ST Forum: Vital to regulate commissions (FAIR Review)

Last Updated on 6, July 2014

Monetary Authority of Singapore has decided not to cap the total commission a financial adviser earns. Instead, it is proposing to cap the first year commission. In my opinion, this will lead to an increase in cost to the consumer. I decided to write to the press to feedback.

The following was published in Straits Times ST Forum page on the 22 January 2013:

THE Financial Advisory Industry Review (FAIR) panel has recommended a 40 per cent cap on the total commissions payable to the financial advisory firm and its representatives in the first year of any regular premium life insurance policy ("S'pore 'not ripe' for fee-based finance advice"; last Thursday).

According to its report, the current "distribution costs of regular premium life insurance products are typically heavily front-loaded, with about 49 per cent to 55 per cent of the total commissions paid in the first year".

However, the panel does not recommend capping the total commission over the whole policy period because of the industry's tendency to gravitate towards the cap. This could have the unintended consequence of increasing the total commissions paid by the consumer.

Take, for instance, a regular premium insurance plan that has $1,000 as total commission and pays $550 for the first-year commission. If the 40 per cent cap is imposed, the commission would be only $400 in the first year. But if the total commission is increased to $1,375, the first-year commission is restored to $550. Unfortunately, the client is now indirectly paying a 37.5 per cent increase in commission.

Regulating the total commission is key to ensuring that both consumers and advisers are treated fairly.

This brings me to the proposal to use non-sales key performance indicators to provide a balanced framework for remunerating advisers ("'Sales not only basis for pay plan'"; last Friday).

Unfortunately, the source of remuneration is flawed because commissions have nothing to do with the actual work an adviser does. Advisers who do a good job may not necessarily be remunerated fairly.

For example, providing advice on a private integrated Medisave insurance plan garners a much lower commission than, say, giving advice on an investment-linked policy.

Yet the work involved is comparable. Thus, advisers will be biased towards recommending high-commission products.

With the lack of correlation between the commission paid and the actual work done, the only solution is for clients to pay for work rendered, and ban commissions altogether.

The panel has decided against doing so. It was cited as saying that clients with smaller investments could end up paying more under the fee-based model.

Yet it must recognise that ethical advisers have the right to earn a decent living too. The commission model is an unfair remuneration scheme to both consumers and advisers.

Wilfred Ling