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FA firms should disclose payments, product mix
NAVIGATING the world of the financial advisory (FA) industry or the greater insurance solar system would be less of a pain if it were not opaque to consumers, particularly in light of the growing FA business models and increasingly complex payment and ownership structures.
Consumers are often not aware of the existence, nature or the implications that these structures bring.
This is why advisers should be made to disclose any payment arrangements over and above the standard commissions so consumers go into a purchase with their eyes open.
In buying an insurance policy or investment product, the Monetary Authority of Singapore (MAS) sets out market conduct rules that apply to all financial sales representatives.
The regulator requires them to disclose the type of services and investment products they provide, among other things. In particular, it requires these sales reps to meet clients' needs and recommend reasonable products.
In practice though, as market sources say, many advisers have a tendency to lean towards a certain provider and there is no telling to what extent.
This inclination is due to many reasons, including familiarity of an insurer's products, the adviser's view that a product is perhaps easier to sell, or if the level of commission from certain products is higher.
These are not disclosed to consumers, leaving them in the dark.
And consumers certainly would not be aware that some insurers now have payment arrangements with FA firms distributing their products that are over and above the standard commissions and distribution costs.
For example, some insurers are said to be willing to pay 45 Singapore cents for every premium dollar of protection products sold, while there are those willing to fork out about 10-15 per cent of premiums sold on saving products.
Already, payment arrangements between FA firms and insurers are like a black hole.
To safeguard consumers' interests, advisers who are getting such additional monetary incentives must disclose this to customers.
FA firms' product mix should also be made known to consumers and the logic here is simple.
A common selling point raised by advisers is that they offer a wide range of products from multiple insurers.
But if the majority of the firm's total product offering, say 70 per cent, are from one insurer maybe because it offers more competitive rates and so those products are easier to sell, the probability of an adviser recommending this insurer's product is higher than the rest and consumers deserve to know this too.
Disclosures become even more important as varying business models have popped up in the FA industry which now comprises at least five structures.
- In general, advisers are employed by FA firms that are typically owned by individuals and offer products from a few insurers. In case you wonder what is the difference between an adviser and a tied agent, the latter is "tied" to an insurer and therefore sells only that insurer's products. The exception in this is when, for example, an insurer wants to offer a product it does not already have.
- An exclusive FA firm is one that's fully owned by an insurer and primarily offers products of that insurer, which makes them similar to a traditional tied agency force, only with a different name.
- A new hybrid FA firm is in town. It is wholly-owned by an insurer but offers products from rivals too.
- Dominant FA model is one where an insurer has a majority stake in the firm and offers products from multiple providers.
- Independent FA firm have no links to product providers. Advisers from the firms have to declare at least four quotes from four different insurers during their sales pitch to consumers.
- Exempt financial institutions such as banks, insurance companies and insurance brokers. They do not have to get an FA licence from MAS as they are already licensed under another Act, for example, the Insurance Act. There are more than 460 exempt FA firms here.
With so many variations and an unequal playing field, consumers are at a huge disadvantage.
To partly counter this, consumers should carry out their own due diligence. One way to do so is to browse through the compareFIRST website to make an initial selection of products they are interested in before approaching an agent or adviser for more advice.
As the saying goes, better this than nothing.