Putting the fight back into human financial advisory | An interview with Providend CEO, Christopher Tan
Christopher Tan, the CEO of financial advisory firm Providend, has no illusions about the growing competition posed by roboadvisors. At the same time, he does not believe his business will be replaced even in the long run.
In its 17 years of operations, Providend has proven itself to be a trusted specialist in retirement planning with a unique fee-only proposition that ensures the best advice and the most transparent fees for its clients.
ZUU online met with Tan at their office on Duxton Hill to learn about Providend’s business, and its winning strategy against roboadvisors.
Life planning, Going beyond financial planning
“People are always talking about whether robots will take over the world, whether human advisers will survive,” Tan said candidly. “My take is that, if we are not human in our advisory process, we will be rolled over by robots. If as an advisor, I am just pushing products, robots can do a better job. If as an advisor I am just doing analysis, robots can do a much better job.”
The difference between a roboadvisor and a human advisor, he says, is human wisdom.
“Robots can have knowledge, but only humans can have wisdom. Wisdom is the application and the balanced use of knowledge, and wisdom takes into account the emotions of your client and the context of your client that robots will not be able to understand.”
Tan gave an example of a man who might have a sum of money earning interest of 2.5% and a loan with an interest of 1.5%. “Technically speaking, it makes sense for him to pay off that loan slowly and earn that spread of 1%. But if I found out that he doesn’t like having a debt, that he cannot sleep properly or have peace of mind until he is debt free, what should the right advice be?”
“The right advice should be for him to pay off everything,” he said firmly. “Because at the end of the day, the purpose of money is to help you live a more fulfilling life. If you make a technically correct decision, but you cannot sleep properly as a result, then what is the point?”
“Robots cannot provide you with that kind of advice. There’s no algorithm for this,” he quipped.
Providend provides what Tan calls “life planning”, a holistic financial plan that understands the aspirations and priorities of the client, and plans to allow them to live their lives well now, and in the future.
“A lot of financial planning is about planning for the future, like saving for retirement, saving for education, but sometimes financial planners forget that life does not start at 65,” he said thoughtfully. “What makes us so sure that when we plan for the future we are going to live until then?”
According to Tan, a good financial plan should allow the client to live life now and the future, and a good financial planner should also be able to tell their client when they have accumulated enough, and that they can stop. He says clients might make the mistake of continuing to accumulate and save beyond what they really need, and miss out on being able to do the things they really want to do, because of their age or their health.
“At the end of the day, money is not a goal, it’s an enabler, and if I’m able to help you know that you have enough, then you should stop, and live your life now,” he said. “That is the true value of financial planning, and I don’t think robots can do that.”
A desire to do financial advisory right
Tan always knew he wanted to be a financial planner, even when financial planners did not exist as an available career option in 1998. “Back then, there wasn’t a financial advisory industry, so if you want to do anything related to personal finance, you either joined an insurance company, a bank, or a stock broking firm,” he said.
Tan then started his financial career with an insurance company in Singapore, thinking that it would provide him with the relevant skills for a financial planning career. He picked up the ropes relatively quickly and was the second rookie agent of the year. By his third year, he was among the top 25 producers of that insurance company.
However, he continued to feel frustrated. “The money was good, but I was not happy. I didn’t learn anything related to financial planning because I was just selling insurance products, and I couldn’t do anything but insurance.”
“It’s like I’m a contractor who can create a very nice home design for you, but I am only a carpenter, so the only thing I can recommend to you is carpentry work, because that’s all I make money from.”
A turning point occurred when he read an article about US financial planner Suze Orman and her view that whole life insurance was basically poison. Tan was shaken by her perspective, having sold many whole life policies to his clients. But he was even more surprised when he did his own research and realized she was right.
The revelation made Tan even more determined to pursue financial planning, and he left the company after 6 months when he realized that he could not do what he felt was right.
A number of his former colleagues found out what he planned to do, and decided to quit their jobs to join him in his venture. So in 2001, Providend was formed.
Providend’s troubled beginnings
To say the firm was off to a catastrophic start was an understatement.
Tan believed the government was going to enact the financial advisors act in that same year and built up a team of 13 staff. At 6pm of September 11, 2001, he signed the lease for a 1,300 sq ft office space on Malacca Street.
That night, the World Trade Centre twin towers in New York City came crashing down.
