RES 5 – Rules, Ethics and Skills for Financial Advisory Services

The benefits of conducting needs analysis are as follows:
(a) It helps to discover the client’s needs and to advise the most suitable product to buy and how much to buy;
(b) It enables more time to spend on the client’s situation than on the product.
(c) If you sell the client additional products based on his needs and objectives, he will be able to see how the products fit into his overall plan.
(d) It also enables you to establish a long-term relationship with your client.

Establish and define client-representative relationship;
(a) Establish and define client-representative relationship;
(b) Gather data, including goals;
(c) Analyse and evaluate financial status;
(d) Develop and present recommendations;
(e) Implement recommendations; and
(f) Review with client periodically.

In this first stage of the sales advisory process, you will meet the client to introduce your company, disclose your status and xplain your role and the types of financial advisory services and investment products you can provide. You will also need to explain the purpose of the meeting and the sales advisory process to your client. This will help your client to understand the process and form his expectations and understanding concerning your role and services.

In the second stage of the sales advisory process, you will need to identify the client’s life stages, explore his needs and determine his concerns and financial goals. You will also need to gather his financial information and his attitude to risk, and update any changes where necessary. Such information can be gathered using a Life Insurance Advisory Form where the client’s financial needs can be identified. You can then use them to form the basis for suitable recommendations to be proposed to the client later.

Protection needs are for ensuring that financial obligations can be met under the following circumstances:
1.upon premature death;
2.upon disablement; and / or
3.upon contracting serious illness.

Long-Term Family Income: this refers to the income that your client’s dependants will need after his death. (Here you have to consider making provisions for children who are not financially independent yet. You also need to help your client to make provisions for his spouse, including retirement needs);

In the event of serious injury and not being able to work, your client’s financial needs will be:
(i) Current Income: while the employer of your client (if he is employed) may continue to pay his income, it may be for a short period only.
(ii) Current Expenses: daily living expenses such as food,clothing, hire-purchase, loans, mortgages, rent, utility and conservancy charges will still need to be paid.
(iii) Current Commitments: the highest cover that your client can get in the event of an accident or illness is 75% of current income, if he has taken up a Disability Income Insurance policy.

The main sources of money that may be available to meet the client’s financial and protection needs are:
(a) Central Provident Fund (CPF);
(b) Supplementary Retirement Scheme (SRS);
(c) savings and investments, e.g. bank deposits, stocks and shares, bonds, unit trusts, property etc.;
(d) client’s existing insurance policies such as life, accident, health and disability

Employee benefits which may be provided by the client’s employer, e.g. Group Term Insurance, Group Personal Accident Insurance, Group Hospital and Surgical Insurance, Group Critical Illness Insurance.

Before you can perform a proper needs analysis, you must first of all know your client. To do this, you need to gather from your client (and his spouse if he is married) relevant information which will include his:
(a) personal details;
(b) employment details;
(c) number of dependants (this piece of information is required for determining protection needs);
(d) financial information (such as income and expenses,assets and liabilities);

The personal details that you need to obtain from your client (and his spouse, if applicable) should include:
 name;
 NRIC or passport number (or unique identification number);
 nationality;
 address;

Monthly Income And Expenditure
The information that you need to gather here should include the client’s salaries, bonuses and other sources of income, such as rental income, interest earnings, dividends, capital gains and director’s fees, if any.

You need to ascertain the client’s (and his family’s, if applicable) assets and liabilities for a number of reasons. Firstly, significant assets (e.g. the property) need protection against the risk of loss or damage. Secondly, investment assets can be a source of funds for the client or the dependants should the client die or become disabled. Thirdly, financial liabilities (e.g. property mortgage) need to be identified, so that appropriate insurance cover can be put in place.

Besides the risk and return of an investment, clients also make decisions based on their investment time horizon. An investment time horizon is the length of time between when the client invests and when the client withdraws from the investments. This is an important concept when trying to decide what kind of investments that you should recommend to your client in his portfolio.

