Background on Fee-Based Financial Planning in Singapore
Are you looking for a fee-based financial planner in Singapore? Look no further because you could be looking for a needle in the haystack! Fee-based financial planning in Singapore is rare. Few offer it.
Wilfred Ling is one of the very few advisers in Singapore providing fee-based financial planning in Singapore.
Why are there so few fee-based financial planners? The following are some reasons (click on the relevant titles to expand):
1. No regulatory requirement on financial planning
Other financial planning matters such as budgeting to buy a house, drawing up a proper Will, dealing with a spendthrift child, advice on CPF and HDB rules, etc are all unregulated activities. The lack of regulation means anyone can do all these without any form of accreditation and qualification. This means consumers will be confused as to who they can trust. Confusion leads to risk aversion towards engaging a professional fee-based financial planner. With no demand for professional fee-based financial planners due to such confusion, the number of such professionals offering fee-based financial planning in Singapore remains the minority.
2. 80% of consumers only want free advice
There are about 15,000 registered financial advisers in Singapore. Do they work for free? No, of course not. Many advisers and agents earn commissions. It is easier to sell a product that gives $10,000 in commissions than get the client to pay a fee of $500. Due to the ease of selling products with embedded commissions as compared to charging an upfront fee that is transparent and known, most registered financial advisers are product salespersons.
It is this reason why most consumers have never met a professional financial planner before. By the way, free advice could cost you your entire HDB flat!
3. Only 20% have accessed professional advice
It is this reason of the lack of desire to seek professional advice that the demand for professional fee-based financial planner is low. Without demand, there is a low supply of professionals offering fee-based financial planning in Singapore.
4. Low profit margin in advisory fees
To date, ALL firms in Singapore takes commissions.
5. Deliberate confusing 'fee' pricing
- Total distribution cost
- Wrap fee
- Trailer fee
- Sales charge
- Platform fee
- Performance fee
- Retainer fee (this one is invented by Wilfred Ling)
Are these fees or commissions or both? To make matters worst, one firm advertised itself to be ‘fee-only’ because its advisory fee is based on a portion of the commissions earn! If that is the case, all insurance agents are ‘fee-only’ too!
To me, fee-based financial planning means that the client has to pay for the advice regardless of product purchases. This is the same model as a doctor who will charge two kinds of fees – consultation (advice) and the cost of medication (product).
6. The big boys are against fee-based financial planning
Should you engage Wilfred Ling?
Since 80% of consumers only want free advice and have never met a fee-based financial planner before, I provide an opportunity to all potential clients to know me through this website and my mailing list. Please sign up for my mailing list to receive regular financial planning articles at no cost.
Services provided by Wilfred Ling
The following are all the services I provide:
- Retirement and Passive Income Planning
- Life and Health Insurance Planning
- Investment Portfolio Management
As for consultation charges, Fees & Charges.
If you are keen to find out more, feel free to contact us at this link HERE.
Why pay fee for advice when others provide free advice?
Reason 1: Overheads
Nobody provides advice for free. All advisers charge a fee for advice – either indirectly through commissions or directly by stating the fee upfront. It is impossible for any advisory firm to provide free advice. The fee you pay – 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 lost of income. For other matters like professional courses and conferences incur both direct and indirect expenses.
Reason 2: 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;
Reason 3: Fee-based financial planning or fee for advice is the fairest way of remuneration
This is because:
- Transparency – you know how much you 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 commission payable will be considered by the adviser;
Reason 4: Commission-based adviser may not put your 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 wholistic 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).
Which do you prefer? A salesman or an adviser?
2. Fact finding
|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 herefor sales of unnecessary products||Fees earned here for providing on-going service|
Reason 5: 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 could put your family and your retirement in jeopardy.
A financial planner is a financial doctor. Only a person who is financially unwell is required to consult a financial planner. Others who are well would consult a financial planner to avoid future financial trouble through “preventing” advice.
Relevant articles on why it is important to pay a fee for advice
Here are some relevant articles:
Free advice is going to cost you your entire HDB flat!
Why financial advisers must abandon their clients?
Vacuum Cleaners and Financial Services
No advice given, few documentation and non-disclosures but earns easy money
MAS gives examples of illegal sales tactics for the Balance Scorecard
Up to 70% of financial advisers’ recommendations were unsuitable, says MAS mystery shoppers survey
ST Forum: Vital to regulate commissions
What is Comprehensive Financial Planning service?
