This blog post explores why financial intelligence is absolutely necessary for survival in today’s era where financial products are part of everyday life, navigating complex financial markets.
A Life Endangered by Finance vs. A Life Enriched by Finance
To survive within the complex, difficult, and even dangerous capitalist financial system, we must accompany our efforts with the essential act of studying finance ourselves and striving to understand it. Let’s hear from Dr. Cheon Gyu-seung of the Korea Development Institute, who has conducted in-depth research on financial literacy, or Financial Quotient (FQ).
“Financial flows are changing, so if you aren’t quick to adapt to new information, your financial literacy can decline. The financial environment you encounter as a child is vastly different from the one you face as an adult. There’s no guarantee that the financial literacy you acquired in childhood will carry over into adulthood. You constantly need new experiences and new information.”
Financial intelligence (FQ) is the essential quality individuals need to manage their financial lives more efficiently and rationally, thereby living in a more prosperous world. Let’s hear more from Dr. Cheon Gyu-seung.
“Money can be described as a flow: it stops somewhere, then circulates; it stays in my pocket, then goes out. This flow of money has changed significantly in meaning as industrial society developed. The prevailing view was that factories needed money to operate properly, and financial institutions were the places that provided that money. Ordinary people and financial companies didn’t have much to do with each other. Even without special knowledge about finance, life wasn’t greatly affected beyond thinking, ‘Maybe I should save a little.’ However, as financial products have become increasingly sophisticated, finance no longer holds only the meaning of ‘supporting industry.’ It has entered our daily lives. You might purchase insurance to prepare for unexpected medical expenses requiring a large sum, or invest in stocks or funds if you have spare money to grow. This is a significant shift from the past, when savings accounts were the only option. The problem, however, is that when financial accidents occur, the risk falls squarely on the individual. It’s no longer about becoming wealthy through finance; it’s about living a prosperous life thanks to finance. Therefore, how well people understand the basic principles of finance has become crucial.”
Yet, no matter how diligently we study finance, analyzing the ever-changing financial markets and the flood of new products released daily is no easy task. This is because risk always lurks in investment. Even employees at securities firms working in the financial industry find it difficult to properly weed out the ‘bad apples’. Let’s hear from Attorney Jeon Young-jun of Hanuri Law Firm.
“Even securities firm employees find the pamphlets and educational materials from headquarters seem plausible. That’s why they themselves pooled their savings and invested. But that product turned out to be flawed, and they ended up facing lawsuits. Then, one day, that securities firm employee quietly called our office. ‘I’m the employee who sold that fund, and I also suffered losses. Can I join the lawsuit?’ We get many such inquiries. In other cases, after selling the product, the employee regretted it so much that they brought in the customers they had personally recommended to buy it and urged us to file a lawsuit.”
An expert for me, not the bank!
If even financial company employees get confused by these products, isn’t it impossible for ordinary people to understand them on their own? So what should we do?
Wouldn’t it be great to have an expert who provides personalized advice considering my income and expenses throughout my entire life, analyzes the pros and cons of various financial products, and gives sincere recommendations? If we can’t trust the words of employees who recommend products for the benefit of the financial company they belong to, wouldn’t it be great to have another expert who can recommend which financial products are best for us? To see how things are in other countries, we heard from Professor Julia Black of the London School of Economics and Political Science’s Law Department.
“There are people called Independent Financial Advisors (IFAs). IFAs sell financial products on behalf of providers (like insurance companies and banks). This system was introduced to help consumers navigate the maze of the financial market. Financial products have a special nature; they’re called credence goods. They’re not experience goods. You can’t take a pension home, open the box, and check if it works. If you buy a washing machine, you take it home, check it, and return it if it doesn’t work. Just like returning an iPad if it malfunctions. But financial products are different. You must have faith and trust that your investment will succeed and your money will hold up for at least 5 years, or as long as 25 years. Most are long-term investments. You don’t know if the pension you’ll receive in 25 years will be good or bad. You can’t return a lousy pension. Therefore, it’s extremely difficult for consumers to find information on their own and make good decisions based solely on that information. Sometimes products are even fabricated, and they’re hard to understand. This is precisely where an independent financial advisor comes in to help.”
Of course, there are people providing financial advice domestically too. These are insurance salespeople or financial advisors affiliated with banks. There are also those operating under the names ‘financial advisor’ or ‘financial planner’. These are people who diagnose an individual’s overall financial state, including income, expenses, and debt, and based on this, establish the most effective financial plan for the future. However, the reality is that since they are usually affiliated with specific financial companies, it’s difficult for them to recommend products suited to the customer’s circumstances, thinking solely from the customer’s perspective. This is according to Kim Gap-rae, a research fellow at the Capital Market Research Institute.
“Currently, the financial product sales network is centered around insurance companies. Given the inherent weakness of the advisory industry, it has become dependent on insurance companies, which are the sellers of financial products, and their interests are not independent from those companies. Consequently, when recommending various financial products, they often choose the option with the highest sales commission rather than what is truly in the client’s best interest. Concerns about unfair transactions are very significant.”
No one will provide the ‘service’ of comparing, analyzing, and recommending various products for the client’s benefit if they gain no profit themselves. What we need now are independent advisors not affiliated with financial companies—that is, ‘independent financial advisors’. This refers to individuals who, independent of the interests of financial product sellers and without receiving separate sales commissions, recommend appropriate financial products to ensure their clients achieve the best possible outcome. Such systems are already in place in the United States, the United Kingdom, and Hong Kong. These advisors receive advisory fees for recommending sound financial products, not commissions from sales, and are independent from financial institutions. Let’s hear more from Professor Julia Black of the London School of Economics.
