I just submitted the letter to MAS:
RE: Feedback for Financial Advisory Industry Review (FAIR)
As a full time fee-based professional financial planner for many years, I bring with me significant experience which I want to share with the committee. I am a CFA charterholder, Chartered Financial Consultant and as well as an ISO 22222 (SCI) certified person. I am an Appointed Representative.
1a. Currently, any person who possesses 4 GCE “O” Level credit passes can become an FA representative. Is this sufficient? If not, what do you think is an appropriate educational requirement for representatives, and should exceptions be made for existing and/ or older representatives?
These days, many consumers are highly educated. Financial representatives should possess a tertiary education as they would have to demonstrate the possession of a minimum intellectual capability. The tertiary education I recommend is at the university level. In my experience as a practitioner for many years, financial planning has becoming highly complex. I do not think a diploma holder is sufficient to meet today's demands. These days, the financial practitioner must be able to grasp:
- Complex products including those that are 'unregulated';
- Ever changing laws and regulations such as CPF rules, HDB rules; and
- Financial planning fields that are not regulated under the FAA and SFA such as estate planning, tax planning, credit management and so on.
Moving forward, the areas which FAA and SFA regulate are getting narrower in view of the ever changing landscape as demanded by the society. It will do well if representatives have demonstrated the ability to learn by ensuring they have the intellectual capability to do so.
However, FAIR should recommend the tertiary institutions recognise for such purpose after all it is even possible to buy a PhD over the internet.
1b. How else can we improve the quality and professional standards of FA representatives?
There are four elements that define a professional namely:
- One who possesses specialized knowledge not generally understood by the public;
- One who has qualification which acts as a threshold entrance requirement;
- One who has a sense of altruism; and
- One who subscribes to code of ethics;
I would like to enclose an article “What is really meant by professionalism” I wrote for a magazine which I elaborated these four elements in detail. Although it was published in August 2009, all of its contents remained relevant to date. [Note: Due to copyright reason, do not publish the attached article unless the publisher's permission is sought.]
6a. Do you think FA representatives should be paid solely or largely in commissions? Should Singapore move towards a fee-based model for remunerating FA representatives?
6d. Do you think having different commissions for different products affects an FA representative's ability to recommend suitable products to the customer?
There are 5 reasons why consumer should pay a fee and why it does affect the FA representative's ability to recommend suitable products:
Reason 1 why consumer should pay fee: Overheads
Nobody provides advice for free. All advisers charge a fee &ndash either indirectly through commissions or directly by stating the fee upfront. It is impossible for any firm to provide free advice. The fee the consumer pay &ndash either in commission or agreed fee is meant to help offset the large amount of overhead as illustrated below (Note: not drawn to scale):
There are generally two types of overheads: Direct and indirect expenses. Direct expenses are like utility bills, salary of administrative staff, IT support, licensing fee, professional indemnity, advertisement and rental. Indirect expenses are those which incur opportunity cost due to the long hours spent on it. Examples of indirect expenses will be CPD hours, product launch attendance and research. The time spent on these mean less time to meet clients and thus the loss of income. For other matters like professional courses and conferences incur both direct and indirect expenses.
Reason 2 why consumer should pay fee: Commission is an unfair method of remuneration
This is because:
- A client who buys the product (which pays the commission) is subsidizing another who does not buy;
- Some products pay outrageous commissions for little work done. This is unfair to the client afterall the client is the one who ultimately pays the commission.
- Some products pay insignificant commissions despite the large amount of work that the adviser has to do. Thus, the adviser is under paid;
- Many superior products pay no commission and thus advisers have no incentive to recommend these if they are relying on commissions;
- Many important areas of financial planning do not require purchase of product. Advisers will not be paid for helping clients plan for these areas.
Areas in financial planning that do not require purchase of products are:
- Minimizing income tax;
- Debt management;
- Cash flow, Balance Sheet and Ratio Analysis;
- Advice on the selection of employer sponsored insurance;
- Investment planning using passive funds like ETFs;
- Mortgage loan and installment calculation;
- CPF related advice such as amount eligible for mortgage, Minimum Sum Scheme, CPF Life, etc;
- Removing duplicate insurance policies; and
- Estate planning.
