As customers become more affluent and discerning, competition for products become keener and information becoming easier to obtain, the expectation of customer service standards will rise. In the western developed countries, with a rich history, they have been through the phases and have come to embrace customer service standards as a key Strategic advantage.

In Singapore, one just needs to survey the job market for sales-staff, promoters and you will see many part-timers and people who are not well-trained. It also does not help that they are not necessarily well-paid.

Another aspect that is lacking is Management and Leadership in the company to adopt excellence in Customer Service as a key component of their business.

In the financial planning arena, as consumers have more choices, become more well-informed, they naturally start to compare. At first, price and value would be a concern. However, when there is a lack of differentiation or keener competition, it may boil down to customer service as one of the key strategic advantages.

This forces many Financial Advisers to reconsider their business model. Does their model rely on new clients’ business or retaining old clients? How well do they service their old clients? Is the longer-term strategy of excellent customer service  more profitable and yet have more time freedom in the long run?

Like it or not, the market is evolving, and eventually customer service standards will be one of the key sustainable factor for any Financial Advisory Business.

See articles on Customer Service standards:

“Customers today harder to please“, Straits Times 29 Oct

“Customer satisfaction drops again“, Straits Times 28 Oct

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The article is however unclear as to whether they are also providing financial advisory services as registered under MAS Financial Advisers Act.

Read it in this article here.

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Read the full article here.

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This means one less insurer for Financial Advisory firms who rely on a breadth of products to complete their suite of products. A quick check with some financial planners from these companies reveal that nnot many UOB products are not on the highly recommended lists. Information reveals that UOB Life’s competitive products are in the Mortgage Insurance and Single Premium Endowment plans (especially guaranteed interest types). The life insurer’s Life funds investments are also not amongst the best in the industry. You can say that their departure will not be missed.

To existing policy holders, they will be unaffected, just like when Keppel Insurance was bought by HSBC Insurance. The new insurer will honor the rights of the policy owners.

What about other insurers? Is there going to be any consolidation?

The next smallest life insurer in terms of local assets is HSBC Insurance, coincidently also the “non-core” arm of a bank.  The advantage is that HSBC has their own distribution arm. As to whether HSBC sees the insurance unit as a potential growth sector remains to be answered.

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Investment-linked (ILP) policies have additional charges such as annual policy fees, management fees and insurance charges. Insurance charges increase as you age, therefore generally incur greater costs for people above 40 years old.

With pure unit trusts, the costs involved with providing a small amount of insurance (usually 5% to 25% of the original investment sum) is eliminated.

For consumers with investing as a priority and are older, these new “pure” unit trusts definitely is a better proposition.

However, one has to take note about the costs of switching (if any) from one fund to another especially from different fund providers. In addition, 40 funds are not really that many, considering there are more than 450 funds available. The astute investor still has to evaluate the fund performance as well as determine the spread of asset types offered by these 40 funds.

Do they have commodities futures funds like Schroder AS Commodities? Currency funds like DWS Currency fund? A decent variety of bond funds? How about funds with absolute return mandates?

Other than giving Manulife agents new products to sell, the danger is that the agents take to the streets peddling products instead of giving suitable investment advice. Financial Advisers intending to make investment management one of their business lines ought to receive adequate training and be more conservative in their approach.

How would other insurers react? Likely, to also be looking at expanding their offerings in due time.

As for other financial advisers, if insurers were to follow in the foot-steps, you’ll probably be needing to pass M8 – Collective Investment Scheme, so get it done as soon as you hear wind of it happening in your company.

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According to the article the first $500,000 will incur annual fees of 1.5%, and go as low as 0.75% for bigger portfolios.

While Citi-bank may be the first bank to offer such a service typically reserved for the ultra-high net worth private bank clients, Financial Advisory (FA) firms offering independent have already been at it since 2003 for the mass affluent.

