Friday, April 30, 2010

Remove Commissions for Financial Planners


I read with interest the news in Channel News Asia regarding Australia coming up with certain regulations to do away with the commission based model of compensation for financial planners.

This is indeed something interesting that Singapore should consider exploring.

In today's financial planning industry, Singaporeans are limited to the banks, insurance companies and independent financial advisory (IFAs) firms. While a new breed of financial planners are still emerging that charge clients based on a fee based model, the public as a whole seem unprepared to pay for financial advice.

As such, a large majority of financial planners are still paid based on commissions. They are considered financial planners but they have sales targets and objectives to meet. In fact, insurance companies recognise their "best" financial planners as those who are able to achieve the most sales for the company. Just look through those advertisements in newspapers featuring the top financial planners and you will notice that they are called : "TOP PRODUCING FINANCIAL PLANNERS" , etc.

This basically means that these are the people in the industry who managed to make the most money for the company and themselves, not for their clients!

I have nothing against financial planners being paid a commission. The issue I have is the potential conflict of interests that arises when it comes to recommendations to the clients. Because a financial planners is compensated based on commissions, his or her judgement could be skewed to favor products that pay higher commissions. Sometimes, it could even mean recommending products to clients that are unsuitable based on their risk profile. This is worrying.

Considering that most Singaporeans are not saving enough for retirement, any bad financial planning advice will only be more detrimental to their overall financial health.

Singaporeans ought to debate more openly about this issue and demand for more professional financial planners to serve its entire population. It is time that Singaporeans as a whole consider the option of moving the financial planning industry towards one which pays its financial planners based on a fee. This is similar to seeing a doctor or a lawyer. When one needs professional and independent advice, it is best that the professional you are seeking advice from does not have to struggle with conflicts of interests.
There are limits to what regulation can do. If the market is not ready for fee-based financial planners, no amount of regulation by MAS will help. Singaporeans need to ask themselves whether they are willing to pay a fee to meet up with a professional financial planner.

Let's do away with commissions for financial planners. Let's move towards a fee-based model of compensation for all financial planners. What do you think?

6 comments:

  1. Not to worry to much
    Be brave when you are losing,all will be get well soon..

    ReplyDelete
  2. Hi,

    Good idea, any suggestion on how to go about a fee-based model of compensation? Hey maybe financial planners can charge a 'consultation' fee like doctors? At SGH Senior Consultants charge private patients $92.02 for the first consultation.

    The next question is - so when are clients coming for the first consultation? :)

    Finarati

    ReplyDelete
  3. Lawyers and doctors are professionals that required many years of study and training to become one. What do you think of financial planners? How do we judge their level of professionalism?

    ReplyDelete
  4. Hi Anonymous,

    I believe there are some fee-based financial planners around in the market today. They charge around $100 per hour with first few hours free.

    The way they charge is basically based on a 6 step financial planning process that involves setting objectives, fact finding, analysis, recommendation, implementing recommendations and review.

    Typical hours spent are estimated to be around 20 to 30 hrs for this financial planners. So it is not uncommon for the bill to be around $1000 per visit. I am not speaking from experience so I stand to be corrected if someone has tried out fee-based financial planning.

    My gut feel however is that Singaporeans (including PRs) are still not ready for fee based financial planning. Not ready in the sense that they are not willing to fork out money for someone to teach them how to manage their money. The idea is : "My parents survived fine without a financial planner. Why on earth do I need a financial planner for?"

    CW8888,

    You raised a very good point. For fee based financial planning to work, these financial planners need go through more stringet certification to ensure that they are really professionals who know what they are talking. Today, there are certifications life CFP and ChFC but I think this is still not sufficient. But again, if the market does not demand for such professionalism, we will never see the professionalism in the industry. It is a chicken and egg problem.

    ReplyDelete
  5. As I see it, since some IFAs are already charging consultation fees(on top of commission) market conditions will decide which model is more popular.

    Though it might be prudent to consider a few things;

    First being that insurance products work only when sold in large volumes. So sales volume is absolutely essential for them to function. And commissioned agents are the most motivated sales people.

    Second, unlike doctors or lawyers, finance/economics are not exact sciences. So to charge a fee for an opinion, no matter how well founded, strikes me as dodgy.

    Finally, I'm actually in favour of combining commissions for insurance products but basing commissions for investment related products on annual value of the investment(Basically trailer fees).

    Of course, I happen to be a Manulife Financial Planner myself, so my opinion might be skewed.

    ReplyDelete
  6. Singapore is not ready for fee bases advice, based on sg culture, despite sg being an highly educated nation. Maybe only rich people willing to pay, thus, only rich will plan. The rich and poor gap in sg will widened in worst case. Financial professional's income affected, means a substantial number of people will have less money to spend, to sustain the economy. Economy will be hit. Everyone sinked, everyone happy. Lol

    ReplyDelete

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