Otherwise known as:
a) Why Someone Who Has Investment Experience Should Still Consider Using a Financial Consultant, or
b) How I made my clients over 35% annualized returns in the last 4 years.
I was writing this particular topic for a talk that was intended for REDACTED, called Modern Investing and Necessary Knowledge for Millennials.
The idea was to help introduce the current consumer mindset to this group of Financial Consultants and teach them how to be more competent. Unfortunately, they had their own issues and this talk fell through.
I'd always intended to create a variant for consumers, so this is the part of the talk where I would have discussed how a Financial Consultant can add value despite your high commission products, fees etc.
It's a small section which I decided to expand on after I finished planning for the talk (and never got to deliver it).
I still haven't met someone investing on their own [EDIT: outside of exceptional traders] who has produced the kind of returns I've been able to do for my clients. A typical person's YTD result of 2020 could have been here, as represented by Stashaway - and if you keep up with this blog, you'll know that my clients did 3 times most of those returns, on average -for 2020.
Of course, technically this title would be inaccurate as well since its the application of knowledge, not knowing more - that actually works for investments. CFA or GIC people would make a lot more returns than me otherwise, but I don't see that happening yet.
The 10 Levels of Investment Competency - and More!
Before I begin, I'd like to thank Christopher Tan from Providend for having inspired me with this particular checklist as well as our meeting in 2018. READ ALSO: Money Maverick vs Providend [Debating Active vs Passive management, Term vs Whole Life and more]
I realized during the writing of this article that a lot of his philosophies have shaped my investment principles and my desire to give clients my best in the face of my fees.
Without understanding the value add of an Investment Specialist, I wouldn't feel like I could ever justify my fees and its made me determined to increase and apply my knowledge the way I do now.
Please keep in mind that this list of 10 levels is really just my opinion - although it seems to have been a reasonably accurate gauge. Whenever I meet a new client, I try to talk from Level 1 and work my way up (speed up my conversation when I realize the client is of a higher level) to show them my value.
Level 1: Understands the Basics of How Money is Made Through Investments
Level 1 typically starts from people who are looking to make a change quickly. They understand the basics of stocks and bonds making interest to make money work harder for them, or at least that investment interest makes more money than bank interest.
They've typically learnt some basics through the following
a) Rich Dad Poor Dad - A popular book that showcases the power of financial freedom through investments.
b) Financial Consultants - Some representatives may have introduced investment plans as a concept to make more money.
c) Trending News (e.g. bitcoin) - Something trending loudly in news made them really interested in learning about investing, like Bitcoin or Gamestop.
d) Financial Forums: Like Hardwarezone, Seedly, some Telegram groups or Facebook groups. They also have Financial Bloggers.
e) Job Affection: This is a newer category, where a lot of people who were affected by the 2020 Covid-19 Financial Crisis started looking for how to generate other sources of income.
Level 2: Understands the Importance of a Diversified Portfolio and some basics of Dollar Cost Averaging
Most people do not make it past level 2, unfortunately. Typically looking for the simplest way to make higher interest, they will eventually understand Level 2 and the importance of a simple diversified portfolio.
Some of them will go onto fully relying on their consultants, while on the extreme end they will possess an extreme hatred for consultants and insist only on low-cost ETFs.
The latter often consists of diehard Warren Buffett fans who've never taken a close look at SPIVA outside of the base conclusion that 'most active funds don't outperform the benchmark'. Unsurprisingly, they rarely have impressive results.
Typical Investments are some of your ILPs, Robo-Advisors or your Invest-Saver type plans in the bank. On a very slightly higher level, they will use platforms like FSM or Saxo.
Level 3: Understands Investment Options and Opportunities outside of the US or one's local market, and capitalization(s)
Level 3 people usually start to explore beyond your standard ILPs as well as your standard ETFs (SNP500, STIETF, IWDA), especially beyond the Singapore/US market. One typically has the most information about their own market or the US market, so you rarely see the mass majority explore level 3.
Some advantages of having such information are the ability to find undervalued stocks more often - or basically the ability to buy good stocks at a discount.
If you think about it - investing is fundamentally about buying low and selling high. It is quite hard to do this if all the information is available or others like you are all looking at the same stuff.
Exploring a different market entirely can make it easier to find deals you otherwise would never have considered, which ultimately leads to higher returns.
Level 4: Has Basic Knowledge of Buying, Selling and Holding Purposefully
When I say purposefully, I mean that your investing is goal oriented - an investment is designed for a specific goal and thus requires a certain number of years of commitment.
This level is particularly high because you very rarely see people do purposeful investing. It can be something as generic as retirement without accounting for the possibility of much earlier retirement, or it can be an investment made on your risk profile but not on your need for liquidity. An example on the latter is someone who is willing to take risk and invests in aggressive instruments. However, the purpose of gaining interest might be for something else OUTSIDE OF THE PERSONS RISK PROFILE that needs to be sold at a higher value predictably (e.g. house downpayment).
E.g.: Person's Risk Profile is high: -10% to +25%
But for a house downpayment the variance should be lower, like -4% to + 10%
By correct assessing this, you prevent the high-risk taker from making a big mistake so he/she doesn't have to come up with lots of additional capital from their own pocket in the worst case scenario. This is the primary reason why you see people underperform the market - because they end up buying high and selling low for such a reason. Yknow. Outside of just being overly greedy or complacent.
Level 5: Has Increased Knowledge in Buying, Selling and Holding Purposefully
Generally has an increased ability in this area on top of understanding their purpose for investing.
