Have you ever gotten your personal financial statements analyzed and interpreted by a financial advisor representative? It is important for consumers to be aware of potential subtle biases in the analysis and planning. Here are some things to look out for to ensure that the analysis you are receiving is less biased.

Background

Financial statement analysis reports generally highlight the financial strengths and weaknesses of a business situation or an individual’s financial situation. Financial statement reports are important because they can communicate the financial health of your business to potential investors or an individual’s financial status to loan companies. These reports are crucial for obvious reasons. They can significantly impact an investor’s decision on whether and how much stake they are willing to invest in your business, or whether you can successfully get your mortgage loans.

Did you know that the SAME set of financial statement reports can be analyzed differently with different lens depending on the objective of the analysis? Have you mastered the art of noting subtle biases in financial analysis, be it for yourself, for your company, for your loved ones or even for your clients? The underlying reason for this is simple. The financial advisor analyzing one’s financial statement reports may have a vested interest in trying to push certain insurance or wealth management products; or may have partnership distributions with other financial advisory companies that reduce the independence of the advice.

“Some analytical tasks are well defined, in which case articulating the purpose of the analysis requires little decision making by the analyst. For example, a periodic credit review of an investment grade debt portfolio or an equity analyst’s report on a particular company may be guided by institutional norms such that the purpose of the analysis is given.”

~ Cited from snippet of my CFA textbook in featured pic.

Situation

I am not sure if you have encountered the situation where you sought for retirement planning and the advisor rep goes analysing your shield plan shortfalls and early critical illness gaps. You rightly question why, and the response comes back along the lines of “protection first”. So which is it? Your priorities first? Perhaps the question should be to what extent do you subscribe to the “protection first” camp? Did the advisor rep give you a chance to state your position or was it an assumptive close on the “protection first” approach?

As shown in the snippet of the financial statement analysis framework extracted from my CFA level 1 textbook, it is important to first know the context and purpose of the analysis prior to understanding any financial statements. The study of your net worth and cashflow statements to check for premium sustainability of a life insurance product, is different from the credit check for a mortgage loan approval. An understanding of the purpose and context of the financial review is key.

It is also worth noting that financial statements analyzed by banks may result in an interpretation that is in the perspectives of the sales of financial products. Banks and numerous insurance companies have a partnership distribution structure whereby the entities may share the profits of the same financial products. In the past, insurance brokers have been paid high commissions to push through the sales of products. However, with such partnership distribution models, banks can earn additional revenue by selling the insurance products, while insurance companies are able to expand their customer base without having to expand their sales forces or pay commissions to insurance agents or brokers. Consequently, the reading and the analysis of financial statements of customers will come from the perspective of pushing through the sale of certain products.

Moving Forward

This is where seizing control of the direction of the planning and analysis becomes important. The weightage component of the FDM process ensures your uniqueness as an individual is expressed and taken into consideration. What is most meaningfully relevant to you? What are you willing to trade off? Does the advisor rep understand how unique you are and have the breath of products to tailor to your fitting? Appreciate fully why financial planning is a craft and the importance of choosing who to work with.

If you are serious about financial planning then you got to know the process and the deliverables of the process, especially if you engage a licensed advisor rep to work with. Biases are everywhere, so its just a matter of extent, and what can be done to reduce them. Ethics that govern the behavior of the individual advisor rep varies with as much as fifty shades, the extent by which future buyer remorse is taken into consideration varies between different advisor reps and COVID19 revealed this.

If you feel that I can be of meaningful service in your personal finance journey, do not hesitate to reach out to me.