As a hybrid model, FA firms charge a lower front-end fee (typically from 3%) and an annual wrap fee (from 1%) similar to what Citi-Gold is offering. Most firms also have a scale such that for larger amounts under management, the front-end fees as well as the wrap fees, will be gradually reduced. Most FA firms will handle these “Wrap” accounts for amounts $30,000 onwards. Within the basket of investments, all switches from one fund to the other are free of transaction charges, thus clients need not worry about incurring large transaction costs, and if the adviser is making money from “churning” the account.

Citibank’s move, will put some pressure on the early high net worth market on other banks and FA firms serving this market. While the move is clearly advantageous to clients, a clearer insight into how it works exactly before a client should commit.

For example:

Some investment  products should not be part of the annual fee arrangement. Transactional products like structured products have in-built fees, and require little management once implemented. Straight bonds also have little management involved, and when 1.5% is taken away from a low yield fo 2-4%, it does not make much sense.

Clients should understand what constitutes the annual fees before entering into such an arrangement.

While the inherent issue of “churning” the account can be reduced with this arrangement, consumers should also bear in mind other aspects of potential conflict of interest: the financial institution’s own products, compensation arrangements with product providers and biases due to limted suite of products.

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The interim President, Mr Tan Kin Lian, former CEO of NTUC Income, and a well-known figure in the local financial services scene expressed the role of the association to be encompassed in (extracted from Objectives of FiSCA):

• Providing consumer financial education especially in terms of collective investment products and insurance
• Seek consumers’ active participation to represent consumers’ rights and interests

with the aim of:

• Protecting consumers from unscrupulous practices in the financial industry
• Encourage Best Practice and combat abuses in the market

The way it’s role is to be carried out is:

• website content: topical education, product reviews and financial news
• workshops and short courses

Mr Tan has been very active in garnering support for action against miselling of credit-linked notes, which led to a greater awareness of the public, and likely put some pressure on regulators and financial instututions to provide a better solution. His clout and previous exposure as ex-CEO of NTUC Income, gives him the necessary leverage to take regulators and financial institutions to task.

While that might have been the case, he is also a controversial figure, frequently embroiled in tangles with NTUC Income (latest being Bonus Cuts by Income), citing alternative (to the incumbent) political parties web-links and political ambitions? So what is the motivation for Mr Tan in founding FiSCA?

This latest move is clouded by a duality of purpose in (1) Financial Education, with a lesser emphasis (2) represent consumer rights.

There are already quite a few public and private Financial Education content providers giving very good quality Financial Literacy content (like CPF Board, MoneySense, I’m Savvy etc). While the seminars, workshops certainly provide a way to fund the association, the content should not overlap too much of what’s already available in the market, and if they are already up-to-mark. In my opinion, where FiSCA can really plug the gap, is on independent product reviews with a daring opinion while navigating the regulations requirements, rather than go the way of “How much should they save?…”

The first and credible attempt POSB’s MyHome Fund would be one of the many items I’ll read personally. However, I think this is going to be a moumental task in keeping up with various products of banks, insurers, investment companies. I suspect the momentum will soon be subsiding, especially if they are “non-profit” and poorly funded to have the manpower to cover so many products.It might be a better idea to cover classes of products and group them together instead of individual products.

The other gap that FiSCA could really assist the public would be the raising of unfair practices by citing case studies, compiling complaints especially on how financial products are sold in various situations: like road shows, over-the-counter in banks, unsecured loans, etc. Thereafter provide simple advice on how to go about pursuing the case with the recognized resolution bodies. A list of lawyers trained or willing to take up smaller cases would also be very useful.

The impact on Financial Advisory Practitioners?

You have to understand what can constitute mis-selling and improve your processes, as well as quality of advice. Merely filling up the Financial-Needs-Analysis and Risk Profiles may no longer be enough.

1. The understanding of the financial products and what’s at your disposal
2. Suitability of the products for your client in meeting his needs
3. Adequate disclosures and understanding on the part of the client about your products
4. Managing client expectation on levels of service and advice, Delivering what you promised

The way Mr Tan and FiSCA is heading with an example of article about Term Insurance, you better know your products and not just follow some old adage in the industry like “Why buy term, there’s no Cash Value”. If the term insuranace product is available in your company, and you failed to recommend it given the client’s budget and Needs instead you recommended an endowment policy, this could be construed as inappropriate advice.

