Last Updated on 25, April 2014
"Customers and clients, when they're seeing a financial planner, deserve to know that a financial planner is acting in their best interest and when you have commissions that is simply impossible," the Financial Services Minister Chris Bowen said in an article from channelnewsasia.com HERE. However, there is some opposition to it.
According to the article, "the conservative opposition said it would oppose the changes because they could prevent people on low incomes from accessing financial advice as they may not be able to pay for it up front." So it appears that the Australia opposition is going to make this an election issue. Australia is going to have a general election this year.
The Australia’s opposition party argument against banning commissions citing higher cost for low income to access financial advice sounds quite familiar In Singapore. The Monetary Authority of Singapore also acknowledge similar reasons in its "Second Part of Response to Feedback on Proposals to Strengthen the Regulation of the Sale and Marketing of Unlisted Investment Products" on page 3 which I quote from the PDF file:
“While we note the arguments in favour of a “fee-for-advice” remuneration structure, we are mindful of unintended consequences such as restricting consumers’ access to advice due to potentially higher costs of financial advisory services. We also acknowledge the concern regarding the viability of imposing a “fee-for–advice” remuneration structure in Singapore. We note that some jurisdictions have indicated intentions to ban commissions over the next few years.” - MAS
Both MAS and Australia’s opposition party appeared to share similar view that banning commissions will increase cost and restrict access to financial advice for certain segment of the population. Well, I am afraid I disagree with both parties. Both of them are wrong in one assumption which is the assumption that consumers (including the low income group) have access to financial advice in the first place. I personally do not think access to financial advice is that readily available even in the status quo. Many people do not realized that buying an insurance or buying some ILPs, dual currencies and structured notes are not financial advice. In fact, I hardly come across anyone who has truly obtained financial advice.
Recently, a survey commissioned by Russell Investments showed that less than 20% of Singaporeans have accessed professional financial advice when comes to retirement. You can read the brief article HERE. But my estimate is that it is actually much lower. Among the 20% who said that they have accessed to professional financial advice, it is likely 80% of them mistakenly believe the service they got from a product salesman is financial advice. Thus, this means probably only 4% of the 500 employed persons interviewed by Russell Investments actually obtain financial advice.
What is meant by professional financial advice? It is quite simply a service consisting of advice. It has nothing to do with products. I think the word “advice” is easy enough to understand that it is about one professional telling another layperson on what to do. If your financial adviser is fully remunerated by selling products, the focus will always be on product sales and not advice. If you did not pay for the advice, how can you be sure the adviser isn’t trying to sell a product?
Back to the Australia opposition party opposition to banning of commission and MAS’ similar views expressed previously. My view is that not only is the current population (including the low income group) not getting financial advice, but they are spending huge amount of money in inappropriate products and commissions. Sometime ago I met a cleaner. I mentioned to her that the most important insurance plan is hospitalization & surgical plan. She said she already bought some insurance from the bank. I discovered it was an endowment plan. I showed her the lowest Incomeshield Basic plan but she said she cannot afford it! Why? Because most of her money is committed to that endowment plan costing $100 per month and that commitment is over 10 years. As it can be seen that her financial well being is be jeopardized by the financial salesperson who sold her the endowment product without advising her appropriately.
I always encounter emails and meetings with financial advisers who are guilty stricken for harming their clients’ interest due to their high sales quota, agency and firm culture and as well as the pressure just to earn a living. To me, there are better ways to earn a living. Everyone has choices. There is no need to resort to ruining other people’s life just because one needs to earn a living or just because the boss say must cheat. Banning of commissions is a very blunt way of halting all these malpractices. But looking at the present situation, there appears to be no solution in sight to improve the professional standards of the financial industry. There is no association, professional bodies, etc who have the teeth and the professional skill to improve the industry. So I think halting commissions altogether will do the industry good. Since by my estimate only 4% of the population has access to financial advice, banning commissions altogether probably will not have a material impact to consumers’ choices since majority never accessed to financial advice. In fact, banning of commissions would probably help the remaining 96% to save lots of money by avoiding investing in inappropriate products.
Here is a related link: UK moving to Fee Paying Advice
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