I would take a moment to point out that MOST CONSULTANTS SHOULD BE HERE. If your consultant is not at this level, there isn't much value paying them fees to help you invest.
Incidentally, the majority of my work tends to take place here.
For example, they should understand every geography and sector broadly, with the knowledge of the maximum drawdowns (how much it can lose historically) and regular drawdowns (how often it loses money periodically). For example, the 2000 Dot Com crash kicked the relatively-diversified portfolio of the SNP500 by over 40%. However, the Technological Sector alone crashed over 70%.*
This has implications on whether or not something is a buying opportunity, worth holding onto or something that you need to let go off before you could plunge a lot further.
It also opens up a tremendous amount of opportunities in getting higher returns, or much more risk-managed returns compared to simply leaving it in an ETF or a fund where nothing is done about it, while eliminating the risk of having the short-term underperformance make you give up your investment.
An easy example is recognizing certain stocks in an ETF to be budding failures.
Your rebalancing (selling off performers to buy low for underperformers in order to get a more predictable portfolio that can result in better long term performance and less risk) should also be customized according to this knowledge that you have.
Level 6: Understand Efficiencies in the Market
I would say this is the level of which you're qualified to select and invest in individual stocks - trying to do so earlier carries a tremendous amount of risk.
You should be able to do assessments of the investment itself on top of Level 5:
-Relevant ratios (P/E, Sharpe) -Balance sheets
-Management Team/Company Direction
-Other relevant macro knowledge
You should also understand value and growth investing. To put it simply (please do not critique me on this point):
Value: Buying Low and Selling High Growth: Buying High and Selling Higher
Level 7: Understanding of Various Fees/Taxes/Forex impacts
Usually people tend to make a big deal out of fees. It affects so little of your investment performance and is so preventable that time would have been better spent mastering the previous levels.
That is why I put it here - so you can optimize your extremely strong knowledge and ability further: but NOT before. Spending all your time in this area is a tremendous waste when you can be making much more money.
Its pretty self explanatory - just be careful of the following.
In particular, people tend to overestimate reinvestment fees, or taxes like dividend withdrawal and inheritance/estate.
Level 8: Understands Arbitrage Opportunities via Trading, Risk Management or More Effective Variants
I hang out around here quite a bit for my highest level clients - especially the ones who trade on their own at Level 6.
Realistically, if your consultant is good at investing and asset allocation, there's a very decent chance they wouldn't spend every other month informing you of changes they want to make. So the value I can add is understanding how to optimize a category.
For example, many people ask me they should invest now. I could say something generic, like China.
However, out of so many China ETFs and China Funds, how do you select the one that is most likely to be performing?
This utilizes the previous levels concurrently to make a lot higher returns for the same risk, which you can see from my actively managed fund vs MSCI China. [42% vs 28%]
If you are at the level which you consistently optimize the category of asset allocation you're in (e.g. you can almost always isolate the best part of your stocks/bonds/commodities portfolio), you almost make a consultant completely redundant.
Level 9: Application of Knowledge During a Financial Crisis/Major Strategic Shifts in Sectors
Typically this comes with investment experience and some studying.
You should be able to identify stress points for Financial Crisis's and buy/sell/hold accordingly, and be able to identify and isolate performing sectors based off the TYPE of Financial Crisis. Additionally, you also should be able to do the same thing during Major Strategic Shifts that may change assumptions made for your portfolio.
For example, bonds are increasingly less inversely correlated with interest, the energy sector is no longer dominant like it was between the 1950s and 1990s, and how quickly REITs will recover from Covid is a completely unknown.
A consultant at this level would provide immense value to you and your investment uncertainties, while preventing you from making detrimental mistakes with your hard earned money.
Level 10: Uses Leveraging Effectively
Less common for consultants.
Leveraging isn't a particularly difficult concept to understand, but frankly I don't even believe you should consider leveraging at all if you don't know all the other levels.
You should be very familiar with potential fluctuating interest/loan implications and margin calls on top of all the other levels.
Level 10+/Level 999+:
I am not at this level, by the way.
You can design portfolio management using buy/hold limits, judge according to moving averages, has broad awareness of every geography/sector and can filter individual stocks to remove inefficiencies in funds to create a hyper-optimized portfolio.
(I'm literally not sure how to explain this in English)
You know how certain bosses in games won't reveal their level after 999?
Please go into fund management, you're spending too much time on doing this than the job you should be good at.
You may as well be doing this as a second job, but why do that when you're so much better at this than the job you're likely doing?
As one of the Top Financial Bloggers in Singapore (Feedspot, Withcontent.co), I would be happy to answer any emails and questions you may have, as I have been doing for my readers over the past few years - especially about Insurance and Investing, as it is my forte of personal and professional knowledge.
You can contact me at 91769099, or at my Facebook: https://www.facebook.com/luke.ho.54/
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The views on his blog are strictly of his own opinion and have no affiliation to any of the companies he works with.
Here are some of my resources on:
3) Retirement and Leverage: Leveraging a Private Annuity, Pros and Cons (ft. Jamus Lim)
4) Spending and Saving: The Biggest Spending Mistakes You DIDNT Even Know you were Making (and how to avoid them)
5) Job Assessment: A Case Study on How a $6k/mth GIrl makes MUCH more money than a $10k/mth Guy
6) Financial Optimization: How I Avoid the Largest 'Fees' of All *In reference to Benchmarks provided via capitalization