UK banned financial advisers from taking commissions from 31 December 2012. After more than 3 years, the regulator has to revisit the changes made because of the following problems:
First problem: The supply of UK advisers dropped
The supply of UK advisers dropped from slightly above 40,000 in 2011 to slightly above 30,000 in October 2014. This means the supply of financial advisers decreased. Since there is a limit as to how many clients each adviser can handle, it just means that there is an overall deceased in supply of financial advisory service. Majority of advisers who left were mainly from banks and building societies. In other words, when commissions were banned, it was the financial institutions that suffered the highest attrition. This was the reason why majority of the large financial institutions were against Monetary Authority of Singapore for banning commissions. See Great Eastern Life and other big boys are against fee-based planning.
To put it into context how bad the situation is, UK has approximately a population of 64 million people. The ratio of advisers to population is 1:2133. Whereas in Singapore, there is approximately 30,000 advisers including those working in the banks and FA firms. Given the population size of Singapore is about 5.4 million people, the ratio of advisers to population is 1:180.
But it can also be argued that Singapore has too many financial advisers. If commissions are to be removed in Singapore, majority of the financial advisers working for banks and insurance agents will either be fired or will resign.
Second problem: Less advisers are focusing on the low income
It was reported that more financial advisers in UK are now focusing on customers with more wealth. For example, over the last two years, the proportion of UK firms who asked for a minimum portfolio of more than £100,000 more than doubled - from around 13% in 2013 to 32% in 2015. At the same time, a whopping 45% of firms (i.e. nearly half) rarely advise customers with small funds (defined as less than £30,000).
One of the reason cited is that there is a minimum cost per customer for face-to-face advice. So it does not make sense for firms to provide financial advisory service for customers with small portfolio size.
This issue of minimum cost per customer is always an issue regardless of the remuneration model. What is different for UK is that in the past, it was possible to earn a lucrative commission by selling say an investment-linked policy of £300 a month of regular premium. Such a product is very affordable to many low income households. But when commission was banned in UK, such product is no longer a viable way to earn an income for the adviser. The only way is to charge an advisory fee by the hour and a percentage of asset under management. Thus, the larger the assets under management the higher the fee in absolute dollar.
So, does that mean that commission based system is good for low income families? Absolutely not. When the individual pays the advisory service using the commission model, he is effectively borrowing money from the product provider to pay for this service. The amount borrowed from the product provider has to be repaid with interest in the form of lower investment returns and high exit penalties. This model is not transparent as the exact amount of money borrowed is not known and the cost of borrowing is not disclosed. In Singapore, there is a column in the insurance benefit illustration called the ‘total distribution cost’. The total distribution cost is supposed to show the total commissions that insurer is paying to the distribution channel. I have found this figure to be highly unreliable.
As a fee-based financial planner, I want to give another side of the story why low income earners are not likely to obtain the services of a fee-based adviser. In the past, I used to provide pro-bono services or provide below market rate advisory fee to low income earners. But I found that I was made used off because many of these clients were either not sincere, had more (secret) wealth than I thought or were extremely calculative. As I already provided pro-bono service, I expect such clients to be not calculative and at minimum show appreciation by saying ‘thank you’. Far from that, I always get very rude and calculative customers. It happened so frequently that I decided not to bother about the low income earners anymore. I will still provide low income earns advisory services but I will charge based on market rate fees.
In contrast, majority of my fee paying clients are more trusting, less calculative and extremely polite and well mannered.
Third problem: basic and simplified advice did not take off because of complicated regulation
UK introduced ‘Basic advice’ in April 2005 which allowed the sale of simple products with product charges capped. The adviser was not even required to hold formal qualification.
Currently, the UK regulator allows firms to provide ‘simplified advice’ for specific needs. It does not require an analysis of the consumer’s circumstances that are not relevant to those needs.
However, none of the above were popular despite allowing customers to obtain some form of advice without the need to pay the fee for full advice.
The reason why neither of these simplified advice gained traction was because of complicated regulation. The UK firms were afraid that in the event of any complaints, these firms may be judged by the authority against the standard of full advice. What this means is that there is insufficient clarity in the regulations.
As a financial practitioner, I am not surprised that very often the main obstacles is the complicated regulation. Sometimes, the regulation is so complicated that even the regulator does not even understand or even aware there is such a regulation.
