Last Updated on 6, January 2016
Financial advisers will be facing the new Balanced Score Card framework from 1 January 2016. This Balanced Score Card framework actually started in 2015 except for the part on monetary penalty. From 1 January 2016 onwards, there will be monetary penalty for not achieving certain KPIs.
What is the Balanced Score Card? Imagine you work for a company and your boss tells you that from 1 January 2016, you will receive 12 months of your salary if you meet certain KPIs. If you do not meet the KPIs, up to 7.2 months of your salary will not be paid to you. If you perform extremely well far exceeding the expectations, the company will not recognise your efforts in terms of extra bonuses. To put it another way round, your performance bonus ranges from -7.2 months to 0 months.
Do you want to work in this type of company which will withhold up to 7.2 months of your salary on an annual basis but will never give you additional bonuses for doing well? Of course not! But if you are desperate to work, you will do everything to avoid getting such a pay cut but you will never do more than it is required since the company will not recognise your additional efforts.
The Balanced Score Card is also complicated by the fact that it exempts certain products from the framework such as health insurance (e.g. integrated shield plans). However, if the adviser would to provide a holistic insurance advice, the entire advice is subject to the Balanced Score Card including the health insurance product being recommended. So in practice, none of the products will get exempted from the Balanced Score Card.
Although I support the Balanced Score Card framework in principle, I disagree with the Monetary Authority of Singapore that it will motivate financial advisers to do well in terms of advisory quality. The Balanced Score Card will reduce the number of complains but it could actually results in a greater cost for consumers.
The following letter was published in the Straits Times’ forum page on 28 December 2015. My original title of the letter was “Balanced Score card framework encourages mediocrity” but they have kindly change to a more polite title “Use incentives to spur financial sales reps”:
Use incentives to spur financial sales reps
I support the new Balanced Score Card (BSC) framework that all financial advisers will be subject to ("Financial sales reps face audits from next year"; Dec 11).
However, I also agree that clawing back commissions is unfair ("Unfair to hold back sales reps' commissions" by Mr Cheang Weng Keong ; last Thursday).
The Balanced Score Card framework seeks to impose a financial penalty on financial advisers who fail to meet certain key performance indicators (KPI).
However, the framework does not encourage anyone to excel in his advisory duties.
Employees usually receive extra bonuses or are given a promotion for meeting certain KPIs.
Any human resource practitioner will agree that people work best when they are given incentives, since they encourage excellence.
The lack of bonuses, or being denied an expected promotion for failing to meet their KPIs, would already be a penalty for poor performance.
However, the financial advisory industry in Singapore seems to be the only occupation that deducts remuneration but provides no incentives for excellence.
I am aware there is nothing stopping financial institutions from rewarding advisers who demonstrate excellence in their work.
But many financial institutions have decided to cease deferred compensation such as a year-end bonus. The rationale is that if the remuneration has an unknown deferred component, it is administratively difficult to calculate the amount of remuneration to deduct in the event of an infraction.
While the Balanced Score Card framework will ensure customers receive advice that is of a minimum standard, this could be all that they will receive.
But customers will not be satisfied with an adviser who is only required to meet just a minimum standard.
The Financial Advisers Act, (Section 27), in a nutshell, states that products that are recommended to customers must be done so on a reasonable basis.
Yet, advice that is "reasonable" does not necessarily take care of customers' interest.
If there are two products that are deemed suitable for the client, it is now more likely the product that provides a higher commission, probably also the more expensive product, will be recommended instead.
This is more likely than in the past as many financial institutions are now faced with lower profit margins - due to higher compliance costs - and know there is no financial penalty for recommending more expensive products, as long as they pass the "reasonable basis" test. Customers will have no recourse in such cases.
The authorities should consider replacing the penalty-based regime with one centred on incentives, in line with practices in the human resource industry.
Advisers who continue to flout the law by recommending unsuitable products should be dealt with separately, through mechanisms such as counselling, suspension or even termination.
Wilfred Ling 
Source: http://www.straitstimes.com/forum/letters-in-print/use-incentives-to-spur-financial-sales-reps
Update 28 December 2015 4:24pm
I was asked what will happen to the industry when the Balanced Score Card is fully implemented next year.
