Supervisors oversight is not up to mark in a number of FA firms.
I attended the 15th Annual Conference of the Association of Financial Advisers (Singapore). The keynote address was Ms Merlyn Ee, Executive Director, Monetary Authority of Singapore.
According to her:
- Mystery shopper exercises found some financial advisers did not ask for all information on the financial situation of customers such as their cash flow, net worth, income and existing financial portfolios.
- Another area was some financial advisers did not provide consumers the necessary documents for them to make an inform decision.
- Supervisors were also reprimanded for weak oversight such as approving cases that could lead to unsuitable recommendations being made to customers.
My commentary:
These issues raised will never go away. May I propose a few reasons why this is so.
Financial advisers are not fiduciaries, Singapore’s standard is too low
There is nothing in law that say that financial advisers must place client’s interest first. In fact, the entire Financial Advisers Act is product centric. Everything in the FAA act is about how the product should be sold. How should it be sold is prescribed in the FAA such as the need to do fact finding and make suitable recommendations.
The standard in the FAA act is so low that any tom-dick-harry can fulfil it. The ‘suitability’ test is a very easy test to fulfil. Want to sell a Universal Life? Just make sure your client can afford it by getting some evidence he has a $200,000 cash in his bank account, fill up the needs analysis to show that he need $5m and make sure you check the box in the KYC to say that “Legacy Planning” is his highest priority. If you got a feeling that the client actually wants to use the $200,000 to buy a house, don’t ask him. If you don’t ask, you can always say the client did not fully disclose all his dreams, wishes and fantasies to you (i.e. non-disclosure) in the event of a compliant. The KYC is used to protect the interest of the adviser, not necessarily the client.
Strangely, many advisers are poor form fillers and so they end up getting into big trouble because they are unable to show that the recommended product is ‘suitable’. No worries, technology is to the rescue. Insurance companies and FA firms can develop electronic KYC that will refuse to transact if the fields are missing. So you end up having the robot to fill it up for you. As you can see that client’s interest is not really in the picture.
The solution is to abolish the entire FAA and legislate a new professional act that is meant to put client’s interest first. A new act is required to be non-product centric. Unfortunately, this is easier said than done otherwise it would have been done long ago.
Some supervisors are not even qualified
Let me tell you a secret. A financial adviser is promoted to a supervisor not necessarily because he is technically competent but because of his ability to (1) do recruitment and (2) increase the sales of the team. So you end up with a situation in which the supervisor does not even understand how to determine the suitability of the product.
There is no mandatory requirement in law that states that a supervisor must proof that he can even write a financial plan for his own clients. So you also can have a situation in which a supervisor does not even know how to do financial planning.
I am not surprise that some supervisors end up either rubber stamping all the cases OR robotically going through the checklist to ensure all fields are filled up but not able to exercise higher order thinking on whether a product is suitable or not. Rubber stamping and robotically going through a checklist can be easily done by a robot. In fact, I think a robot can do a better job as the robot has no concept of conflict of interest unless the robot is an AI (artificial intelligent, not Accredited Investor).
Supply for financial advice far exceeds demand for it
In my personal opinion, there are just too many financial advisers. The supply of financial adviser far exceeds the demand.
Let’s be frank, what is the chance of a person getting up one day suddenly feels like buying life insurance? When a person suddenly wants to buy insurance, it is usually too late. Such a person is already uninsurable (that is why he wants insurance!).
On the other hand, it is possible for a person to suddenly get up and want to buy a property, walk into NATAS fair and book a tour or even buy an iPhone just because everybody else has it.
It has been said that on the average, each person in Singapore has more than one mobile phone. Why? Because it’s the lifestyle choice of the day. It’s fashionable. Hence, the demand for a mobile phone is extremely high.
But there will never be a day in which the average sum assured is sufficient to cover the average required insurance needs. Surveys after surveys show that Singaporeans are terribly underinsured. This is not surprising because it is NOT a lifestyle choice of many and neither is it fashionable to want to talk to a life agent or a financial adviser.
It is also this reason why the government has mandatory law to force individuals to have a basic financial plan: CPF Life, Medisheild Life, DPS and Eldershield are either compulsory or opt-out schemes. Since nobody bothers, an opt-out scheme has similar outcome as a compulsory scheme – you have high participating rate.
BTW, there is no need to pass laws for mobile phone ownership.
Since the demand for financial advisory services is so low, it is important that the supply be kept corresponding low too. Otherwise you have the numerous problems.
Churning. Churning is an act of replacing products for no good reason. This happens frequently because the market for financial services is small due to the lack of demand. So advisers may have to replace products sold by the previous advisers.