“Independent financial advisors sell financial products. They must also provide advice. They must maintain a relationship between client and expert. You could say it’s similar to a lawyer. Independent financial advisors cannot receive commissions; they must receive advisory fees.”
Qualifications for Independent Financial Advisors!
However, several conditions are necessary to cultivate such professionals. There must be a certification system to prove their expertise and regulatory mechanisms to ensure advisors fulfill their duties faithfully. Furthermore, independent financial advisors must disclose whether they are truly independent—meaning they sell all products from all providers—or if they are limited to specific products and providers. This allows customers to clearly know whether they are receiving good advice or not. However, compared to other countries, Korea still has many shortcomings. Kim Gap-rae, a research fellow at the Korea Capital Market Institute, expresses this regret:
“It’s still inadequate. In other countries, advisors have a duty to recommend the best financial investment products available in the entire market to their clients. However, in Korea, we haven’t yet imposed that level of fiduciary duty on advisors.”
The ‘duty of care’ refers to the standard of care expected of a prudent manager, meaning exercising the level of care generally required given one’s social and economic position.
Not investors, but financial consumers!
Our government is also making efforts to prevent the ills of financial capitalism. One of the most representative examples is the ‘Act on Financial Consumer Protection’. This law was submitted to the National Assembly in July 2012 and is currently undergoing the legislative process. However, there is something we must pay close attention to in the terminology used to refer to this law. That is the term ‘financial consumer’. This term reflects a new concept: in financial capitalism, we should now be referred to as ‘consumers’, not ‘investors’. This is the explanation from Attorney Jeon Yeong-jun of Hanuri Law Firm.
“We now live in an era where ordinary people can purchase financial products anytime at their local financial institution branch. If we continue to view these individuals solely as ‘investors,’ we cannot adequately protect them. Therefore, we must use the concept of ‘financial consumers’ and regard them as subjects requiring protection.”
Investment inherently carries the premise that ‘you could lose money,’ meaning ‘investors’ are also ‘people who could lose money at any time.’ Since investors bear full responsibility for this aspect, it leads to the conclusion that no social protection mechanisms are needed. However, unlike the concept of an ‘investor,’ using the concept of a ‘financial consumer’ allows them to be seen as individuals who can receive protection when there is a problem with the product, similar to purchasing general goods. The ‘Act on Financial Consumer Protection’ currently being legislated is premised on viewing those purchasing financial products as ‘consumers’ rather than ‘investors’. It also includes provisions for ‘six major sales conduct regulations’ for all financial product sales and the promotion of sound financial product advisory services. It also imposes certain independence requirements on financial product advisors. Until now, advisory services were regulated separately by insurance, banking, and securities sectors. The key point is that they will now be consolidated under the term ‘financial product advisory service providers’.
This legislation is undoubtedly essential for us, as it lays the groundwork for ‘consumers’ to make informed choices about financial products. Furthermore, based on this law, the cultivation of independent financial advisors is expected to become more active in the future.
Beyond this, various policies and institutions for financial consumers are showing signs of becoming active domestically. However, many shortcomings remain. Although the ‘Financial Consumer Protection Planning Group’ under the Financial Services Commission launched in August 2013, its scale was significantly smaller than initially anticipated, and its operational period is initially limited to about two years. Furthermore, there are budgetary issues. The Financial Consumer Protection Planning Group’s budget is allocated from the Financial Supervisory Service’s budget. However, it is ironic that the majority of this budget comes from contributions made by the very financial companies that are subject to supervision.
There are still many shortcomings preventing us, as financial consumers, from receiving fair treatment and making investment decisions freely within legal safeguards. This is a point made by Niall Ferguson, Professor of History at Harvard University.
“We must recognize that in ten years, we will live in a world where finance is even more crucial than it is today. Just as finance is far more important now than it was ten years ago.”
We are still far too lazy, naive, and ignorant. ‘Even if retirement funds are wiped out, investment advisory firms and securities companies…’, ‘Equity funds like fallen autumn leaves’, ‘Elderly crowd stock ticker screens… Ah! My retirement funds sigh’, ‘Brokerage employee suicide over investment losses’, ‘Korean Savings chairman’s 400 billion won illegal loans’ – just collecting financial scandals from the past year alone would fill an entire wall and then some. Of course, we bear the full brunt of the damage. But is it really wise to simply say, “It’s my fault,” just because we didn’t know? When we seek a doctor because we’re sick, the doctor must explain our illness and the treatment methods. That is their duty as a physician. Let’s revisit Professor Niall Ferguson’s words.
“Today, many people believe ethics don’t exist in the financial world. They say those working in banks and hedge funds have no moral compass, using every means possible to focus solely on making money. The Hippocratic Oath that doctors take should exist in finance too. But we don’t have that. People who become bankers don’t take any formal oath. That’s the problem.”
It’s not just bad food that kills people. Bad financial products are family destroyers and social evils that ruin entire lives. So, it’s perfectly acceptable to demand with confidence. Above all, it is essential to tell financial product sellers: ‘Explain this properly,’ ‘I don’t understand, explain it again,‘ ‘Clearly tell me exactly how risky this product is.’ This is one of the most important principles that must be prioritized to minimize the risks your own choices will bring. Because we must protect ourselves.