Take for instance, MAS called me a few weeks ago for a discussion. They asked me why it is not possible to give advice on hospital & surgical insurance in just 10 minutes? I got stunned for a while. I told them that they should ask their colleagues for the reason for introducing an insane list of things that an adviser must do just to advice on hospital insurance. This new regulation is known as the revised MAS 120 dated 30 October 2015. Apparently they are not aware of such regulation!
Fourth problem: majority of consumers not willing to pay for advice
It was found that only 8% of the UK customers were willing to pay over £500 for advice for an investment. On the other hand, the average financial advice costs £150 per hour and typically giving advice on a pension requires an average of nine hours on the part of the adviser.
The advice on pension is considered as a narrowly focus advice. For a comprehensive financial advice, the time required is even more. My average time I spent for comprehensive financial planning is from 20 to 30 hours.
There is a difference between unable to afford to pay for advice and unwilling to pay for advice.
In my personal opinion, customers are likely not willing to pay for advice rather than unable to afford to pay for advice. I even met ultra high networth individuals who are not willing to pay for a single cent of advice despite countless ‘preliminary meetings’ with me.
So it can be seen that the customers’ expectations are unrealistic resulting in what it is called the ‘advice gap’.
Fifth problem: the advice gap
It was observed that there has been an increase in UK customers making their own decisions. In fact, two-thirds of purchases were non-advised in 2014/15. In other words, 2/3 of transactions were ‘DIY’ or direct purchases without any financial advice.
The problem is that only 35% of these non-advised customers say they were confident immediately after the purchase. Further, it was found that:
- 47% of consumers had not receive any form of financial advice in the past 3 years
- Yet only 27% of consumers stated that they were confident to sort out their own finances without advice.
- A whopping 34% of those who purchase a product without financial advice have latter regretted the decision.
I believe the statistics is similar in Singapore. The fact that an investor buys an investment product ‘directly’ or without financial advice does not mean he or she is a savvy investor. I have never come across any investors who bought stocks (in Singapore, there is no such thing as buying stock with financial advice due to unknown reasons) know why they bought them. When I asked them why they bought these stocks, their responses were:
- I bought these stocks because of my friends’ recommendations.
- I bought these stocks because of dividends.
- I bought these stocks because I bought these stocks.
Moreover, majority of Singapore residents traditionally make their own decisions when purchasing properties, budgeting and managing their expenses and determining how many kids they want. The fact that they made their own decisions do not mean they are savvy – it is likely because they did not know they can seek advice on these decisions. Of course, I am referring to fee-based financial planning which I offer.
Comprehensive financial planning deals with the entire works of financial decisions namely in area of budgeting, cash flows, debts including mortgages, housing purchases, taxes, insurances, retirement planning, investments and estate planning (will & trust).
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When it comes to fee based regulations & environment, it is better to learn from US. UK is still rather traditional (apart from a small segment of population in London) and its financial laws are still rather convoluted, backdated, cumbersome due to it being a process of evolution and case law and “law of the land” over 1,000 years. SG laws & processes are based partly on UK laws, hence our equally or even more cumbersome regulations.
It’s difficult to change the mindset of people to pay for financial advice, due to generational values over many decades or even centuries. The industry is also ill-equipped to handle it sufficiently while still able to earn enough profits. It is an evolving process. involving mindset change, pricing, education, product placement, leveraging on technology.
E.g. 20 years ago, almost no Sinkies willing to buy pure term insurance, as the thinking was money down the drain if no claims, plus pricing for term life plans in those days still quite expensive. Today many young tertiary-educated people recognise that term plans can provide the bulk of their protection needs using a small outlay of their income.
At the end of the day, there needs to be different market segments for financial advising. At the high-end, the charges & processes will be what Wilfred is doing. But at the low end, there needs to be commoditisation — intelligent AI crunching millions of statistical data points to provide recommended suite of low-cost direct purchase products. Similar to robo-advisors for investment products in the US.
Commoditisation is important for the masses to enjoy the fruits. E.g. Becoz of commoditisation, almost everybody today can have meat for breakfast, lunch, dinner if you want. 200 years ago, without commoditisation, 90% of the population whether in Asia or Europe are unable to afford meat on a daily basis, at most once a week on Sundays, or even worse once a year during CNY.