According to Economics 101, when a good or service has overwhelming supply relative to the demand for it, the equilibrium price of the good or service approaches zero. Empirical observations show that it is true that financial advisers appear to work for free. Prospects are also not willing to pay any fee for such services because the equilibrium for financial advice is $0. This is purely has to do with the lack of demand for it and the overwhelming supply for financial services.
But the theory of demand and supply assumes that both buyers and sellers of the good and services have the same information to make their decisions. What if the sellers have information which the buyers do not have? Ahh.. that will be interesting. In this case, the price of the good and service is no longer zero.
That’s how the industry works because products have become so complicated and complex that the potential buyers may not understand it. Which brings me to the next point on disclosure of these complicated products:
Disclosure regime and seeking advice
Singapore practices the disclosure regime. The assumption in this disclosure regime is that the consumer must get all the information they need to make an information decision. That is why MAS is so particular about giving the investor the Product Highlight Sheets, Factsheets and Prospectus.
A financial adviser who recently joined the industry introduced himself to me during the AFA Congress. He asked me why was the Lehman Brother MiniBonds such a lousy product when it was MAS that approved the sale of such product? I explained to him that MAS does not endorse nor recommend these products. The product was allowed for sale because it has met the legal standard for disclosure. In the MiniBond fiasco, the prospectus contained all the information – except nobody understood the document because it was too complicated. Financial advisers who did not understand the product sold the product to conservative investors when the product was more suited for speculation. Investors relied on the advisers’ recommendations because they did not understand the product too.
As it can be seen that more information for the client does not mean more understanding. If clients can understand, why do they need advice? Shouldn’t they buy the product directly to save cost? If I can understand all medical textbooks and literature, why do I have to consult a doctor when I am ill? The fact is nobody really understand and that’s why you need to see a doctor who has devoted 100% of his time understanding medicine! Similarly, no person can claim to know much about financial matters unless he spent 100% of his time on it. (You may wish to read this letter I wrote to Straits Time Forum: Insurance sales: More info, less understanding.)
When you see a doctor, you leverage his knowledge and the experience he gained by seeing many thousands of other patients. If you try to self-medicate, you can only rely on your own knowledge and your limited experiences.
When you see a financial adviser, you leverage on his knowledge and the experience he gained by seeing other clients. The problem is what knowledge are you leveraging and what kind of experience he gained from seeing other clients? If the knowledge and experience the financial adviser has is all about pushing products, you will be leveraging on his or her knowledge and experience on how “close” the prospect as soon as possible.
If the adviser’s supervisor was promoted to his present role because of his ability to grow the sales volume of his team, you’ll also be leveraging on such knowledge and experience by giving your wallet and wealth to his team to increase their sales figures.
Are you being hit by the sales target's arrows?
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This balance score card is a wayang to fool the consumers that insurance agents follow the financial planning protocol for fair dealing outcome.MAS surely knows that all the insurance companies are in cahoot with their sales people. Their interest is SALES and how the agents get them the companies don’t care a hoot. Why MAS isn’t doing mystery shopping at roadshows? Just catch them red handed. Has MAS audited the insurance companies? surprised audit? What about enforcement? If MAS doesn’t police the industry and punish the offenders balance score card is a sham.Since implemented January don’t tell me no offenders. The insurance agents scored perfect marks? followed the process? It is rubbish.
The public must not trust MAS to protect their interest. Better protect yourself. Don’t rely on MoneySense, you can’t learn very much. The sellers MUST be made responsible for the outcome . There is no such thing as INFORMED DECISION for insurance AND INVESTMENT. Caveat Emptor should NOT be applied to insurance and investment. They are not tangible products whcih can be seen, touched, taken for test drive. Decision made on what the conmen and women tell you? It is dangerous. Trust is a dirty word. The conmen use trust to cheat their victims., isn’t it so?
99% of financial advisers are simply salesmen & saleswomen. They only focus on closing and making sales on ILPs, wholelife & endowment products. They don’t give a crap about what customer financial situation. Frankly even if customer borrows money from loansharks to buy also can. Or even if money comes from black market / drug sources. That’s the level of ethics in financial sales industry, particularly in insurance where most of the management comes from the sales line.
And the reason why most advisers and their managers are poor form fillers, is that majority of people in insurance (or financial sales) are not that intellectually bright i.e. lousy school grades. That’s the reason why 99% of them end up in insurance anyway. I ever work in a home-grown large insurance company before, and the managers and GM there are basically like Sim Lim Square bozos everyday exhorting team leaders and advisers to hit sales targets, with focus on flavour of the month products. Every month will highlight a wholelife or endowment or ILP where the company will increase the commission to the adviser, and then push the sales teams to sell these “hot products”. These products bring the largest profits to insurance companies hence the emphasis to sell them and encourage the advisers by having the largest commissions.
As for whether such products suitable for the customer… who cares as long as I close the bugger and get the commission and secure my job right?!?! The forms that I have to fill are to cover my ass.