Comprehensive Financial Planning service is a written report covering all of the following:
- Understanding client’s goals,
- Tabulating the cash flow and balance sheet statements,
- Credit management,
- Risk (protection/insurance) management,
- Education planning,
- Retirement planning,
- Investment Planning
- Tax planning and
- Estate planning.
What is there to plan for Estate planning?
The purpose of estate planning is to ensure the clients’ dependents receive the intended monies to assist them in their lively hood until they are financial independent. Second purpose is to ensure liabilities are paid on the demise of a borrower. Third purpose is to leave behind a legacy to the intended beneficiaries and to ensure unintended beneficiaries do not receive it. Finally but most importantly to ensure that the decease appoints a trusted Executors/Trustees for who will have the fiduciary duty to ensure the estate is managed and distributed for the interest of the beneficiaries.
The tools used in Estate Planning are: Will, CPF Nomination, Revocable Trust, Irrevocable Trust and Portfolio Bonds.
See this FAQ on estate planning: HERE
What is there to plan for Tax planning?
Singapore’s tax law is quite straightforward. However, high income earner may not realize that there are attractive tax saving tools to reduce their tax liabilities. These tax saving tools are not automatic but has to be planned ahead. Some of these tools are Supplementary Retirement Scheme (SRS), CPF Minmum Sum Top-up, CPF Voluntary Contribution scheme and donation to Institutions of Public Character. Using CPF rules to save on taxes can be a complicated affair because CPF rules change almost on a yearly basis.
Those who invest in foreign investments may like to know that they may be taxed by foreign government on their dividends. For example if the dividend yield is 3% and the tax rate is 30%, there is almost a tax expense of 1% per annum. Careful planning can be done to avoid this by investing in other jurisdiction for which there is no dividend tax.
What is there to plan for Investment Planning?
Both education planning (short time) and retirement planning (long-term) require some elements of investment planning. However, we treat the clients’ entire wealth (excluding personal use assets and residential home) as a single portfolio. We do not departmentalize into separate and isolated portfolios like “Retirement portfolio” or “Education planning” portfolio.
Everything which the client has is part of that single portfolio. Therefore, we will taken into account of cash deposits, fixed deposits, single premium endowments, SRS balances, CPF Ordinary Account, Special Account, Medisave, funds, stocks, investment properties, as part of the entire portfolio. We will calculate what is the weighted average return of the existing portfolio.
We will then recommend an asset allocation to achieve the desired weighted average return. Because the portfolio is not static, those who have sign up for our Retainer Service will expect us to assist in advising on how to rebalance this portfolio as and when it is needed.
What is there to plan for Retirement planning?
We use expense method to calculate the amount of retirement funding required for retirement planning. The first step is to determine today’s expenditure excluding mortgage, dependents’ cost and luxury. We project the expenditure at retirement based on an assumed inflation. Based on an assumed life expectancy and investment rate, the lump sum retirement funding is determined. If that lump sum is not available now (after discounting time value for money), we will recommend a monthly contribution to achieve that goal.
What is there to plan for Education planning?
If the client has children, this is the section which we plan for the amount required to save for the children’s tertiary education. The education planning method we use takes into account of time value for money by establishing the lump sum required now. If the lump sum required now is not available, we will recommend a monthly contribution to meet that goal.
What is there to plan for Risk (protection / insurance) management?
Under this section, a survivor needs analysis is performed to establish the required amount needed in the client’s estate to ensure his dependents are sufficiently provided for. The amount insurance required for death is established after taking into account of the client’s existing insurance, net asset but excluding personal use assets and residential home.
In addition to the above, we will check to ensure the client has already insured himself for disability income, critical illness, health insurance, liabilities (mortgage) and long-term care insurance.
What is there to plan for Credit management?
The purpose of credit management is to identify affordability of taking up a loan (such as a mortgage) and the amount of downpayment that can be afforded from balance sheet point of view. Moreover, if the clients have numerous debts, we will need to convert all interest rates to effective interest rates and rank them from the highest to the lowest. This is to assist the client in paying off his debts in the most efficient manner.
What is there to plan for cash flow and balance sheet?
The purpose of establishing the client’s cash flow and balance sheet is to identify sources of income and expenditure. Moreover, minimum liquidity is required to meet unexpected emergency cash outflow. The balance sheet will tell us whether is there sufficient liquidity. If there is a large positive cash flow but the balance sheet do not reflect the high saving rate, we will have to identify where these surplus cash has gone to. Finally, we need to identify negative equity asset as there is a danger of margin call.
All of the following planning relies on cash flow and balance sheet. Thus the cash flow statements and balance sheet represents the most fundamental items in a comprehensive financial plan.