Tan Kin Lian's Blog: Ethical financial consultants

Monday, January 25, 2010

Ethical financial consultants

There are ethical consultants and bad consultants in the financial services field. The ethical consultants offer advice and products that are in the best interest of their clients. The bad consultants think of their own benefit and offer products that give bad value to their clients.

The tied consultants can only offer the products that are available to them to be sold. If they work for a financial institution that offer ethical products (i.e. transparent and fairly priced), they can earn a honest living. However, if the financial institution designs products that are meant to deceive or mislead the consumers, the consultants face a dilemma. Do they act ethically, in the interest of their clients, and avoid these products? Alternatively, do they sell these products, as they are "bribed" with attractive commissions?

It depends on the ethical and moral values of each individual consultant. Some are upright, but others are not. In our current market environment, it is more likely to find an bad consultant - but there are good ones around.

Some consumers will trust consultants that they know personally. However, there are many cases of such consultants betraying the trust and taking their friends for a ride. If you are not able to differentiate between an ethical or bad consultant, it is best to avoid them altogether.

Tan Kin Lian

6 comments:

Anonymous said...: Don' want to sound pessimistic, but the probability of finding an ethical and upright financial sales staff is 0.01% Due to the remuneration structure of this business, these financial salespeople have little choice but to push high commission products. Even for those staff on fixed monthly salary, they are expected to meet high monthly & quarterly targets of such high commission products as these type of products give highest profits to the insurers and banks (the employers). Hence for the sake of their salary and their jobs, 99.99% of financial salespeople will eventually resort to whatever and any kind of tactics to sell high commission products, even convincing themselves that such products are "good" for customers.

The only way to avoid such conflicts of interest and unethical behaviour is 2-fold:
1) Ban all commissions and quota-based targets. Go for full fee-based remuneration structure.
2) Make it compulsory for full fact-finding, complete financial investigation, analysis and planning. MAS must then be prepared to enforce the full spirit of Section 27 of the FAA, to hold financial salespeople and FIs against their financial analysis and recommendations.

Yes, such a regime means that most current financial salespeople will have to drop out and find another job. But it is the same with medical industry. You want any tom, dick, harry with 'O'-Level and tikam-tikam exam to prescribe medicine to you?
By 2011, when UK converts into this type of regime, Aviva predicts that at least 50% of current advisors will drop out.

In my 20 years of dealing with banks and insurance companies, I have only ever encountered *1* individual whom I believe is ethical and upright. And the only reason he could be like that was because he was already financially independent. Even in the depths of March 2009, his stock portfolio was around $900K providing him with regular dividends averaging about $3K/mth. No kids and house all paid up. Working in local insurer just to pass time and meet people. We had a long chat about investments, insurance, economy etc and he showed me a bit of his brokerage account and investment techniques.; January 25, 2010 1:43 PM
Anonymous said...: We must continue to pressure MAS to make the changes to do the right thing.
Commission is the evil behind the mis-selling , conflict of interest etc.Some agents committ the evil knowingly some blindly but nevertheless they commit the evil.
Fact finding must be made compulsory otherwise you cannot get good, hones and competent adviser. payment Right now you get only salesmen who push koyok fo commission and worse they peddle this koyok as cure all diseases koyok.Wholelife , limited living , endwoment and cash backs are all koyok products whci insurance agents push as cure all koyok.
How to get an honest and competent adviser is big problem as only 99.99% of the population are koyok salesmen.Eg if you engage a ntuc agent in all probability you get a koyok salesman, and a super duper sales champion one too.; January 25, 2010 2:05 PM
Anonymous said...: Tied insurance agents sell anything the company produces, good or bad isn't the issue, commission determines. A good product is one that gives the agents high commission . From then the agents together with the trainers will think of 'strategies' to push.The strategies are usually some truth and the rest lies.The agents are trained to tell what the customers want to hear and suppress the negatives. The agents are told to be positive, to beleive in the products, to beleive the black is white and vice versa and be so convinced that they can lie without batting an eyelid.To embolden the agents the management ensures the commission and incentives are enough to help them tell more convincing lies.Eg. growth is a fixed deposit...this implies guarantee. if customer not convinced then the word 'guaranteed' is used.This is how agents peddle the products. If they are daring enough then it is theirs to eat.'; January 25, 2010 4:13 PM
Anonymous said...: i think this problem (ethical vs non-ethical) lies on the asymmetric information theory. The market consist of 2 group of financial adviser, the good one and the bad one.

