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Sharing Wisdom (2nd April 2012)

Fee-based advisory service the way to go

31 st March 2012

The Business Times

Doing away with commissions would make the Singapore marketplace much more financially sophisticated and serve the financial advisory industry well in the long run

By GENEVIEVE CUA PERSONAL FINANCE EDITOR

THE prospect of an advisory landscape sans commissions has generated an intense buzzin the financial advisory (FA) market, following the announcement by Ravi Menon,managing director of the Monetary Authority of Singapore (MAS) that a FinancialAdvisory Industry Review (Fair) is about to take place.

Not surprisingly, many advisers have reacted with consternation as the new rulesthreaten their rice bowl. On the other hand, consumers (based on letters to The StraitsTimes Forum page) appear to have generally welcomed the changes. They are appalled,for instance, to learn of the quantum of commissions earned from the sale of insurancepolicies.

More than 10 years ago, the Committee on Efficient Distribution of Life Insurance(Cedli) generated just as intense a reaction. Cedli sparked a number of major changessuch as more rigorous training requirements for insurance advisers, and greatertransparency in benefit illustrations.

In those days, agents bristled and responded vociferously to the charge that they arecommission-driven. Today, based on what was publicly said by the Association ofFinancial Advisers (Singapore) this week, the association head actually admitted tobeing commission- driven. But many of the arguments in favour of commissions andagainst a fee regime actually do a disservice to the financial advisory industry at large,even though the state of advisory today leaves much to be desired.

Today, only one firm (Providend) operates on a fee-only business model - which chiefexecutive Christopher Tan says was 10 years ahead of its time. 'Many industry playerssay that Singaporeans will not pay a fee for advice. Our experience tells us this is nottrue; Singaporeans will pay a fee for advice as long as they see value in our work. Andwe must prove that our work is of value to the clients. Our existence after 10 years is atestament to that.'

He adds: 'We persisted because of our deep conviction that if you truly want to giveprofessional advice, you must not take commissions. We have a strong desire to see ourprofession accorded the same respect as lawyers, accountants and doctors.'

Life Planning Associates (PA) CEO Benny Ong says the firm derives 80 per cent of itsrevenue from fees and 20 per cent from commissions. He does not take on new

advisers who are reluctant to transition to a fee model. His clients, he says, are happyto pay a fee. Not all of them are high net worth individuals. 'You must sit down and find

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Sharing Wisdom (2nd April 2012)

out what they really need, not what you want to sell,' he says.

Here are some recently published arguments against a fee-only regime.

If there are no commissions, the adviser has no incentive to actually sell a plan,

so the argument goes. This assumes a scenario where the adviser actuallycharges a fee to do an insurance needs analysis. It envisions that the client walksaway and no sale is made.

Again, the implicit assumption here is that the adviser is incentivised only bycommissions - which is an indictment of the industry. An adviser who takes thetime to map out a client's needs, survey the available products and explain alloptions should surely be able to convince clients to take the next step toactually address the needs. This assumes, of course, that the proposed productsare affordable and gives maximum mileage for the premiums.

A fee-only model suggests that advisers are paid a salary. This is said to killcreativity and entrepreneurship. Tied agents take pride in being entrepreneurial.But this argument is a fallacy. Not all agents are entrepreneurs, although theagency owner who risks capital is arguably entrepreneurial.

Just as one can run a successful agency with commissions, one can also run aviable business with fees and salaries for advisers. The latter is admittedly morechallenging. But it all boils down to two different models and philosophies: thesalesperson versus the professional. Both models incur market and operational

risks. In fact, the fee-only model incurs higher risk and arguably demands moreentrepreneurial drive as it takes great commitment to make it a success. Not allagents can become fee-only advisers.

In fact, separating fees from commissions actually increases accountability.Today, clients pay a commission and believe advice is free. But the commissionactually compensates the adviser for advice as well. Separating the twocrystallises the fact that the client demands and deserves advice.

It is said that a fee-only regime may skew the marketplace towards term

assurance or pure protection plans. This may or may not be the outcome givenSingaporeans' preference for policies with a savings element and returnguarantees. But a preference for term assurance is surely welcome as it goes along way towards addressing Singapore's under-insurance gap. The danger isthat the extent of under-insurance may actually rise. Australia and the UK aremature markets which are accustomed to paying portfolio fees, yet the under-insurance gap is alarmingly wide. In their markets, term assurance iscommoditised - that is, premiums are low and undiffferentiated. Plans can bebought online. Insurance advisers in the UK and Australia at the moment stillreceive commissions from sales of protection policies. But the commissions maynot compensate them enough for the time taken to advise clients.

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