Everybody I know is concerned about their salary because they want to save for retirement. Financial advisers are no different from the human being next door. They need to earn a living as well. Unfortunately, such clients are going to be sold expensive product. Why? It has to do with low levels of productivity.
Productivity is the amount of output for each unit of input. For financial adviser, the “input” is the time spent on the case. The “output” is what he needs to earn. Let’s reverse engineer this situation.
Let’s say he 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 term (which generates < $100 of commission) or shield plan (which generates <$50 of commission) or disability income (which generates <$500 in commission). For unit trusts, it has to be a very large in amount. Amount such as $10,000 cannot generate $10555 in commission. For RSP, it is even worst. Even for whole life, it is almost impossible to generate $10555 in commission.
Let’s say 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 in outerspace.
So why this happens? It is because of extremely poor productivity due to the fact that most prospects pay $0 for advice. The prospect that buy 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 ALWAYS pay 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 useless 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!
The lesson? Free advice is going to cost you your entire HDB flat!
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