In my opinion, we can stereotype an adviser based on sales and quality of advice. There are four stereotypes:
- If the adviser is good in sales and good in advisory – will continue to stay on for a while but will look for other occupations because all other occupations give bonuses for good performance.
- If the adviser is good in sales but poor in advisory – will quit from the industry because the commission will drop by 60% due to repeated infraction.
- If the adviser is poor in sales but good in advisory – will quit from the industry because cannot bring home the dole (this is not a new problem though).
- If the adviser is poor in sales and also poor in advisory- will quit immediately because up to 60% of the commissions will be deducted despite the original amount was already so small to begin with (due to poor in sales).
Prior to Balanced Score Card, an adviser who is good in sales usually will stay for long-term. Now, even those who are good in sales will consider leaving the industry simply because there is no incentive but only punishment!
From the above analysis, it can be seen that the financial advisory industry is bleak and has no potential upside at all.
Update 2 January 2016 - response from another forum writer on BSC
Remove commissions to reduce product bias
The reasonable basis requirement of the Financial Advisers Act requires an adviser to take into account factors relating to the customer and product ("Use incentives to spur financial sales reps" by Mr Wilfred Ling; Monday).
He has to consider the customer's investment objectives, financial situation and particular needs.
He is also required to have conducted investigation and gained knowledge of the product by performing product due diligence.
Putting the two components together, an adviser is then to assess and recommend a product that is suitable to the customer.
This process takes care of a customer's interest.
The problem of recommending a product that pays the adviser a higher commission can be better resolved by banning product commissions.
The Monetary Authority of Singapore (MAS) considered such a measure in 2013 ("S'pore 'not ripe' for fee-based finance advice"; Jan 17, 2013). Though it was not eventually implemented, the MAS said it intended to review it again after a period of time.
In fact, a number of countries, such as Britain, Australia and the Netherlands, have introduced the removal of commissions, and it has been found to reduce product bias in adviser recommendations.
Goh Chuan Yong
Source: http://www.straitstimes.com/forum/letters-in-print/remove-commissions-to-reduce-product-bias
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Do you need to incentivise someone to do something that is morally and ethically right?
What about incentivise the drug traffickers not to peddle drugs that are harmful to the public.
BSC is to PROTECT the buying public from the charlatans and the incompetent. Do you need to incentivise the insurance agents NOT to CHEAT or to conduct the business competently? There had been plenty of cases where the insurance agents or the salesmen plundered their clients by peddling them “SUITABLE” insurance products. In the past few months, in the StraitsTimes and the Sunday Times we read of these cheats.
Balanced Score Card is to protect the buying public from the conmen and women and the INCOMPETENT salesmen and women. If you need to be incentivised to do good for your clients this is NOT the business for you.This is required of you.This is called REGULATION and PUNISHMENT is to deter practitioners from doing harm to their clients financially.
You misunderstood my letter entirely. Don’t think in one direction only.
First of all it should be correctly referred by you as Balanced Scorecard. Balanced is an adjective and not a verb like balance!
In the corporate world it is quite common that incentives are linked to goals derived from the four different perspectives of a Balanced Scorecard (Customer, Processes, Financials and Learning).
I do see your point of the negative incentive.
From my perspective the best method to pay Financial Advisers should be 100% via a pre-determined share of investment profits that he brings to his clients. Not upfront, but only when realized.
Only then the client could be assured that his adviser has his best interest in mind and really sits in the same boat with him.
ILP would quickly die and term insurance combined with investments in ETFs would strive. But that is maybe not what the industry could survive on. But individual independent financial advisers would boom.
The not so good advisers would quickly exit the game.
Investment planning is only a small part of financial planning. So the numeration tied to profits of an investments will not be applicable in most cases. Moreover, they are also disadvantages of using the profit-sharing methods which are widely documented in the literature. One of the issue of profit sharing method is that the adviser’ risk appetite also come into the picture. That is to say that the adviser is no longer objective. If the adviser’s risk appetite is speculative, the client is subjected to unnecessary risk. If the adviser’s risk appetite is conservative, the client’s money hardly grows.