Be careful not to end up as one of the statistics of “unscrupulous practices”, and end up on the wrong end of the tree.

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Mission before Commission. Or have insurance practitioners forgotten about that?

MAS called for a review of the commission structure for life insurance advisers, stating concerns that the prevailing front-loading structure may not serve the best interest of consumers.

The impact of a “restructuring” could see commissions stretched out over many more years than traditionally 4-6 years for regular premium life products.  While that could significantly impact on the ability of the career to attract advisers solely based on a full-commissions structure, it seems that some form of adjustment may eventually be inevitable.

An example of such a commission structure is NTUC’s product commission structure. Some of it’s products spreads the commission over the life-time of the policy. While that may not be attractive for “myopic” insurance advisors, it’s actually a good long-term income building prospect for those who stay long in the business.

So far the regulator has taken a “self-regulation” approach rather than going straight ahead to lay the parameters. This would mean the implementations may take a while before materializing. Mr. Stanley Jeremiah of the Singapore Insurance Institute explained that there is an inherent conflict of interest if the industry were to tweak their incentive schemes, instead of the regulator taking the lead.

The implication for practitioners and financial advisory companies is to expect some changes to eventually take place and be ready to adapt to changes. I see three possibilities emerging from this:

1)      The adoption of fee-based or partial fee-based advice

2)      Embracing an assets (premiums) under management model of advice with trailers instead of front-loaded insurance commissions

3)      Partial fixed pay component to offset removal of front-loaded incentives

By implementing a combination of the three, we may resolve the issue of too much front-loading, and yet provide a viable means of attracting competent and enterprising individuals that can put clients’ interest first to take up the career.

A total fee-based advisory mode may not be viable for the mass affluent market (which is where the problem of conflict of interest usually lies), as the annual fee required may be too costly for most people. A poll of majority fee-based models indicate a fee of $1,000 to $3,000 for an initial plan, and $500 to $2,000 for on-going annual fees.

The assets or premiums under management model would require a gradual revamp of the current insurance industry retain a larger portion of distribution profit, spreading it over more years or on a trailer basis. Likely this may occur over certain class of products, moving gradually to others. Challenges however remain to design win-win-win (company, adviser, consumer) compensation plans.

Financial Advisory Companies (non-tied) typically do not have deep pockets like banks or insurance companies to adopt a higher fixed income component, may have to build up reserves in the coming years to adopt a partial fixed income model.

Perhaps, the regulator should look at the giving of appropriate advice and focusing on customer-service standards instead of going along this route. I know of many well-respected insurance advisers that give excellent advice regardless of commissions, especially when they have the choice of many companies’ products to choose from and yet did not choose products with higher compensation.

I believe the conflict of interest in insurance advice resulting in high commissions but not meeting the needs comes from, but not exhaustively from:

1)      Quota, performance and incentive systems stemming from financial institutions and managers driving profitability.

2)      Using of needs analysis superficially, not meeting protection needs as a priority: example implementing an endowment policy when obviously a term policy would have ensured sufficient protection with limited budget.

3)      Reluctance of consumers to adopt a fee-based retainer model.

Why not consider also addressing some of these issues?

The first two could be achieved by increasing the scope of the independent audit team to best practice advice for compensation alignment as well as a myriad of other issues like compliance and appropriate advice.

The last could be enforced with education of consumers to receive fee-based advice as a means to reduce conflict of interest issues. Coming from an independent bodies like MONEYSENSE and SAS, that could be more effective.

As for practitioners, we’ll need to be aware of the implications, up our professional and service standards and get ready to adapt to a change of business model in time to come.

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For many people who join the insurance and financial planning business, they are frequently told by their relatives and friends that this industry is saturated, they know of at least 2 or three insurance agents or financial planners, assuming that everyone else is similarly crowded with such people.

