I was at Takashimaya and found a road-show by an insurer. There was two large banners which say it provides a free financial health check and another on how to “Win Takashimaya vouchers” When I see that, I find it there is really lack of taste. There is also no sense of professionalism and pride. Although I respect the advisers who are trying to earn a decent living, I really feel sad for them to have to go so low just to get sales. In the meantime, MAS isn't doing much about all these and in fact is currently having some legal issues on their own. The following are my ideas of an ideal industry:
- Get rid of academically non-inclined insurance agents/ RMs and IFAs. An important factor that a financial adviser need to have is a minimum academic ability. The CFMAS exams mandated by MAS is too easy.
- Ban road-shows.
- Ban commissions.
- Follow the examples of other professions. Many professions do not permit the person to practice on his own until he or she has gain sufficient experience under the mentorship of another professional. Take the example of a power (electrical) engineer. Upon graduating from the bachelor degree, the graduate will have to work under the mentor and guidance of a Professional Engineer. After having experience for a few years, the person will be allowed to apply for a Professional Engineer license (PE) under the Professional Engineer Board. The Professional Engineer license is regulated under the Professional Engineers Act. It is only upon approved by the PE board can the person concerned receive the license to practice electrical engineering and able take clients on his own. The Professional Engineer can be sued for negligent. His clients can sue him or her either in tort or by breach of contract. For the insurance adviser? Theoretically the insurance adviser can also be sued in tort or by breach of contract (if there is one). However, based on common-man-in-the-street perspective, most people do not view the insurance advisers as professional anyway. So I seriously doubt the adviser can be sued in tort. As for breach of contract, unless there is a financial planning fee involved otherwise most advisers (perhaps all advisers) do not sign any contract with their clients. So again, there is no basis for breach of contract (ie.. there was no contract!)
- Level playing field required. The manner which advisers are remunerated is not a level playing. It is well known that commission based advisers earn more than a fee only adviser. This is not necessary because products always contain high commission (side track: Shield plan contains negative commissions because after netting off cost of transport, coffee, time and life long liabilities the earnings to the adviser is negative) but it is because clients generally like to pay hidden and embedded cost rather than transparent and upfront cost. Due to this psychology and assuming all things being equal the client prefers “free” advice which is actually embedded cost. People do not mind paying $10,000 in commissions but do not wish to pay $2000 in fee. Due to this customer's psychological problem, it means that the economic theory of demand and supply dictating price is unable to come into effect. The “price” continues to be very high ($10,000 in commissions) although the fair price is $2000 (example). Another problem is that as long as clients like to pay embedded fee, many advisers will spent more time learning the technique of selling embedded products and thus recommendations could be skewed to certain high commission products. In other words, due to the breaking down of demand/supply theory, the quality of advice actually decreases relatively speaking. In this case, there is a double whamming – customers pay a very high price for poor quality. Since free economy market forces cannot achieve optimum result for customers, we have to rely on the regulator and government's help. Unfortunately our regulator is quite hands-off as it can be seen by the MiniBomb fiasco and they prefer to outsource others to look into it. Currently MAS is also have some legal issues and have to appoint a Senior Counsel for assistance. Frankly, if during “good” times MAS cannot be bothered to regulate the industry properly, I seriously doubt they have the time to regulate it well when their hands are full.
Someone told me why it is impossible to “force” and move the industry to a fee paying rather than commission based. The obstacles of (force) moving the industry to a fee-based one are:
- Customers do not wish to pay fee due to the above mentioned psychology. Customers will instead go direct to the product manufacturers to buy the product and bypassing the distribution channels. This will kill the entire distribution channel.
- What I think: If the customer is savvy enough to go direct to the product manufacturer, they should go direct to minimize their cost. For instance, I do not need to see a doctor to buy a Vitamin C. I can buy the Vitamin C directly.
- If the customer wants advice, he should be prepared to pay for the advisory service to an independent adviser. If the customer prefer to go direct to the product manufacturer to seek advice, the product manufacturer should also charge for the advice in order to have a level playing field. This can only be achieve if it is imposed by law.
- If the customer consults an adviser who is not independent (i.e. could only represent one product manufacturer), the customer must be informed that he or she has the option to seek an independent second opinion from an independent adviser. From what I was told, this was supposed to be what should be happening in UK in which tied agents must informed their clients that they can seek independent advice. However in practice nobody does it and apparently it is not enforceable.
- Another obstacle is that in order to justify the advisory fee, advisers will tend to talk about more complicated matters. Simple products and simple matters will be neglected. For instance, in local context we could end up in a situation in which few fee-based advisers would want to talk about the shield plan. Moreover, the shield plan only cost a couple of hundred of dollars but the fee for advice could be twice or triple of that. So knowing customer will not pay for such advisory fee, advisers will talk less about such category of products. The result will be a disaster for the industry as client's interest will not be taken care of.
- What I think: This situation is no different from the current situation in which people's interest are not necessarily well taken care of. Currently shield plan is also not frequently mentioned too. So this situation is not new anyway.
- Advisers can help their clients to do a comprehensive financial planning to justify their fee. In this way, simple but essential products will get to be mentioned in the overall plan.
- I know of a lawyer friend who charges his customers a retainer fee on a regular basis. The retainer fee is a fixed fee. If his customers wish to consult him, the advisory fee is already paid for by the retainer fee. I think this is a good idea. The financial adviser could also charge a modest retainer fee so that the customer need not renegotiate the fee involved everytime an advice is required. So getting a shied plan or a simple product will not attract a seemingly huge fee.
I know many people thinks I am idealistic. But I refused to be pragmatic. Sometime I am laughed at for advocating fee-based advisory model and sometime got mock at it too. However, UK is going to ban commissions and impose a fee-based model. If UK can do it, so can Singapore. Let's see who has the last laugh!
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