Last Updated on 26, November 2016
I often hear of complains from clients that their previous advisers stop contacting them after a few years. Clients often felt that their advisers were just out to make money but did not bother about after sales service. I would like to write about this from a new perspective.
Let’s say the adviser need to earn $4000 per month in earnings. Assuming a banding rate of 70%, the gross revenue to earn is 4000/0.70 = $5714. I want to provide some illustration for advisers that employ three different types of business models:
Model 1 – Earnings based on Transaction
Assuming each sale can provide $750 in gross commission (this figure is purely for illustration purpose only), he needs to close nearly 8 cases / clients per month. For simplicity we assume this $750 is the present value of current and future recurrent commissions.
Therefore in one year he would have accumulated 8*12 = 96 clients. In three years, there would be accumulatively 288 clients. In five years, it would be 480. In ten years it will be 960 clients.
But there are only 252 working days in a year. It is impossible to provide any “after-sales” service for more than 252. So some older clients have to be drop out especially those who do not generate any more new sales.
Those that will not be drop out will have to buy new products or permit their unit trusts to be churned (frequent switching of funds at high cost without good reason which is a criminal offence but many advisers still do it).
As you can see, this model does not provide for the adviser to support existing clients because earnings are always based on new sales.
The great majority of the adviser including insurance agents, IFAs and banks employ this model. Large financial institutions tend to use this model because of the culture of focusing on short-term profit rather than long-term. Most banks’ frontline staff are salaried with some amount in performance bonus. However, if they cannot meet their sales targets, they will be fired. So they end up chasing short-term transactions and get into these same problems as everybody else in the industry.
Model 2 – Earnings based on Asset Under Management (AUM)
In this model, the adviser gets his clients to invest with him. He earns via a management fee. Using the same $5714 in gross revenue required, he need to earn 5714*12=$68,568 per year in gross revenue. To do this, he needs to have an AUM of at least $6,856,800 assuming a management fee of 1% per annum.
Let’s say he wants to provide 4 days of meeting with each existing clients in a year, it means that at very most he could have (252 – 21)/4 = 57 clients. I assume this fellow take 21 days of leave per year.
Therefore, the asset that each client need to invest is an average of 6856800/57=$120,294
This model is much better because there is a provision on how he is going to support his existing clients. Implied in this model there will be no more additional new clients once he reaches his maximum number.
The disadvantage is that each client must invest at least $120,294. In other words, everyone must put a six figure sum with this adviser regardless whether is this suitable, needed or appropriate. If the client is ultra conservative and only dare to put money in fixed deposit, the adviser will have to force the client to invest anyway and this will be detrimental to the client. This is of course a criminal offence but some advisers do it anyway.
Model 3 – Agreed Annual Fee
In this model, each client agrees to remunerate the adviser based on a predefined yearly fee.
Again using the same gross revenue of $5714 and assuming that annual fee agreed is $2000 per client per year. This means that he need to have at least 5714*12/2000 = 34 clients.
This figure means that he can afford to meet each client on an average of (252-21)/34= 6.7 times a year.
This model is also quite good because there is a provision on how he is going to support his existing clients. Moreover, clients do not need to invest even a single cent. The adviser is free to advice on a wide ranging of financial matters such as tax, estate planning, investment bought from another adviser and insurance. Even sourcing for the best fixed deposit rates can be part of the on-going service!
The setback in this model is that unless the agreed annual fee is adjusted for inflation; the adviser will still need to acquire new clients just to maintain his earnings at the same level on a long-term basis.
In Singapore, most advisers employ Model 1. Some uses a combination of Model 1 and Model 2.
I know of nobody except the author of this blog who uses Model 3.
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What can the authorities and the public, as well as yourself, do to get the industry to stop using Model A?