Advantages of fact-finding

Q: What are the advantages of opting for a 'full advice' fact-find?

Mr Jeremiah said that the more information you give, the deeper will an adviser be able to analyse what you need. More importantly, Mr Tan said, doing a full fact-find will mean investors have a better chance of seeking redress or compensation from the financial institution should the recommended product bomb.

This is because Section 27 of the Financial Advisers Act states that the seller should have a 'reasonable basis' for making the recommendation to the customer.

This means the seller's recommendation is considered appropriate only after analysing a customer's investment objectives, financial situation and particular needs, and the only way to do this is to have in place a proper sales process which takes into account the customer's needs.

Sadly, many investors caught in the Lehman-related debacle could have knowingly or unknowingly consented to a 'no advice' or 'product advice' sale instead of a 'full advice' sale.

This may mean they failed to provide the necessary information, which may likely free the adviser of responsibility if his recommendation is found to be unsuitable.

Q: Is the risk-profiling process sufficient for a proper product recommendation?

Advisers typically carry out a risk profiling exercise to determine your risk appetite by asking you a few questions on your risk tolerance. This is done during 'full', 'partial' and 'product' advice sales transactions.

However, Mr Fok noted that while risk-profiling helps to determine one's willingness to take risk, it does not represent his ability to take risk nor his need to take that risk.

For example, the risk-profile questionnaire may indicate that you are a high-risk investor, but if you look at your financial commitments, it may show that you have a lot of debt. This would mean that you are unable to take high risks even though your risk profile says otherwise.

'An adviser must be able to find a balance between a client's willingness and ability to take risks. One question that needs to be asked is that even if the client turns out to be a high-risk investor, is there a need for him to take the risk?' he said.