Reason 3 why consumer should pay fee: Fee-based financial planning is the fairest way of remuneration
This is because:
- Transparency &ndash consumer know how much they are paying;
- All clients pay according to the actual work done. A simple case cost less than a complex case. No cross-subsidy;
- Advisers are free to recommend without worrying about their compensation since this is already decided upfront;
- Superior products with no or low commission payable will be considered by the adviser;
Reason 4 why consumer should pay fee: Commission-based adviser may not put clients' interest first
This is because:
- The adviser has no incentive to spent time on matters that will not result in a product sale. Clients will not necessarily get the most holistic advice;
- In the table below, it shows that commission-based adviser will push the client from Stage A to Stage B of the advisory process. That is to say that such an adviser will tend to push the client to purchase some products. On the other hand, a fee-based adviser will not push the client from Stage A to Stage B.
- The commission-based adviser focuses on product sale (since he is paid for sales) while a fee-based adviser focuses on the quality of his advice (since he is paid for advice).
|Stage||Six step advisory Process||Commission-based||Fee-based|
|A||1. Establishing relationship with planner
2. Fact finding including goals setting
|Nothing paid here||Majority of the fee earned here|
|B||5. Implementation/ product purchases||Majority of the commissions paid here||Minority of the fee earned here|
|C||6. On-going review||Commissions repeatedly paid here for sales of unnecessary products. Often known as churning and twisting.||Fees earned here for providing on-going service|
Reason 5 why consumer should pay fee: Moral hazard
Imagine a doctor who cannot charge a consultation fee but could only earn through commissions selling medicine. Can you imagine the health hazard of being prescribed unnecessary drugs just because the doctor could only earn through commissions selling drugs? Similarly, the financial hazard of engaging a commission-based adviser often put the consumer's family and their retirement in jeopardy.
6b. Would you be prepared to pay an upfront fee for financial planning and advisory service (even if this does not result in purchase of life policy or investment products), instead of commissions based on sales concluded?
I think it is not a matter of whether is the consumer willing to pay a fee for advice but why consumers are not paying for it.
Consumer will never pay an advisory fee to a salesperson after all the goal of a salesperson is to sell a product. The salesperson's target is to bring in the revenue for his Principal and he is rewarded based on the amount of sales brought in. Also, there is nothing wrong with the salesperson earning a commission. If a car salesperson can earn a commission for selling car, why can't the financial salesperson earn a commission? The issue is that many consumers actually need the advice more than the product. Unfortunately, there are just disproportional too many financial salespersons in the industry right now (more on this later).
Currently, almost all representatives are actually salespersons in terms of job function. That is why consumers are not willing to pay for advice and in fact they should not be doing so. The Council for Estate Agents wisely selected the usage of the word 'salespersons' to mean the individual property agents. The financial industry will do well by regulating terminology properly.
This bring me to the next point that the industry uses many confusing titles resulting in the consumer unable to differentiate between those who are doing sales and those who are providing advisory service. To make it worst, the Financial Advisers Act (FAA) uses confusing terminology as well. Naturally, with such confusion, any consumer would be worried that they could be paying fee to the wrong type of person! The following is a table which I compiled to reflect the current confusing situation:
|Terminology||Meaning under the Financial Advisers Act||The natural meaning in the English language||Reality|
|Financial adviser||Refers to a company providing services regulated under the FAA.||The individual providing financial advice.||A salesperson.|
|Financial advisory Firm||No such terminology.||Refers to a company.||The firm selling products from many manufacturers.|
|Financial adviser representative||The individual representing the financial adviser.||Bad English.||Consumer cannot understand this term as it is bad English.|
|Adviser||Unregulated term||The person who gives advice.||A salesperson.|
|Senior Adviser||Unregulated term||An experienced person who gives advice.||A salesperson.|
|Consultant||Unregulated term||A very experienced person who gives advice.||A salesperson.|
|Personal Wealth Consultant||Unregulated term||A very experienced person who gives advice.||A salesperson.|
|Financial planner||Unregulated term||A person who can do planning.||A salesperson.|
|Appointed Representative||The individual representing the financial adviser.||Appointed by who? Bad English.||Consumer cannot understand this term.|
|Life insurance broker||The firm selling life products from many insurers.||The individual who can source life insurance policies from many insurers.||No often used by the industry.|
|Life insurance broker representative||Refers to the individual representing the broker||Bad English.||Not used in the industry.|
|Independent Financial Adviser||The firm that does not receive commission for providing financial advice.||A freelance individual who does not work for any firm but can provide financial advice.||Although the term is regulated, it is not enforced. Almost all FA firm claims to be an 'independent' yet all receive commissions (I consider wrap fees as commissions).|
|Independent Financial Adviser Representative||The individual representing the independent financial adviser.||Very bad English.||Not used in the industry as the English is too horrific.|