The 911 incident threw a spanner in Tan’s plans as the government postponed the launch of the Financial Advisors Act, focusing its resources instead on national security issues. “I just got an office space, I spent about $60,000 to $70,000 renovating it, 13 people quit their jobs to join me and I had no license to operate,” Tan said.
To pay the office rent and other expenses, the team signed a short distribution agreement with a new insurance provider, during the interim period. They would then pool their earnings to pay for the office expenses and split the remainder equally among the team.
Tan recalled what a tough period it was. “The highest pay I had at the time was $1800, and most of the time I was getting $700 or $800. I had one child, the second one was coming, we just moved into a condo, got a maid, and got a car.”
The financial advisors act was finally enacted on Aug 1, 2002. Tan and his team developed their business plan and opened for business when they applied for their license on Jan 1, 2003.
From its inception, Tan knew they wanted to be different from its competitors. “We decided that the best way to give advice was for none of the advisors to take commissions, so we started the fee-only practice. Instead of taking commissions for the products we sell, clients pay us a fee for our advice. If there are any commissions, they are rebated back to the client.”
Providend’s advisors would quote a one-off time-based fee to analyse and advise clients for their investment and retirement needs. That would include 3 to 4 meetings that involve fact finding, understanding their client’s goals and aspirations and finally providing a detailed report with personalized advice for that client. To manage their client’s investment portfolio, they would also charge a separate fee that is pegged to the returns they produce.
However, it took a long time to educate its clients on the benefits of the fee-only business proposition. By June 2005, Tan had to tell his team that they had run out of money. “I called all my peers into my office, and told them we had 6 months to grow all our assets under management to $100million, or the business would fold. At that time we had just $36 million in AUM.”
In the next 6 months, the team achieved a total AUM of $70 million, doubling the AUM they had taken 2.5 years to achieve. By the third year of operations in May 2006, they achieved their target AUM of $100 million.
Tan and the team invited their clients to watch the premiere of “Mission: Impossible 3”, to celebrate overcoming their own “Mission: Impossible”.
Painful lessons from the Great Financial Crisis
Providend’s business continued to do well after 2006, and the team moved into its current 4,200 sq ft office at Duxton Hill.
Then the Great Financial Crisis in 2008 threw financial markets into a state of turmoil. Providend, like all other financial companies, were badly affected by the crisis, and their portfolio returns fell by over 30% in the short span of 3 months.
“It was not easy coping with 2008 because clients were scared and angry,” Tan said, adding that a client had thrown a file at him in his office and said his team was useless. “There was so much fear in the market, people didn’t know what was going to happen, some of our staff couldn’t take the stress and left.”
Tan took the painful decision to set things right for the entire business, by issuing an unconditional apology. “We’ve always had an annual client event, but that was a very scary year to do an annual client event. Because portfolios were bad, clients were upset, and emotions were running high.”
“I went up on stage and apologised to the clients for putting them through the experience, and apologised to the clients for the things we could have done better.” Tan also explained to his clients that the firm could have improved their fund selection that would have buffeted the effects of the crash, and highlighted their plans to avoid making the same mistakes in future.
Tan admitted that the decision to apologise had been tricky, as it went against the advice from his legal compliance team. “But I could not go for my annual client event and try to give an excuse because the fact is, there are no excuses.”
Following the 2008 crash, Tan and his team also gradually changed their investment philosophy. “We no longer do market timing, moving our assets from cash to bonds and back, because we realised it doesn’t work.”
At present, Providend no longer recommends actively managed funds, preferring to use passively managed funds like Vanguard’s index funds or Dimensional’s low cost funds. “Our investment performance over the past few years has done extremely well, because of all these new things we put in place.”
For instance, when Great Britain voted to leave the European Union in June 2016, Providend stayed invested when market watchers recommended investors to switch to bonds. They continued to do so even when Donald Trump won the US presidential elections in November 2016.
“People who were doing tactical asset allocation and market timing would have moved out of equities, and they would have missed out on some very significant returns because the market wasn’t affected at all. We stayed invested and our returns in 2017 were phenomenal. Our balanced portfolio, had a return of over 10%,” he said grinning. “Right now we are very comfortable with our investment philosophy and approach, and we’re very confident that even if a crisis hit us again, we would be fine.”
Fee only – still a game changer
Since, then Providend has grown from strength to strength. Tan established DIYinsurance, a life insurance comparison portal that emphasises on providing unbiased advice. To do that, DIYinsurance’s financial advisors rebate 50% of their commissions back to their clients.
