Singapore capitulates to special inteest group and do not go the way of Australia and the UK to ban product commissions altogether

PUBLISHED OCTOBER 11, 2013

EDITORIAL

Advisers must earn their commissions

FINANCIAL advisers would have heaved a sigh of relief at the Monetary Authority of Singapore’s response to the consultation exercise on the Financial Advisory Industry Review (FAIR) recommendations. Since the FAIR panel convened last year, there was much speculation on whether Singapore would go the way of Australia and the UK to ban product commissions altogether. The regulator’s response to public feedback is measured, clearly seeking to strike a balance between maintaining the viability of an industry where thousands of advisers rely on commissions for their livelihood, and yet seeking to protect retail investors’ interests. The fact that not all the FAIR panel’s recommendations were accepted testifies to just how challenging the balancing act has been – and remains so.Adviser remuneration from insurance sales is surely one of the knottiest issues. On the surface, product commissions potentially drive unsavoury hard-sell behaviour. The UK and Australia chose the fee-only model as a more transparent way to reflect advisory costs and align the interests of advisers and clients. In this respect, MAS’s concession – to retain the first-year cap on insurance sales commissions at 55 per cent – is significant as this is already the industry practice. The FAIR panel recommendation was a first-year cap of 40 per cent. Instead, it is hoped that a balanced scorecard framework to evaluate advisers’ performance and influence remuneration will help to drive the right behaviour and penalise errant advisers. A “significant proportion” of the adviser’s remuneration is expected to be based on how well he or she stacks up in terms of non-sales indicators.

Consumers must be wondering if the measures will result in lower cost products. After all, many were dismayed by the revelation last year that insurance advisers may be paid as much as 160 per cent of a year’s premiums in commissions. But while MAS appears to have kept to the status quo on commissions for now, the impact of other recommendations – in particular, a web aggregator to facilitate product comparisons and provisions for direct online sales – cannot be underestimated. The aggregator is a big step in transparency and should ultimately drive insurers to put their best foot forward, not just in terms of pricing but also in product benefits.

To be sure, consumers typically want to pay the lowest price possible for a service, and service providers seek to maximise revenues. But the gap is not insurmountable once consumers understand that there is a price for advice and this is typically reflected in product commissions. With competition and transparency, the market eventually settles at a price level that consumers are willing to pay and is viable for agents and advisory firms. The consequences of an onerous commission cap that makes the financial advisory business unattractive for young talent or forces advisory firms out of business are potentially severe. But advisers must earn their commissions, ensuring that, in return, they deliver the good advice that consumers seek and need.