The topic of how financial advisors (FA) should charge for our services has been debated for many years. I shall do a brief explanation for those who are not aware of the different mode of remuneration of a FA.
A FA is remunerated by these methods:-
1) Commission base – The FA conducts a fact finding process to establish the needs or financial goal of an individual with a financial plan. He recommends a product from a service provider that serves the purpose to meet the client’s needs. In return, the service provider gives a commission to the fa.
2) Fee base – The FA charges a fee ranging from as low as $300 to $4000 for conducting the fact find process to establish the needs or financial goal of an individual with a financial plan. He may or may not recommend a product to help the client achieves the financial goals.
3) Fee + Commission base – A mixture of both.
4) Salary base – The FA gets a basic salary and we usually find them in banks.
5) Free base – The FA provides free advice and does not expect to be remunerated for advice rendered or products recommended.
Which adviser will you choose as your financial adviser? 8 out of 10 people will say the fifth FA which is FREE base. As for the other 2, one most likely doesn’t understand the question while the other most likely don’t understand the answer. Now, what if the Free base financial adviser sitting in front of you is not professional, not ethical and not providing you a good advice? Will you choose to walk away or to engage his service by providing a fee instead of having a free service? Likewise, if you realise a commission based FA is product pushing than selling base on your needs, the immediate action is to walk away. One good example is FA trying to close a deal at a road show. It always puzzle me as how a financial plan which may take up 20yrs to implement to last at least 20yrs of the client’s life can be done in 20 mins or lesser!
One fee base financial advisory company charges its first consultation Free but it will be $400/hr subsequently. Another firm charges $4000 for a comprehensive financial plan and 0.8% -1% of the amount that is managed by the firm from year two onwards.
When we consult a GP, they charge us a fee of $35-40 per consultation & a specialist may charge $80-$100. Does it make sense to pay a financial advisor that sort of money? Some say yes because they are required to sit for regulatory exams and licensed by MAS before they can be a financial planner. My question to these people is if you trust MAS to certified the fee base advisors to be qualified enough to be a financial adviser earning such a fee, why are you not trusting the MAS to certified Independent Financial Advisors to be Independent?
There are two ways a financial plan can be constructed. The two ways are the proper way and the improper way. If you are constructing a financial plan using the proper way, the method used to analyse your cash flow, financial ratio, needs analysis and recommendation will be the same since all of us goes through the same exams and licensing process.
The FA’s ability to conduct a comprehensive financial planning process is not reflected by his remuneration method. Most Singaporeans are familiar to tied agents than Independent Financial Advisers(IFA). There are several regulations under the Financial Adviser Act and the guidelines set by Monetary Authority of Singapore to be met before one can be called an Independent Financial Adviser. There are several channels to feedback if you think an IFA is not independent. A fee based advisor will argue that the method is better for the client since he charges a fee and will be impartial in product recommendation. However, do remember that there is a retention fee of 0.8%-1% that is payable base on the net asset value managed by the firm every year. Will a unethical fee based advisor subject the client to higher risk or more risky products to increase the returns so as to get a bigger fee? We see that each of system will have its pros and cons. It is likely to be a unprofessional and unethical abusing the remuneration system than the fault of the system. Therefore, I suggest that you walk away if you feel that an financial advisor is out to squeeze every drop of your hard earn.
Personally, I think when a client approaches a commission based FA, he tends to be wary that the FA will sell him a product that is recommended based on commission than needs. Therefore, he think twice before making a commitment. In the case of Fee based, the client assumed that the FA plans based on needs so enter into a investment without much consideration. There is no best way to remunerate a FA. Some may say that developed financial markets such as the US are moving more to Fee base to improve professionalism and impartiality.May I suggest that we sit back and see how such payment method improve the situation as compared to when it was a commission based? As a consumer, you decide which adviser you are comfortable to work with for your financial plans.