By Lorna Tan

The term 'fact-find' cropped up in recent articles about Minibonds and DBS High Notes, the failed investment products linked to bankrupt Lehman Brothers.

It is a shorthand for what is known as the financial needs analysis process.

This is the process where customers are queried by financial advisers on their financial details.

The information is captured in a document that all retail investors should have come across before they signed up to buy a financial product.

The intention of a 'fact-find' is to give investors a better chance of buying the right product to meet their needs.

Some of the 10,000 investors who invested in Lehman products are now claiming that they cannot recall what they had signed, or if indeed they had been taken through a proper 'fact-find' process by their financial advisers.

There are a few possible reasons for this.

First, the financial needs assessment comes with four options. Customers can request 'full advice', 'partial advice', 'product advice' or 'no advice'.

These options should be offered at the start of the meeting with the adviser, upon which the customer ticks off an option box in what is known as a needs analysis form.

'Full advice' requires the customer to provide detailed financial information about himself so that the adviser can recommend a suitable product.

Some customers don't want this option because they prefer to keep their personal financial matters confidential or they do not trust the adviser, who could be a stranger to them.

If the investor had opted for 'no advice', he would not have provided any personal financial information.

Another possibility is that the adviser did not conduct a proper needs analysis and simply ticked 'product advice' or 'no advice' on the form without the knowledge of the investor - which is wrong - or persuaded the investor to do so.

But what most investors do not know is that when they opt for 'product advice' or 'no advice' during a transaction, they are putting themselves at a greater risk, warned Mr Christopher Tan, chief executive of wealth management firm Providend.

'They can't blame the advisers for poor advice subsequently if things go wrong,' he said.

Here are some things you need to know about the 'fact-find' process.

Q: Under what circumstances should investors consider the various options?

FULL ADVICE: If the investor is not financially savvy, he should opt for the full fact-find, said Mr Tan and Mr Ben Fok, chief executive of Grandtag Financial Consultancy.

'If you are not savvy, it is likely that you do not know enough. You may know some but not every part of financial planning and you want advice,' said Mr Tan.

'When you see an adviser, you should expect nothing less than a full fact-find. This is to ensure that all things are considered before any recommendations are given. In addition, all the areas of a person's financial life are inter- related. Making a decision in one area affects the other areas.'

PARTIAL ADVICE: This is usually adopted when the investor wants to reveal limited information to the adviser, or when he wants advice only for a single or specific need, such as how to save for his children's education or his retirement needs.

However, Mr Stanley Jeremiah, a council member of the Singapore Insurance Institute, suggests that this option be cut out from the process altogether as it is neither here nor there.

'Partial advice is in a no man's land and I think this category should be eliminated,' he said.

PRODUCT ADVICE: Choose this option when you know what you are looking for but need help in pinpointing which product will suit your needs, said Mr Jeremiah.

A case in point would be if you have just bought a property and have an outstanding mortgage of $500,000 and want a plan to cover the outstanding liability.

As there are different mortgage- reducing policies out there, you would want the adviser to explain their various features to you.

NO ADVICE: This is for customers who are financially savvy and are clear on what products they want. Mr Fok said that at Grandtag, advisers take pains to explain that opting for 'no advice' means the adviser will have no information on the client at all. This includes not knowing his risk appetite.

'Only if the client agrees and signs that he understands the ramifications will the product sale be executed,' he said.

Q: What are the main features of a 'full advice' fact-find?

Depending on the complexity of your financial circumstances, it may take between one and two hours or longer.

You are expected to reveal personal financial details such as how much cash you have, what sort of stocks you own, your insurance plans, assets, liabilities and monthly expenses.

It is only when you have done so that the adviser is able to analyse your financial circumstances and make a suitable recommendation.

The information you provide will allow him to understand the following:

Your cash flow (to calculate surplus or deficit in cash flow and understand your spending habits);

Your current investment portfolio (your asset allocation and risk profile);

Your personal risk management (whether you have sufficient insurance coverage); and

Your estate management (your wills and trusts).

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.

Things to look out for

Q: What should retail investors look out for in a sales process?

Don't be afraid to ask questions even if they may sound stupid. These may include queries like why you need to do a fact-find and why the adviser is recommending that product to you.

Mr Tan said that clients who buy investment products such as unit trusts and structured products should be given a prospectus.

If it is an insurance plan, they must be given a product summary, benefit illustrations and a copy of Guide To Life Insurance. They should also ask the adviser to explain financial terms in simple English.

Shun advisers who suggest to you that you should opt for 'product advice' or 'no advice' sales, because it is an indication that they are keen to make a quick sale.

An exception to this is if it is a routine top-up of the same type of investment and your financial circumstances have remained unchanged, said Mr Leong Sze Hian, president of the Society of Financial Service Professionals.

Under no circumstances should you be pressured to sign any document. Take your time to consider what is being offered and keep a clear mind about what you are investing in.

If you do not understand how an investment works, do not invest in it. Be suspicious if a marketing brochure promotes very attractive returns and always ask for the worse-case scenario.

If you are in doubt, consult another adviser.

This article was first published in The Straits Times on November 09, 2008.