The good financial advisers have the skills, financial knowledge and are people oriented and are keen to offer financial advise to the public. However there are social stigma attached to being a financial adviser and cause the good financial advisers reluctant to enter the market because lack of recognition.

The bad financial adviser has nothing to lose. Equipped with the minimum knowledge and to earn a living they will sell like a salesman. After all insurance products is not going to ruin ur life mentality rather that needs analysis.

Hence in the end the public cannot differentiate between who are good adviser and who are bad adviser, then attach a negative perception (social stigma) to financial adviser resulting the exit of good financial adviser and the market is flooded with bad adviser.

Well the above is my analysis. If my theory application is correct then we will need an intermediaries to bridge this gap. Most probably is to increase the entry level to graduates or diploma with relevant financial knowledge. Whether it is ethical or not it is up to the upbringing of the individual. Regarding the pay structure i would definitely agreed to a fixed pay structure BUT i think Singaporeans do not care about what is financial planning and they are reluctant to give accurate information such as wages, asset and liabilities. This is Asian culture. This pay structure works in United states and Australia because the people there believe financial planning is essential. So do Singaporeans think this way? if not, it will not attract good financial adviser due to low pay and recognition. We will then back to square one again. In addition there will not be too much consumer-driven customer going for financial planning and in the end the business model will fail.

I definitely think that financial adviser is a profession and not just a pure salesman job. It is sad to see that the social stigma is preventing good financial adviser from entering the market.; January 25, 2010 11:14 PM
Anonymous said...: Remove the commission and reward for advisory work done, not leg work or mouth work or body work or hand work or any other kind of work that is not financial.99.99% is alot of salesmen. It is hard to get an honest qualified adviser really.
Anyway there is one local insurance company that is proud of its salesmen and women. They are labeled as super dupers and sales champions. Is it wonder that they sell very well?; January 26, 2010 12:02 AM
wjsim said...: I have a radical suggestion and that would be to scrap the FAA. The FAA is one hell of a bible that I can bet that not a single financial adviser rep has read and understood it from cover to cover. What it does is raise entry barriers to new FAs. I'm not exactly well-versed with the FAA but I believe one such instance is that FAs must have a capital of a certain minimum sum. This prevents FAs with an "ethical" culture from thriving as they won't have that kind of capital in the first place. It is a known fact the "unethical" reps "earn" more than "ethical" reps for their principal.

Another problem in the FAA is under training and competency. Anyone and everyone should be allowed to hold a license. This way, where's the "information assymetry" now? These "part time" brokers can act as the "direct channel" that has been dreamed of for such a long time. They have full time jobs and just act as "form fillers" who knows the drill and won't stuff any products down your throat since they don't live on that anyway. The FAA restricts such "neutral" brokers as the FA has to spend resources to train them to satisfy CPD hours. Without the FAA breathing down FAs to train their brokers, FAs will be more than happy to have "inactive" brokers who do nothing but help friends and relatives fill forms. They know what's going on behind the scene, the commission, the exclusions etc and won't lose too much dough sharing with his "prospect" for the lack of a better word. Honestly, the training for CPD hours is nonsense. How does holding a party at Expo or Suntec count as 5 hours of skills or knowledge?

The professional consultants who do real financial planning can still carry on with their usual rounds, but as many have pointed out, "the probability of finding an ethical and upright financial sales staff is 0.01%."

People always draw analogies between financial "consultants" and doctors. There is a stark difference here. Financial planning is voluntary, and can be managed by yourself provided you read TKL's good book and do research. In fact, you would make the most objective decisions this way as there is 0 conflict of interest. Medicine however requires years of study and training and medical services demand a high price due to this exclusivity to only the brightest and most determined of the population. If fiancial services were to become such (given even higher entry barriers), people will avoid them altogether due to the high charges and simply read TKL's book instead.; January 30, 2010 1:11 AM