Hi Wilfred,
I agree that investments are a small part of financial planning, but an important one, once the basics are taken care off (payment should be based on a fixed fee per insurance category the adviser is taking care of).
The issue you bring up could and should be handled by first of all asking the client about his risk profile and what kind of return expectations he has (incl. max. draw downs/volatility). Isn’t that mandatory procedure anyhow? Then the good adviser will have to adjust his risk approach to the risk appetite of the client in order to serve his/her client appropriately.
Yes asking the client’s risk profile and expectation is part and parcel of the advice but as the remuneration is profit sharing, the adviser’s own personal risk appetite also comes into the picture.
For example, if the adviser’s prefer a steady remuneration, he would tend to put the assets into safe assets so that he can outperform the benchmark most of the time. On the other hand, if the adviser do not mind getting no income for few years in return for outrageous (potential) profits, he may put the client’s money into more speculative stocks. In other words, there is actually a conflict of interest that arises in such a situation.
There are other issues, you can google to find out more especially on hedge funds which tends to go towards absolute returns (profit sharing).
There is no perfect model but the industry tends to discourage profit sharing due to it having more disadvantages then advantages.
There is actually a boutique investment company in Singapore that uses a profit-sharing method (i.e. 0% management fee unless they do better than a benchmark) and they have also done quite well in in terms of returns. They manage just a single fund that is all invested in stocks. So you will need to be a highly aggressive investor before you invest with them.
To apply the Balanced Score Card (BSC) to investment/ILPs/UTs many insurance salesmen will fail miserably because as many as 95% of the insurance agent population are only financia/investment product salesmen and women except for a few , eg. like Wilfred Ling. These salesmen are not qualified or competent in investment.
To be fair to both of you guys I think both of you are NOT on the same page. Wilfred is talking about standard of advice which if it exceeds the minimum as required by LIA it should be rewarded but unfortunately it is NOT measurable and it is qualtative and subjective in nature whereas TacoMOB is talking performance in quantative term , eg like hedged funds which pay performance bonus.
Sticking to the subject of BSC I reinterate that there should be NO incentive to motivate any insurance agents to give proper and ethical advice to standards as required under section 27 of the FAA. This section is no different from a traffic law which says it is an offence to beat red light. Must motorists be incentivised not to beat the traffic light? Try to beat and make the traffic dept rich.
Again I say BSC is to PROTECT the consumers from the conmen and conwomen and the incompetent financial/insurance product salesmen and women and there are plenty of them out there pounding the street and lurking at every corner ready to pounce on their unwary victims.
Having said all, if the regulator doesn’t enforce the BSC it will lose its credibility and respect of the buying public. Lets watch
BSC will mainly affect those good in sales but not able to move into mgmt. Most financial salesmen I know don’t want to remain salesmen for too long. They invariably aspire to chalk up enough sales and weighted premiums to get into the good books of the GM or Directors for promotion to junior managers, with the benefits of a fat confirmed monthly salary plus bonuses plus the typical perks of corporate executive life e.g. paid medical, annual leave, 5-day work week, official working hours, travel claims, and other benefits in kind/reimbursement.
Only the older uncles & aunties salespeople without much paper qualification are stuck with closing sales, as they can’t handle mgmt stuff. These are the people that BSC will most affect.
Stumbled on your blog while looking for advice on what to do about unethical financial advisors. Is the Scorecard applicable only to forthcoming sales or will it be applied retroactively?
What do you suggest people do when they realize years later that they’ve been (legally) scammed with mis-sold products? Have not been able to find much information on how to save oneself.
Usually new laws are not applied retrospectively.
You can consider approaching FiDREC.
You can also read this post on how lodge a complain: https://consultwho.sg/questions/Get-a-refund-of-my-premium–133
There is no time bar to suing or lodging a complaint against the insurance advisers who scammed you with MAS. Even he is out of the indsutry or dead you can still sue his estate.
Crimes have no limited liability in time.
Thanks both. Very helpful.