Tan Kin Lian's Blog: Value of financial advice

Tuesday, November 13, 2007

Value of financial advice

Dear Mr. Tan,

In your view, are the commissions paid to insurance agents too high? What is the situation in other countries? Please be frank.

REPLY

In some countries, the financial adviser helps the customer to achieve significant savings from income tax or estate duty. To qualify for these savings, the customer has to meet certain requirements. These are complicated for the ordinary person. They need the professional advice of the financial adviser.

Although the financial adviser earns a large commission, the customer still achieves a net saving from the savings in income tax or the higher return from investing their savings in the life insurance or investment product.

A good example are the tax incentives given to encourage people to save for their retirement, such as superannuantion funds in Australia or the 401k in America.

This type of tax savings is not available in Singapore.

As the financial adviser is not able to create any tax saving for the customer or give other tangible value, it is important that the commissions should be kept low.

In my view, the customer is better off by investing in large, well diversified, low cost funds.

ADDITIONAL NOTE:

In Malaysia and Indonesia, the commission rates are about 30% to 50% lower than similar products sold in Singapore. These limits are set by the authority to ensure that the products offer fair value to the consumers.

In my view, the commission rates in Singapore are too high. In the case of NTUC Income, the commission rates are lower than the market - so their products provide relatively better value to the customer.

7 comments:

Anonymous said...: I agree with Mr. Tan's view.

Different countries' implementation of financial products require different set of expertise to tackle them and professionals should be paid according to the value they put in their services and products.

By the way, Mr. Tan, would appreciate your view on the inflation in Singapore: Are we experiencing just a little inflation of 1~2% p.a or it is higher than we thought? I felt that transportation and healthcare costs are increasing but I can't pin-point how.

Do you think consumers should take it into account when planning for insurance coverage or retirement?

Thank you for your thoughts.; November 13, 2007 12:22 PM
Anonymous said...: Financial planning is defined as the process of determining whether and how an individual can meet life goals through proper management of his or hers financial resources. It is the development and implementation of an integrated, coordinated and ongoing plan for achieving overall financial objectives.
This how a financial planner gets paid in US for doing the above.
You can see it is not selling or paddling products. It is about looking after and helping the client to achieve their financial future. It is holistic and all financial decisions are related.Making one decision affects another because people have many needs but limited resources , there fore need to allocate properly and efficiently. Eg;will buying and allocating my money to revosave affect my other areas of needs. Am I putting my money to work harder and efficiently? Is my retirement funding more important than ...?
Planners don't sell; they advise and plan and charge a fee. Implementation of the products is through another person or directly to manufacturers.( Aviva and Prudential don't have an agency force in UK) The cost of the product comes with a huge discount.
Do the insurance agents conduct their business in this manner? No!! They sell.Selling is very dangerous. As Mr. Tan highlighted in his other posting that agents are trained to "overcome objections" and to downplay weaknesses of the products. There is no transparency and disclosure and customers don't get full picture of the product. The sale depends on how clever the agent can turn and twist until the customer is dizzy and lost the will to think. There is no objective advice. It is caveat emptor. You die your business.
So this is up to the customers whether to engage an adviser or a insurance salesman. Warning: the title does not tell you his approach. Nowadays they carry fanciful titles and masquerade as financial consultant,wealth managers, adviser and life planner.Maybe their qualifications tell you a bit and probably the only telltale sign of what they can do.; November 13, 2007 12:45 PM
Anonymous said...: Dear Mr Tan,

In Singapore, we have Supplement Retirement Scheme (SRS) to help us save for retirement and can enjoying tax savings on contributions.; November 13, 2007 2:23 PM
Anonymous said...: Inflation is the stealth thief that investors must always worry because it steals some or all the return from whatever you earn.
"Inflation could hit 5% early next year" hogs the front page of the Straits times today.
Although Singapore has been managing the inflation well , one of the lowest in the world but it still makes great impact on your investment.
Over the long term it should average about 3.5% and not 1-2% as most insurance companies love to use to make their product return look good.They also love comparing to the banks' rate. This is misleading and can lull the investors into a false sense of contentment.BEWARE OF THIS.
The endowment products , both regular and single premium, cannot give any inflation adjusted real return to the customers. They may look safe but not really safe .
AN EXAMPLE: NTUC Income growth policy's projected return is about 4% but the probability of returning 4% is low. It may return 3-3.5% at best, looking at the long term interest rate. So if you are invested in this product you are getting back your own money back after 10 years. Is it good? Think again.
Nothing beats the inflation beater equities.
Mr. Tan's recommendation
of a broadly diversified portfolio is the way to go and surest way of accumulating wealth and not those endowment stuffs which the insurance agents and the companies have you believe that they are low risk but actually very risky as you can see. Get a good adviser to help you.; November 14, 2007 12:54 AM
Anonymous said...: If the inflation is not tamed investors holding traditional products will lose in term of purchasing power.
In some countries like India and China inflation is near 7-8%. If their investments don't earn more than this it is loss in real value.
In Singapore, it is not easy to control the inflation and over the long term the average will be around 4%.
Currently endowment and cash value plans over the long term can return about 3-3.5% and they will certainly be badly mauled by inflation.
Those who plan their retirement must avoid having this type of plans. The best bet is still using the strategy of 'buy term and invest the rest.Seek a qualified adviser with investing expertise to help you design a portfolio that suits your goal and risk tolerance.
All endowment plans, whatever name they go by, will be a terribly disappointing in the future if inflation continues to rear its ugly head.; November 14, 2007 2:15 PM
Priyadi said...: "In Malaysia and Indonesia, the commission rates are about 30% to 50% lower than similar products sold in Singapore. These limits are set by the authority to ensure that the products offer fair value to the consumers."

are you sure about that? distribution cost of the most notorious ILP here in Indonesia is 205% of annual premium, or equivalent to about 24-25 months worth of monthly premium! this is far higher than any ILPs offered in Singapore according to this: http://www.askdrmoney.com/Ins_ILP_RP.htm

because higher distribution cost translates into higher commission rate, I believe they do get higher commissions rate here in Indonesia than in Singapore.

other than simple term insurance, I've yet to find any insurance product that offers good value here in Indonesia.; November 15, 2007 7:18 PM
Tan Kin Lian said...: Dear Priyadi

I am familiar with the commission rates paid by a large local insurer in Indonesia. Their rates are lower than Singapore for ILP and traditional products.

On second thoughts, I think that you are right. The commission rates paid by the foreign insurers are much higher and could be similar to the level in Singapore.; November 15, 2007 11:07 PM