The simple truth is that although there are many who join the business, there are more thaty fall out of the business. Since 2006, there is only a 1.2% increase (from 12,841 in 2006) in insurance agents. This is not in line with our population growth and wage increase numbers.

Another interesting fact is, according to national statistics, the average coverage of working adults is only $165,628 marginally up from $118,000 in Dec 07. A study done by Prof David Yee (NTU) commissioned by the Life Insurance Association, shows an average working Singaporean adult will need $495,000 protection against death. This points to gross under-insurance and a huge market for life insurance.

Study from Prof David Yee in Power Point Slide Show (prepare for long download)

The more scary issue is that when you look at what makes up the $118,00 of average coverage Singaporeans have, the bulk is from Dependent Protection Scheme $47,000, Company Group Insurance $47,000 and the remaining $20,000 or so as personal insurance!

Another look into this report is that the statistics used are based on an adult aged 40, of median family expenses of $40,819pa with one child and supporting one elderly parent or non-working adult. Which means if someone falls into a family of higher expenses from lifestyle, more children or elderly parents, they are at a even higher risk.

Any good financial planner, with a look at the report details also can tell you that this study is done on a very conservative estimate basis that under-estimates the actual protection needs required.

On the other hand, if somone is single, young and with no dependents will not actually need that much protection to start with.

A simple rule of thumb used is 10 times annual income. According to Prof David Yee, that number should be 11.3.

You would think that with about 13,900 (source: LIA) tied agents and approximately 3,400 FA representatives in Singapore, Singaporeans would have a higher protection sum by now. But the truth is that it’s not about how many agents or planners are there, it’s about two important issues:

• Perception of Consumers about Life Insurance and
• Selling practices of Insurance practitioners.

According to a consumer survey by Saffron Hill, consumers were:

1. Largely ignorant (or choose to be) about how much protection they need and what they have
2. Of those who think they are adequately insured had only $100,000 – $200,000
3. Of those who are not inclined to insure more, 49% think it’s too expensive
4. finally, there is a higher interest in investing and savings towards protection

As a practitioner I find the situation rather perplexing and saddening, especially when I see reports of how families suffer due to a lack of responsibility on the part of consumers to know more and of financial planners that do not take their role seriously.

Firstly, let me debunk the issue of “Too Expensive”. SAFRA and SAF group term policies insure their members for as little as $200pa per $100,000 coverage. That’s affordable even for a low income earner. Commercially available term policies may cost slightly higher at $300pa or $400pa depending on the entry age. Even then we are talking about just over $2,000 per year for $500,000 coverage. >> If you want high protection at low cost, go for term.

This issue about “costly” insurance could have been propagated partly by the focus on savings through endowment policies which is the worst in terms of protection to premium dollars. Judging by the number of endowment and investment cases, it seems that the industry has a tendency to recommend products that generate higher commissions instead of meeting the protection needs of the consumers.

This phenomena can be prevalent in road-shows where to entice people to save through endowments, they are even offered gifts. As far as I know term plans, and high protection plans are few and far between implemented at such events.

Enough about me bashing the industry, check out this report that is asking for the commissions structure to align clients interest and needs with the compensation to insurance advisers.

Would there be a shake-up in the industry? Let’s hope so for the good of consumers and the larger portion of us that provide objective and cost-effective advice.

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In terms of distribution channel sales, there has been a slight but gradual decline in tied agency sales, while banassurance sales has been volatile, sales from other channels like brokers and direct sales have been steadily climbing. This shows a maturing of the insurance industry much like what’s occured in UK, US and Australia.

Another interesting fact is that since 2007, LIA has been monitoring the percentage of new sales done via a partial or full fact find. That figure has been steadily rising from 57% in 1H 2007 to 61% in 1H 2009. This augurs well for the industry and consumers as standards of needs based advice is taking root.

With a tighter enforcement by MAS, this figure will continue to improve.

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