Till today, 17 years after its inception, Providend remains the only company in Singapore to practice a fee-only financial advisory practice. Most financial companies practice a commission-based business model, where advisers are paid commissions for the products that they sell. Others practice a fee-based model where advisors charge a fee for advice and receive commissions as well.
“There are advisors within commission-based companies that practice fee-based advisory services, but as it is right now, I do not know of any other company that hold themselves out as a fee-only advisory.”
It is also easy to see why no other company has tried to follow suit. “It’s very hard to do this model,” Tan admits. “It takes a lot of willingness to suffer at the beginning, because a non-commissioned advisor does not get paid a lot in the beginning.”
“My people have been very resilient. They accepted a very low pay at the beginning, and then as they got better, the clients trusted them more, they gradually managed more money for their clients,” Tan says his senior advisors now manage about $50 milllion in AUM per person, which is much more than the industry average, and is testament to their dedication to growing returns for their clients.
To keep the business growing, for the next 17 years, Tan says the firm is committed to continually learning and improving their retirement planning capabilities, scouting for better instruments to invest their clients’ money and building on their life planning strength.
“I think if we can do all these 3 well, we will never be afraid of robots, we will never be afraid of technology.”
Applying Providend’s life planning strategies in his personal life
In many ways, Tan’s personal life mirrors the philosophy of Providend. He is currently invested in a portfolio consisting of bonds and equities, the same type of portfolio that he recommends to his clients at Providend.
“My biggest investment is in the company. And because I am a business owner, my other investments and assets are a bit more conservative,” he explained. “If I am just a working professional today, I would have put 100% of my portfolio in equity.”
Tan also applies life planning principles into his own life, spending time and money with his family as he works to build the business and save for his own retirement dream. Though this was not always the case.
He admitted that he used to be so focused on building the business that he had neglected his children. He would work late, return home and continue working, refuse to go for long holidays and bring his work with him even when he was on holiday. “After the GFC, I realised that I was missing out on a very important aspect of life, which is the now. I was always thinking, ‘let me build the firm, when it’s successful I will have more time.’”
“But I forgot that my kids were growing up very fast. So what if I was successful? I would not have a relationship with my children.”
Tan decided he needed to make a drastic change to his life. He made the decision to spend more time with his family. He also downgraded from a condominium to a HDB flat and sold his car, in order to free up cash to bring his family for long holidays together.
Their first family long holiday was a two week trip to England in November 2013. His son was a Manchester United fan and requested to watch his favourite team play at Old Trafford stadium. That match turned out to be the highlight of their trip, because Manchester United was faced with its bitter rival Arsenal, during what had been Man United’s most dismal season.
Tan remembered praying for his son’s favourite team to win. They did. Man United scored a goal in the 27th minute and managed to hold their lead to win 1-0 that day. “That year they were doing so badly, they kept losing every match after we left England, but they won that one very important game,” he told ZUU online.
“We have gone for a number of long holidays since then, but if you ask my kids what is the one holiday they remember, they always remember that Man U game.”
“I spent maybe $15,000 to $20,000 for that holiday,” he added. “I could have saved that $15,000 to $20,000 for my retirement, but I would have lost that opportunity to build memories with my children that they will remember for the rest of their lives.”
“That’s what we mean by financial planning being more than planning for the future,” he said. “It’s also planning to live a life now, that may mean you splurging money for things that are important to you in this season of your life.”
“I don’t think robots can understand this.”
Planning for his own retirement dream
Even as Tan continues to plan for his clients’ retirement aspirations, he continues to keep in mind his own dream retirement.
“My dream is to go to Bintan, and build a big house beside the beach,” he said smiling. “The house will be divided into two parts, one part for me and my wife to stay, and the other side I want to be able to house people who are discouraged, tired, or burned out. I want to be able to invite them to stay with me for a few weeks, and I want to be able to encourage them and coach them, so that when they leave, they can be ready to live another phase of their life.”
He joked that his wife is still not fully on board with his idea, but he has already researched how much it would cost to build his dream home on Bintan ($600,000 for a 30 year lease), has figured out where he would get his daily groceries from (FairPrice Xtra at Changi City Point), and has even received certification to be a life coach.
“ I think that’s very life fulfilling, and that’s what I want to do,” he quipped.