryptocurrency.
Beyond that, financial advisers help new investors cut through the noise. Investment and financial planning can be bewildering to young working adults, since most aren’t taught the nuts and bolts at school.
According to a 2017 MoneySense survey, only one in five Singaporeans feel knowledgeable about investing, while half of respondents aged 17 to 29 have not started thinking about financial planning and think it’s too early to do so.
Without another person’s encouragement, it’s hard to make the first move and follow through. DBS found that in their previous investment advisory feature, only 1 in 10 customers successfully made an investment, as many retail investors “prefer a lot more hand-holding” from their financial planners.
For those who proactively read up before making decisions, financial advisers still serve as a second pair of eyes. Indeed, a 2017 Deloitte study found 54 per cent of millennials in Singapore do their own research before investing but rely on a financial consultant for validation.
Experts discuss what drove GameStop stock’s astronomical rise and what part did online trading platforms play. Listen to CNA's Heart of the Matter:
MEETING HIGHER EXPECTATIONS
But for financial advisers to shed their reputation for pushy tactics, they need to evolve.
Consumers want to be served on their own terms, and with so much information available online, advisers can’t just be walking repositories of knowledge. Nor should they expect to only push products that are linked to their companies.
Instead, advisers should sieve through the market’s extensive offerings like subscription insurance or micro-investment, shortlist what is relevant to the client’s needs and make recommendations. This may mean accepting their client wants to try a new fintech product.
Advisers should have a pulse on market trends. For instance, interest is growing in investments that consider environmental, social and governance (ESG) factors.
In an HSBC survey, 68 per cent of investors in Singapore said the pandemic has raised their awareness of ESG considerations. Financial advisers say half of their clients find ESG investment important.
Since they can expect this number to grow, they should be familiar with the mechanics of ESG investing, which reputable funds are out there and what potential pitfalls are, to best educate clients who want to try their hand at it.
But to truly stand out, financial advisers must do what robo-advisers and technology can’t, which is to empathise.
Emotions play a big part in personal finance, and financial advisers can mediate this with a deep understanding of their clients’ risk appetites and how much they can afford to apportion to these vehicles.
Fear gets the better of investors when they start to see losses. Many succumb to panic-selling. An analysis by market research firm Dalbar found that in 2018, when the S&P 500 lost 4.4 per cent, the average individual investor lost more than double that, at 9.4 per cent.
With more young adults going into investing, they can rack up losses if they are not guided by the moderation, experience and training an adviser can offer.
The explosion of products and resources for investing online might just lead to a renaissance of the financial advising industry. Perhaps then, we would see the end of the dreaded coffee chat poorly veiled as a sales pitch.
Dato’ Wayne Chen Zaoxiang is Co-Founder and CEO of GoalsMapper.