CHANGE is inevitable.
Transformation is happening everywhere – from telecommunications to communication companies, advertising, energy, transportation – it has irrevocably changed the way we work, how we communicate, travel and ultimately how we live our lives.
Take for example, low-cost carrier AirAsia Bhd which is leading the low-fare travel revolution in the region. Now everyone, truly can fly. From backpackers, grandparents, students, you name it, AirAsia has, literally, succeeded to bring families and the world closer. Just 15 years ago, air travel was monopolised by full-service national carriers that charged a premium to fly people from point A to point B. The aviation industry has gone through its fair share of changes to be where it is today.
So where does this leave us?
I would like to believe that our financial advisory industry is up at the bat next. Long ridden with conflict of interests and commission driven propositions, it is about time we review the current mechanism and strive for a working relationship that could be a win-win for both the adviser and the consumer.
If you are just realising that there should be more to your insurance and unit trust agent, you are absolutely right and here’s why. The income of commission-based agents and brokers have always been tied to specific product transactions.
This model misses completely much of what clients need. Although commission-based agents can service their clients in their own unique ways, products tied to commissions may or may not fulfil the actual needs of the clients. Are you, the consumer, then able to get more value out of your relationship with your financial services provider? Definitely!
If you were to look at the client-adviser relationship in the United States, UK, Canada and Australia, you will realise that clients pay a fee to the adviser for their professional advice. Independent advisory services are prevalent in more developed markets where advisory fee-for-service by financial professionals is the market norm. The growth of this model has been enhanced by recent regulatory changes that have taken place with the consumer’s interest in mind, such as the Financial Service Authority (FSA) in the UK. Likewise, Australia’s recent Future of Financial Advice (FoFA) reforms similarly raised consumer protection to a higher level by introducing a duty for financial advisers to act in the best interests of their clients. Closer to home, the Monetary Authority of Singapore also distinguishes between independent financial advisers versus tied financial agents, whereby the former are not permitted to have financial or commercial links with product providers that may influence their recommendations to consumers.
Looking at the international and regional trends, it is clear that in Malaysia, a shift towards the fee-for-advice model will be the next evolutionary event of the financial services industry. This spells brilliant news for consumers because now, they get to choose the type of financial services providers they want, where previously, commission-based agents appeared to dominate the market. This is exactly what happened in the taxi industry, monopolised by overcharging cab drivers for decades, simply because there were no other substitutes. Enter Uber and GrabCar with their game-changing ride hailing apps and suddenly, consumers had other options, and would naturally go for the one that serves their needs best.
So why fee-for-service?
The main reason stems from the conflict of interest that arose in the first place between consumers and tied financial services professionals who were using product commission-based business models. When a financial services professional is paid not by the client but by the product manufacturer in the form of commissions, the logical inclination of the product seller would be to prioritise the needs of the product manufacturer in order to benefit himself. Clients’ needs become secondary in such a situation.
In contrast, financial services professionals who apply the fee-for-service model charges professional fees for his advisory services. After which, he may or may not earn commissions from the implementation of the financial advice or strategies proposed. Since it is the client who pays the fees, then the client’s needs will be treated as the main priority.
Thus, by engaging financial services professionals who adopt this model, consumers can be assured of many benefits:
Paying fees ensures the financial services professional’s interest is better aligned to that of the client. As a result, a client can expect independent and more value-added advice and service from the financial services provider like how to grow the overall wealth rather than just some isolated product advice. When the financial services professional focuses on serving the best interest of the client, this will lead to a transformation in the dynamics of the adviser-client relationship where the client can get better value from it.
Fees compensate for the financial services professional’s time and cost needed to deliver his job at his level best. It eliminates the need to push for the most expensive piece of product in his arsenal to recoup his cost. When the financial services professional no longer needs to look to the product manufacturer to maintain his livelihood, he is more likely to recommend lower commission but better value products like bond fund and term insurance to address the client’s objectives more effectively. These products are seldom recommended by commission-based financial service professional because it pays much lower commissions.
Earnings from commissions, if any, are a bonus rather than a “bread and butter” source of income from the financial services professional. Furthermore, as he is not tied to any specific product manufacturer, he will be able to maintain an impartial view when evaluating the pros and cons of each possible solution or product choice out there in the market.
This model is no different from what is practised by medical doctors for example.
A patient who pays a doctor a consultation fee to have his symptoms diagnosed, will be given a prescription for medicine, which he can either choose to purchase from the doctor’s clinic or a pharmacy. If he opts for the former, the clinic stands to earn a wee bit extra, but if not, the doctor would have received a fee for dispensing his learned advice anyway.
Bear in mind that because of the inevitable changes taking place in the financial advisory industry, you do have choices as far as selecting a financial services professional is concerned, and you do deserve the best value service for your money’s worth.
Agent for change
However, it is not a one-way process. As consumers, to ensure that you continue to deserve more, get into the position of becoming an agent for change too, instead of being a mere recipient of it. One of the best ways to go about it is to relook at the way you engage with your financial services professional.
1. Never take things for granted. Complacency can kill your best laid plans. Engaging a financial services professional does not equate to you taking a back seat ride the entire way. Communication is vital at every stage. Both parties need to be on the same page, on the same line even. When you have doubts, raise them. Voicing out as opposed to staying silent could mean the difference between achieving your financial goals as planned or never seeing them come to fruition. A professional and experienced financial services professional will be happy to clear any doubts you may have. It is after all, your money, no one else’s.
2. Educate yourself financially. Consumers can easily increase their financial literacy through magazines, personal finance books and the Internet. With sufficient financial knowledge, you can have a deeper conversation on your goals and objectives with your financial services professional.
3. Do not just settle for products without a comprehensive financial game plan. This is akin to engaging a personal trainer to properly guide you on the best exercise regime to help you meet your fitness goals. Once you have a customised plan to adhere to, any exercise equipment you subsequently use will help you achieve those goals.
Follow the Winds of Change, no need to Knock on Wood;
Just know You Deserve More, and a Change Would Do You Good.Back To Article Page Get Started Today