SmallChange

Learning to tell the professor from his chauffeur

When choosing a financial adviser, take care to pick the right man with the skills for the job

Out of the blue, a friend of mine found that he was $12,000 richer.

He had just turned 55 and soon after, an insurance company sent him a cheque for that amount - the payout from an endowment policy he had bought as an army recruit 37 years ago that had matured on his birthday.

The monthly premium - $12.95 - that he had to pay is quite nominal by our standards today. But as an army recruit getting a monthly allowance of $90 in 1978 when he bought the policy, that was a sizeable commitment.

Through the years, the premiums for the policy were deducted directly from the POSB account he had kept, even when working overseas. He was due to get his payout at the age of 55, which was the official retirement age when he signed up.

The windfall enjoyed by my friend is yet another sign that in order to grow our retirement nest egg, it pays to start saving from a young age. Even saving a small sum like $12.95 every month can snowball into a considerable sum of $12,000 by the time we are ready to retire. Plenty of such happy instances exist, but they do not make the news.


ILLUSTRATION: ISTOCKPHOTO

Instead, what grabs our attention are stories like the divorcee in her mid-50s who went to a bank with her divorce settlement and ended up buying an endowment policy which required her to fork out a hefty premium a year that she was then unable to service because it exceeded her annual salary.

It left plenty of questions on my mind: Should she be sold such a policy in the first place? Besides knowing that she had a sum of money on hand from her divorce settlement, did the financial adviser do a thorough check on her finances?

Her experience may not be unique.

Earlier this year, when I went to renew my fixed deposit at a different bank, the earnest-looking young man serving me had also tried to sell me an endowment policy. "Mr Goh, why don't you put $500 into an endowment policy every month and we can offer you a higher interest rate on your bonus saver account?" was his sales pitch.

Surely, just by taking a look at my greying hair, or glancing at my particulars on display on his computer screen, he should know that an endowment policy might not be appropriate for me.

I believe that an endowment policy is better suited for a person starting out on his working life who needs to save long-term for his retirement or for his children's tertiary education. One good example would be my friend who bought his endowment policy when he was an 18-year old army recruit.

For someone like me in my 50s, who has already set aside a retirement nest egg, it would have been more appropriate to try to sell me an annuity - an insurance product that would assure me a steady monthly income for as long as I live after I retire.

Yet, there are probably plenty of such examples of financial firms mismatching a person's financial needs to unsuitable products. Why is that so?

One reason is that the financial adviser does not bother to understand his client's needs, applying "chauffeur knowledge" rather than "Planck know-how" in serving them.

The two terms I just used arose from a story which my Cambridge tutor told me many years ago about the great scientist Max Planck and his chauffeur whose lessons hold true in investments, too.

From his picture, Professor Planck looks like a dour, no-nonsense German physicist whose big achievement was to show that light displayed particle-like behaviour, thus helping lay the foundations for a branch of modern physics known as quantum mechanics.

Quantum mechanics was one of the toughest subjects I have ever studied, delving as it did into topics such as sub-atomic particles carrying exotic names like Higgs boson and neutrinos that sounded like gibberish to most people.

After Prof Planck won the Nobel Prize in 1918, he went on a lecture tour around Germany, accompanied by a chauffeur who would sit in for all his lectures. Since the lectures were almost identical, the chauffeur got to know them word for word.

One day, the chauffeur said to him: "Professor Planck, I have heard your lecture so many times that I now know it by heart.

"Tonight, why don't we swop roles? I will deliver the lecture. You sit in the audience and pretend to be my chauffeur."

Prof Planck agreed and the driver gave the lecture without a hitch. But the deception nearly fell apart when a member of the audience asked an incomprehensible question.

Without batting an eyelid, the driver replied: "I am surprised someone from the renowned city of Munich should ask such a basic question. It is so simple I will get my chauffeur to answer it."

The first time I heard the story, I remembered laughing out loud because I could not imagine Prof Planck having a sense of humour.

But my tutor had a serious underlying message: Most of us go through life without gaining a real understanding of the problems confronting us - whether it relates to physics or a financial issue.

Planck know-how, rather than "chauffeur knowledge" is what we should aim for.

It is the same in the investment world where we often encounter people - fund managers, research analysts, stock dealers and businessmen - who put on a great show about their "prowess" like Prof Planck's chauffeur to impress us and get us to entrust our life savings to them.

But the big problem is that despite the show, they may possess only chauffeur knowledge and they rarely live up to their promises.

My tutor had a simple way to test whether a person understood a subject. Just get him to explain it in everyday language, he said.

If he is taking a convoluted approach with his explanation, he isn't getting it right.

To me, the agent who sold my friend the insurance policy all those decades ago, had applied Planck know-how knowing that all my friend could afford as an army recruit was a monthly premium of $12.95.

For the most part, we are probably surrounded by financial advisers with chauffeur knowledge who try to impress us with beautiful charts and impressive figures that rarely go beyond the superficiality of their presentations.

Of course, it would be good to acquire some Planck know-how ourselves and understand what we need in our finances.

But if you are not able to do so, finding an adviser to take care of your financial needs may not be as tough as trying to study quantum mechanics.

I always find that if I can find someone who bothers to explain in a simple way why I need to make a certain investment or buy an insurance policy, I am in safe hands.

A version of this article appeared in the print edition of The Sunday Times on November 08, 2015, with the headline 'Learning to tell the professor from his chauffeur'. Print Edition | Subscribe