Three factors which should be considered when analysing your client’s goals and objectives, as these will assist in the resulting assessment of needs:
(a) Firstly, it must be established whether the objective is short term or long term.
(b) Secondly, you should establish whether the objective is for the benefit of the client or for others, such as his children.
(c) Thirdly, you must take the importance of your client’s objectives into account, as this will help you to assess the priority of the identified needs.

The expense method computes the amount of funds required, based on the current level of the household expenses projected into the future at the expected inflation rate.

As for protection needs, you need to determine the sum of the client’s total liabilities, his immediate expenses required at the time of death, as well as the amount needed to provide for the dependants for as long as required.

As for protection needs, you need to determine the sum of the client’s total liabilities, his immediate expenses required at the time of death, as well as the amount needed to provide for the dependants for as long as required. There are two common methods used for quantifying the amount needed to provide for dependants, namely the multiple approach and the needs approach.

As for accumulation needs, you need to find the future value of the target amount taking into consideration the effects of inflation.
When quantifying all the above three needs, you have to subtract whatever sources of funds that the client has already set aside for each of the needs.

The CPF website has a series of financial calculators, such as Medisave / MediShield Calculator, CPF Optimisation Calculator,CPF Retirement Calculator, Insurance Estimator, etc., which may be useful for you to know and use as an adviser.

Below are factors which you should consider before making any recommendation to your client.
(a) Product Suitability
(b) Client’s Objectives And Needs
(c) Financial Situation – Affordability
(d) Tax Consideration

The product that you intend to recommend to your client should also be affordable to him. In the case of a life policy, a client who cannot afford the insurance premiums will have to allow his policy to lapse. The life insurer, the representative and the client do not benefit from such early lapsation. From the client’s standpoint, he loses the coverage and the premiums paid if the policy lapses before acquiring any cash value. The representative loses the goodwill of his client and any commission payable under the policy. The life insurer has to absorb the high initial costs of administering and underwriting such a policy.

Endowment Insurance Policies Provide life cover for a fixed term and a lump sum at the end of the term.

The process of identifying and satisfying the client’s needs does not stop with the implementation of the initial recommendations.Your client’s personal circumstances are likely to change (e.g. the birth of a child) and new needs may surface. These affect the initial product recommendations, as they may no longer be adequate. Regular reviews will ensure that your client continues to receive quality service from you and reinforces your relationship with him.

The manager should not retain soft dollars in the management of the scheme, unless the following conditions are met:
(a) the soft dollars received can reasonably be expected to assist in the manager’s provision of investment advice or related services to the scheme;
(b) best execution is carried out for the transactions; and
(c) the manager does not enter into unnecessary trades, in order to achieve a sufficient volume of transactions to qualify for soft dollars.

The name of a scheme is appropriate if it reflects the scheme’s geographical focus, asset type and sector focus, and is in line with the scheme’s investment objective, approach and investment universe. The use of acronyms which reflect an index provider, a credit rating agency or geographical region (e.g. “MSCI”, “S&P” or “BRIC”) may be acceptable if it is consistent with the scheme’s investment objectives or approach.

Types of CPF LIFE Plans: Under CPF LIFE, there are two plans, namely:
• CPF LIFE Standard Plan; and
• CPF LIFE Basic Plan.

To be eligible for the CPF LIFE Bonus, the CPF member needs
to:
 be a Singapore Citizen;
 be born between 1958 and 1962; and
 be placed on CPF LIFE; or
 inform the CPF Board before his 56th birthday on his decision to join CPF LIFE.

Introduced in April 1984, Medisave is a national medical savings scheme which helps individuals put aside part of their income in their Medisave Accounts to meet their future personal or dependants’ hospitalisation, day surgery and certain outpatient expenses, especially during retirement. Dependants refer to spouse, children,parents and grandparents. Grandparents must be Singaporeans or Singapore Permanent Residents.

Patients who fulfil the eligibility criteria can apply for Medifund assistance through the Medical Social Workers (MSWs) at the
Medifund-approved institutions. They can also apply through any of the Community Development Councils.