Due to the highly confusing titles and terminology used by the industry, it is impossible for consumer to differentiate who are the ones really providing advice and who are the salespersons. I recommend that MAS consider standardizing all terminology with proper English usage and prohibit all other terms. The following is a proposed terminology table:
|Terminology||Proposed legal meaning and actual English usage.|
|Financial advisory Firm||Refers to a company providing advice regulated under the FAA.|
|Insurance Agency||A group of salespersons selling products from one insurer.|
|Life insurance broker||Refers to the individual who is able to sell many life policies.|
|Life insurance brokerage||The firm selling life products from many insurers.|
|Independent financial advisory firm||The firm that does not receive commission for providing financial advice.|
|Salesperson||The individual who receives commission for selling financial products.|
|Senior Salesperson||The individual who receives commission for selling financial products and has at least 3 years experience.|
|Adviser||The person trained to give financial advice.|
|Senior Adviser||An experienced person trained to give financial advice and has at least 3 years experience.|
|Consultant||A very experienced person who gives advice and has at least 5 years experience.|
|Senior Consultant||A very experienced person who gives advice and has at least 10 years experience.|
|Financial planner||A person who can do holistic planning (tax, estate planning, etc)|
|Senior Financial planner||An experienced person who can do holistic planning (tax, estate planning, etc) with 3 years experience|
|Financial planning consultant||An experienced person who can do holistic planning (tax, estate planning, etc) with 5 years experience.|
|Senior Financial planning consultant||An experienced person who can do holistic planning (tax, estate planning, etc) with 10 years experience.|
The proper usage of the terminology could actually help consumers understand who they are exactly dealing with. For example, a company can say “XYZ Pte Ltd is an independent financial advisory firm and a life insurance brokerage”. This means that XYZ company is competent to provide advice, does not receive commission (therefore fees are chargeable) and is able to sell life policies from multiple insurers.
On the individual level, a person can say “I am a Financial Planner working for an Insurance Agency as a Salesperson”. This means that he is able to provide holistic planning but only able to sell insurance policies from one insurer earning a remuneration based purely on commission.
Another advantage of standardizing terminology is that consumers can decide the kind of fee they are willing to pay based on the seniority and experience of the adviser. Currently, it is impossible for consumers to differentiate the experienced person and junior person.
6c. What do you think is a reasonable amount to pay for financial advice?
The reasonable amount that a financial adviser should charge is actually based on a simple mathematical exercise.
Consider an adviser who earns purely on commission:
Let's say the commission based adviser needs to earn $5000 a month in take home pay to feed his wife, children and save money for retirement. Let's say that the gross profit margin is 70%.
Let's say he is an extremely highly active adviser who sees 1 new prospect every day for 20 days in a month. He does this by engaging a super solid professional telemarketer to do the job. He pays the telemarketer $8 an hour and thus assuming 8 hours per day 5 days a week, the telemarketer gets $1280 a month. Assuming the telemarketer gets 15% of the adviser's commission as an incentive bonus. How much the adviser must earns in gross commission in a single month?
5000 + 1280 + 15% * X * 70% = X*70%
=> X = $10555
But everybody knows that the chance of prospect buying a product is very low for cold-calls. Let's assume the closing rate is 5%. It implies there will be 1 out of 20 prospects who will buy a product. Therefore, each case must generate a gross commission of $10555! That's why the adviser will not recommend certain financial products that do not pay well.
Now change the parameter and assume that the closing rate is 100%, each prospect only need to pay 10555/20 = $527 which is a much fairer amount. Of course, closing rate of 100% only occurs rarely.
So why this happens? It is because of the fact that most prospects pay $0 for advice. The prospect that buys is the fool that is going to pay for the rest of the free riders. To be fair, it is not the adviser's entire fault for having such low productivity. Prospects have been thinking that it is the norm to get free advice. This is far from truth. The irony is that because many prospects want to get free advice, they will end up paying for an extremely hefty price of at least $10555 (using the above illustration) when they buy a product.
The worst part is that $10555 is not the maximum they pay. Assuming a product uses 3% of its cost to pay for that commission, it implies that the prospect must buy a 10555/0.03 = $351,833 worth of product. This may be in terms of lump sum investment or the present value of regular premiums over a long-term horizon. My goodness, I can buy a decent no-frill HDB flat with that amount of money!
Therefore, fee-based advisory model is not optional; it is a necessity to save the Singapore people!
The answer to the question is that a reasonable amount to pay the advice ranges from $500 to $10,000 depending on the seniority and productivity. Anything below $500 is not a viable business for any firm.
8a.What do you look for in the financial institutions or representatives you deal with, that will demonstrate most convincingly they are dealing fairly with customers?
b.How do you think we can promote a culture of fair dealing in the industry?
