Seth’s Blog on Finance

Clashes of Interests Between You and Your Financial Adviser

In my opinion, there are a few major clashes of interests between the you, the client, and your financial adviser who is making a living out of his job. 

It is only by identifying and reducing these clashes of interests can there be a mutually beneficial relationship between an adviser and a client.

The first major clash of interest is the remuneration system. Most financial advisers in Singapore still work on commissions. This is due to commissions being a longstanding practice as well as most consumers not wanting to pay an upfront fee for proper financial advice, never mind the fact that most end up paying through their noses in commissions in form of hidden charges and fees. 

Financial products that are good for the client more often than not pay the financial adviser low commissions, and products lucrative for the adviser are usually lousy for the client. It’s a double whammy for clients who pay high commissions only to get products that are contrary to their financial interests. 

The second clash of interest is the adviser only having a limited range of products. While I do not consider tied insurance agents as “real financial advisers”, at more than 12,000 heads, they make up a huge bulk of the industry. They also represent the greatest clash of interest between themselves and their clients as they are restricted only to carrying the products of their captive company.

In a market of more than 10 life insurers, it is simple logic to understand that no one company can claim to have the best of all classes of insurance products. A best-of-class insurance portfolio is made up of best-of-class products from different companies. The situation is worse when investments are brought into the picture. Such agents can only distribute a very limited range of funds from their parent company.

To make a living and meet their quotas, they have no choice but to convince their clients (and themselves) that whatever they have to offer is the best even if the truth points to the contrary. 

Last but not least, most financial advisers have a sales quota to hit. In order to maintain their jobs, they have to maintain a level of product sales. This may force some to transact unnecessary sales just to keep their jobs.

How do I reduce these clashes of interests as a financial adviser myself?

As my move was mainly motivated by ethical consideration for my clients, I have actively sought to reduce these major clashes of interests when I moved out of my old company, and hence the choice of firm to join was an important one for me. 

Like I have previously mentioned, I can settle for a lower remuneration by providing good financial solutions for my clients for a variety of reasons. Eventually, I wish to further reduce the clash of interest between my client and I by shifting from a commission-based model to a fee-based remuneration model when practicable. This is why I have chosen to be mentored by Mr. Wilfred Ling who is one the few fee-based financial advisers in Singapore’s commission-dominated landscape. 

Even as a commission-based adviser, I believe I provide my clients with good advice and best products possible for the needs. One way I do this is to provide a comparison between competitive quotes for a class of insurance product, for example. Personally, I feel that this clash of interest works against me rather than my clients as I sometimes end up earning very little. Clients themselves can help reduce this clash of interest by providing word-of-mouth recommendations and business referrals. 

Not all IFA firms are made equal.

Unlike most FA firms which implement a “banding system” for commissions that rewards top sales producers and penalises those who do bring in as much revenue, my company provides me with a commission model that does not do so. Ethical financial planning usually does not bring in high revenue, and a system that penalises that is against my beliefs and my clients’ interests.

Furthermore, I have no sales quota to meet. Thus, I do not have to resort to product pushing or selling unnecessary things in order to keep my job. Moreover, while IFAs have an access to a wide range of product providers, there are rare occasions whereby the best product is outside of IFAs’ partnerships As I do not have a quota to meet, I can refer my client to transact such products from my friends in companies IFAs currently do not have partnerships with in order to ensure that my client’s interests are kept. 

Clients also need to recognise that clashes of interests work both ways. An ethical financial adviser will not stay in the business for long without reciprocal clients. Lucky for me, I have met quite a few who understand where I am coming from, and this makes proper financial planning possible. Both the client and financial planner needs to be in sync and aligned in interests in order for a mutually beneficial relationship to occur.