Comment on “Conflict of interest between bank and customer “

There is a posting at Tan Kin Lian blog written HERE by an insider about the conflict of interest of a bank and the customer (to be fair, the conflict is applicable to FA firm and tied agents):

• Recommending broadly diversified products tend to cannibalize other high risk products
• Hype and excitement comes with newly created products
• Commission based encourages people to sell certain product as compared to other products. Products that work for customers are often low in commissions

The 3 conflict of interest is not new. However in my opinion the conflict of interest mentioned above by the poster can never be removed if free market is allowed to regulate the market. The bottom line in the above is about maximizing shareholder values. Unless the bank or FA firm becomes a not-for-profit company, it is impossible to remove the conflict of interest. The only way to remove the conflict of interest without forcing the firm to become a charity is to ban commissions altogether. This can only happens if the regulator does so. Singapore is well-known to be the first. Banning chewing gum is I believe the first in the world. Why can’t MAS just ban commissions? So easy, just pass legislation only. In Singapore passing law in Parliament is 100% guaranteed possible.

If commissions in financial products are banned, the only way which advisers can earn money is to charge fee like a lawyer. They will compete based on competency, skill and value add. They will have to focus to build a good reputation for themselves rather than concentrating in selling any products. In fact, selling products become secondary as these are mere tools to help to fix certain problems. Imagine the carpenter taking pride in the furniture he has built. The focus is on the work done, not on the tools (products) used. Or imagine an artist who takes pride in his painting. The focus is on the beauty of the paint, not the paint brushes (products). In another example, imagine the pride of a chef who can produce excellent dishes. The focus will be on the dish itself, not what ingredients (products) were used.

Yes, banning commissions is good for the country. Will our government do this? Of course not, I am a realistic Singaporean!

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