Fairness is a two way process. A lot of attention has been imposed on financial institutions with regard to fair dealing. However, consumers must be educated on the true meaning of fair dealing. Consumers understand the need to pay for the dentist, to see a doctor and the legal fees involved in engaging lawyers. Yet, consumers expect the financial adviser to work for free. Is this fair? It is this reason that financial institutions have developed advanced selling techniques to overcome this 'unfairness'. I propose that MoneySense invest sufficient resources in educating consumers that they should not be expecting free advice. Otherwise, regardless of the regulation (which there is already so much), consumers will continue to receive the raw end of the stick.
Another issue in the industry is the unfairness treated towards financial adviser representatives such as:
- Unfair contracts such as instance termination once a sales quota cannot be achieved
- Not being compensated for taking over 'orphans' life policies; and
- Below market rate compensation (advisers are not able to leave because of the loss of the entire clientele).
I propose that NTUC setup a union for financial adviser representatives so that representative's interest are looked after as well. It is not possible to put clients' interest first if the representatives have their own set of problems.
9. Any other comments or feedback?
Almost all industry players do not have any experience in the fee-based model. As a fee-based financial practitioner, I want to share some of my opinions:
a) Misconception that fee-based means salaried advisers.
Many senior management thinks that advisers must be salaried employee in order to be fee-based. This is a myth. The fee-based model is a model on how the client is going to pay. It has nothing to do with the compensation scheme inside the firm. Currently, consumers buy products in which manufacturers pay commissions to the firm. The product manufacturer deducts this distribution cost from the product. The firm which receive this commission from the manufacturer use it to pay to the manager and adviser and as well as the running cost of the firm. In a fee-based model, everything can remain the same except that the manufacturer is prohibited from paying such commission. The consumer is the one who pays. Many lawyers earn very low salary but has a high variable component based on getting a cut in the legal fees charged to clients. There is no reason to say that all fee-based advisers must be salaried staff. They can still continue to be self-employed receiving a percentage of the fees paid by their clients. Therefore, firms do not need to worry this.
b) Misconception cannot find clients.
Currently, it is very hard to find clients who are willing to pay fees. This is because under the current system, advisers charge $0. Why would clients be willing to pay anything when the adviser next door charges $0? Once the regulator removes commissions, the entire industry charges fees. Naturally, clients have to pay fee because there is only one mode of payment. Clients will cease to make product comparisons but they will compare the fee charges by different advisers.
c) The poor cannot afford to pay fee.
I agree that the poor cannot afford to pay fee. But can the poor afford to buy the products which the salesperson sells? There is no evidence to say that the poor has been benefiting from the 'free advice' offered by the financial industry. In fact, perhaps it is good for the poor to avoid buying products from salespersons! To be fair, there are advisers who do pro-bono for the poor. Advisers who do pro-bono will continue to do so regardless whether it is fee-based or commission-based as their motivation is not monetary. If the poor cannot afford to pay for medical fees, does that mean that the entire medical industry cannot charge medical fees? Or consider the case that if the poor cannot afford the lawyers' fees, does that means that all lawyers must work for free? As it can be seen that the argument against fee-based just because the lower-income group is unable to afford is a flawed one. Instead, the issue of affordable of this lower income group should be separately addressed similar to other areas such as medical, housing, GST, etc.
d) Oversupply of financial adviser representatives.
It is correct to say that the financial industry will consolidate. However, the cause of such consolidation is not because of the fee-based model but simply because there is an oversupply of financial advisers. In 2011, there were 18 doctors per 10,000 population. Assuming there are 15,000 advisers in Singapore, it means there are 15000*10000/(5183700) = 29 advisers per 10,000 population! Would an individual seek advice from an adviser as often as he sees his doctor for flu? Also, very often the 'head of the household' makes financial decision on behalf of the family. Not everyone in the household need to see a financial adviser. In fact, minors in the family are not permitted to make any financial decision with a financial adviser due to the inability to enter into contracts. Thus, there are simply too many financial advisers in Singapore. The reason why the industry must consolidate is because there are just too many advisers. The industry has managed to maintain this number of advisers because of advanced selling techniques taught. As a result, Singapore residents continue to buy unnecessary products. Considering there are so many financial advisers, why are Singaporeans still underinsured? The reality is that most of these 15,000 advisers are salespersons and very few are actually providing advisory. It is not viable to provide financial advisory business without making a sale since clients are not paying a fee for advice.
e) Lack of financial planning can create social and political problems.
