Several years ago, an insurance agent came over to my home because I wanted to buy H&S (Hospital and Surgery) plans for my whole family. He spent the first half hour talking about critical illnesses and endowment plans which I have never express interest in. I listened patiently and politely since the agent took the effort to travel down to my home. I refused to buy any of the plans that the agent recommended because I prefer term plans which are cheaper. Before he left, I guess he could not hide his irritation and told me that the commission he earns from my H&S plans can at most pay for the transport he took to come to my place. I am not sure if this is an exaggeration. At least I know now that agents are paid a pittance for selling term-plans. So, in future, if I should need to buy products that an agent seems uninterested to sell, I will go to his office myself.
For the past decades, insurance sales is driven by commission. Commission-driven insurance agents plus financially ignorant or lazy consumers has resulted in Singaporeans overpaying for insurance protection and yet, remain under protected. How can Singaporeans have adequate insurance protection if the salesmen's main priority is to recommend savings or investment-linked products or expensive whole-life plans that cover death and 30 critical illnesses rather than hospitalization which is much likelier to happen? There is nothing evil in their actions because I will do the same thing in their shoes. If I were an insurance agent, I too will focus on selling products that pay me the most commission instead of selling the most appropriate product to the client. Client analysis means selling the highest-paying commission product that he can afford and probably likes, not necesarily the best product for his financial future. Hey, my own financial future comes first before my clients, right? Let us not be hypocritical. We are all like that.
Ravi Mellon(Managing Director, Monetary Authority of Singapore) made a dreaded speech on 26 March 2012 to the Life Insurance Association. Ironically, this much dreaded speech addressed to the financial advisory community is entitled "Putting the Customer First". Why should a speech from a regulator that puts customers first be received with such dismay? This really highlights the serious conflicts of interests between customers and financial advisers.
Some interesting nuggets from this speech that reveals why that insurance agent started off recommending whole-life insurance plans first;
- Take for example a whole life insurance policy. An FA representative could earn a basic commission of 50% of the policy’s annual premium in the first year, and another 40% of the annual premium during the following five years. (Whole-life premiums usually cost around SGD2000 a year)
- His supervisor would in turn earn overriding commissions throughout the first six years. There is typically a third tier comprising the agency managers who also get overrides.
- Total overrides during the first six years can amount to 70% of the policy’s annual premium.
- Together, the total commissions and overrides earned by the representative and his supervisors would be equivalent to about 160% of the policy’s annual premium.
Unfortunately, fee-based financial advice does not come cheap. These advisers charge by the hour and the average fee comes to around $3000 on average, $2000 at least (correct me if I am wrong). If a person has savings of around $10k-$30k, it does not make sense to go for fee-based advice because the fees are too significant as a percentage of the money being managed. This cuts off the lower-income and youngsters who still have not accumulate a meaningful sum of savings. This is still better than the present commission-driven model because no advice is still better than bad advice. Bad advice is unavoidable when there is a serious conflict of interest between advisers and clients.
I think fee-based financial advisory business will evolve to serve mainly the rich because that is the profitable way to go. What does it leave for the rest? When consumers want something but cannot afford or do not want to pay for advice, they will have to educate themselves. Perhaps the best thing to come out of the move towards fee-based financial advice is that more people will become financially literate in insurance matters.
By the way, do not expect members of the financial services community to educate you. They actually have an interest in keeping their clients ignorant. Ignorant customers are the easiest to do a rip off. There are knowledgeable people around who are generous in sharing their knowledge on financial forums. Below are some links that may be useful;