When a person injured or ill, he will be most willing to seek medical treatment. In area of financial planning, it is a subject that is perceived to be not urgent. As a result, financial planning is viewed as an optional exercise. Due to his reason, the industry has to develop many advanced selling techniques just to get the prospect to buy products. Although it is not urgent to do a financial plan but it is by no means unimportant. Without proper financial planning, Singapore residents could end up overleveraging (resulting in escalating property prices), lack of CPF and investing in products that does not cope well with increasing inflation. The inability to retire eventually becomes a social and political problem. It is true that financial planning is not an urgent exercise but it is nevertheless important. Therefore, large amount of financial education has to be invested to help the public understand the importance of financial planning. Currently, the only institutions with that type of budget are the insurers and banks. There are no other institutions that have such a budget unless MoneySense does this as well.
f) Fee-based will liberate many advisers to become true professionals.
All advisers rely purely on their product manufacturers to pay them the commissions. Advisers' entire pay checks solely rely on whom they represents. Advisers cannot easily go to another company like salaried staff because of the loss of recurring commissions. So how are commission rate determined? The product manufacturers determine it. Different products have different commissions. Who decides which product pays the most and least commission? The product manufacturer. Does it matter that the adviser spent 100 hours on a case to make the sale? Does it matter that the adviser spent 1 hour on the case to close the sale? Does it matter that the adviser spent 1000 hour on a case for which no product sale was made? It does not matter because product manufacturers only pay when a sale is made. The product manufacturer just simply assigns a commission rate to each product regardless of what transpire between the adviser and the client. Why is a regular premium ILP has a higher commission rate compared with say a term insurance? Is the latter less important? They just assign the commission rate to each product independent of the actual work rendered by the adviser.
Some product manufacturers and Principals ensure that advisers can only be paid by commission and not by clients in fees. The impression given is that getting commission through product sales incurs less liability as compared to fees paid by clients. Perhaps that's true in the past when clients are uneducated and not aware of their rights. These days, clients can sue regardless whether is commission or by fee. As long as the advice was wrong, there is always a risk of litigation. Actually, being paid by clients through fee can potentially have a lower risk of litigation. Consider this: If the adviser sells a product that cost $X and receives $Y as commission. What is the difference to the client if the product sells for $(X-Y) and receives a fee of $Y directly from the client? Economically and numerically there is no difference to the client because the total cost is exactly the same in both scenarios. So why can't the adviser charge a fee? The reason is this: If the adviser charges $Y from the client as fee, there is no reason why the adviser should sell that product. He could source from another product that cost $(X-Y-J). Economically the client stands to benefit because in the latter case the total cost is lowered by $J. Financially, the adviser continues to be remunerated at the same dollar value but he is now a happier person. He is happier because he has lowered the cost for his client. In fact, the product manufacturers become commoditized once advisers charge fee because they are no longer bound to sell the product manufacturers'' own products. Product manufacturer are commoditized because they now have to compete based on price and they cannot incentivized advisers with high commissions unlike in the past.
g) Fee-based will lower the cost of products
Because many Principals and product manufacturers do not permit advisers from charging service fee for most services, advisers must continue to sell products. The initial commission is definitely not enough on a long run. So advisers have to continue selling products to earn a living. As a result, existing clients are neglected. That's why clients complain about their advisers not servicing them or ignoring them after the sale is made. The Principal and product manufacturer want their advisers to continue selling their products but stop these same advisers from charging any service fee to their existing clients. If advisers can charge an on-going servicing fee, many advisers will stop selling products for product manufacturers. Product manufacturers will thus suffer and they have to slash down their product prices in order to attract new customers and hence becoming further commoditized
h) Traditional product manufacturers will consolidate and new players can come in
I agree that product manufacturers will suffer. I think that is to be expected as they cannot incentivize advisers anymore. They will have to complete on price and features. New product manufactures will be able to come to Singapore. Companies such as Vanguard will be able to do business in Singapore and able to distribute their low cost and superior index funds. They are not able to come into our markets because advisers are paid through commissions. If they are paid by clients through fees, advisers can recommend low cost products without worrying about their remuneration. The loss of jobs in the financial sectors will be make up by new employers setting up shops in Singapore due to the removal of the barrier of entry.
I support the move towards a fee-based regime. I encourage Monetary Authority of Singapore to champion clients' interests to bring the industry to the next level. There is a strong lobby against this move as evidenced by the statements made by the industry in the media. Do not be discouraged.
Thank you for allowing me to provide a feedback. If there are further queries, feel free to contact me.
Ling Siew Wee Wilfred, CFA
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