This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 25 - 31, 2016.
Commissions or fees? The debate on how financial planners should be rewarded has raged for some time now in the financial planning advisory services industry. The shift towards fees is already taking place across the globe, but the transition has been rather slow in Malaysia.
A key reason for this slow pace is resistance as many financial planners/advisers find commissions more rewarding because their earnings are based mainly on the number of products sold to customers, say market observers. The regulators, however, are pushing for a fee-based reward structure as it will result in better advisory services to consumers.
With the commission-based structure, it has been found that financial planners often push products not because they are good for the customer, but because of the commissions they bring. And in most cases, financial services representatives tend to be attached to a particular financial service provider. Hence, the question: Are they acting in the interest of their clients or is their advice self-serving?
But market players believe that going forward, fees will be the norm rather than the exception. As the transition takes place, there will be implications for all the stakeholders — consumers, financial service representatives (financial planners/advisers) and the financial institutions that offer the products.
For the shift to quicken pace, consumers themselves must make the choice to pay fees. Yap Ming Hui, managing director of Whitman Independent Advisors Sdn Bhd, believes that consumers will be willing to pay fees if financial planners can provide them with a holistic way to grow their wealth. And even more so in today’s environment, where the high cost of living demands that savings and any extra money are invested wisely.
“[Currently], the majority of financial service representatives are just selling products rather than trying to address the concerns of the middle class. Because there is a lack of professionals, it is important for us to educate financial services professionals in the way they dispense advice, so that they are equipped to handle the needs of their customers,” he explains (see accompanying story on Nurturing fee-for-service professionals).
Whitman Independent Advisors is one of the few that have moved towards fee-based advisory services. Yap says it offers clients two options — fees-only or fees-based.
“The first option is to pay us fees only, which is RM5,400, where the commissions earned from the products sold will be rebated. Agents or advisers who are tied to an insurance agency or unit trust company are not allowed to rebate commissions.
“But as we are a financial planner with a Capital Markets Services Representative’s Licence, issued by the Securities Commission Malaysia, we are exempted. The second option is to pay us a fee of RM1,800 and the commissions from the products sold will not be rebated.”
Yap believes that the fees are justified because Whitman’s financial planners have to conduct time consuming in-depth research before they can design a holistic plan for their clients and recommend financial products that are best suited for them. “If we do not charge our clients and they decide not to implement our plan or products recommended, our time, cost incurred and efforts will be wasted,” he says.
“Currently, it is not compulsory to pay financial planners a fee for their services and there are financial planners in Malaysia who do not charge a fee. However, as most local financial planners are commission-earners tied to financial institutions, their advice is questionable as they may not have invested the time that we at Whitman have and they are definitely not impartial.”
Malaysians are penny-wise — they will only spend if they believe the value of an item or service exceeds the price, he notes.
Financial Planning Association of Malaysia (FPAM) CEO Linnet Lee says, “Currently, financial planners have the option of being paid in fees, commissions or a combination of both. What is important is the disclosure to their consumers, which should be reflected in the letter of engagement if the consumer decides to use their services.”
The need to move from commissions to fees
Chung Kar Yin, executive director of the Malaysian Financial Planning Council, and Lee advocate the move towards fee-based advisory services not only because it is beneficial for consumers but also because the product-driven approach will not raise the competency standards of financial service providers.
“To be a financial planner or adviser, they need to be competent as financial planning covers many areas. The move will be the hardest on insurance agents and unit trust consultants who would like to transform into financial planners and advisers. As they are proficient only in specific areas, the challenge for them is to acquire more financial planning knowledge if they want to be effective,” says Chung.
“For the last 50 years, the financial planning services industry has been a tied structure [meaning a financial planner can only sell products from one financial institution]. Hence, to ‘un-tie’ oneself and relearn … it will be difficult.”
Chung says the move to fees will take a while and will likely be painful because Malaysians are not as financially literate as those in developed countries. “I talked to my peers in other countries and they told me the transition is a painful process because you have to take two or three steps back [to re-educate consumers and financial planners] before moving forward. Hence, re-education is very important to both consumers and financial planners during this transition period. It will be less painful if these steps are taken.”
Lee says, “Our financial planning services industry is about 30 years behind Australia. Compared with the US, we are about 50 years behind. But that does not mean we are going to take 50 years to transform. Our industry can learn from the mistakes made by these countries, which are far more advanced than us.
“It is only recently that Australia banned commission-based planning and advisory services. Because of the need to amend regulations, the transition was only completed last year.”
Impact of the shift
The main benefit of having fee-based advisory services is that consumers can expect quality and unbiased advice from their financial planners and advisers.
“When [financial planners and advisers] are commission-based, they will not be neutral. At the end of the day, they will think about their pockets first, rather than the client,” says Lee.
Chung agrees. “The tendency is to be biased towards the suppliers who pay you the commission. But when it is fee-based, the interests of the consumer come first.”
Yap says as the local financial planning services industry moves towards fees, commission-paid practitioners must make the transition as soon as possible to avoid future regulatory issues. “[If they do not move towards fees], the regulators will catch up with them. For example, the regulators in the UK, Australia and India have banned commissions. So when our government decides to do the same, it will become difficult.
“Technology will also have a big impact on commission-based financial planners. There are a few online platforms that offer not only general but also life insurance products, with a discount. So, will you buy online or from an agent?
“When this happens, the commission earners will lose. So, it is not whether commission-based financial services will die, it is only a matter of time before they die.”
However, all is not doom and gloom, says Chung. “My opinion is that financial planners are capable of providing good financial advisory services to their clients. It is just that in the current environment, clients/consumers are not familiar with the fee-based model. When fee-based services become the norm, financial planners should have no difficulty charging advisory fees.”
Lee observes, “When more clients opt to pay fees, the financial planner or adviser will need to adopt a schedule of fees and the services provided. The focus, then, will be on the quality of the service and advice, rather than the quantum of financial products purchased. [However], financial planners who are unable to change may decide to either leave the profession, retire or seek another career opportunity.”
Impact on product providers
The shift towards fees will also mean a change in the way financial product providers operate. Chung says the key will be flexibility in their business strategy.
“We are in a free market and it is competitive. For product manufacturers to penetrate the market and get more financial planners to market their products, they must produce good or value-for-money products. This may incur costs in terms of more effective operations and management, enhanced IT management, and R&D into products and customer needs,” she adds.
Lee says fee-based advisory services will also lead to more competitive pricing. “Some banks have started to do away with commissions for their wealth managers. Instead, the feedback from clients on the quality of their services will determine their key performance indicators (KPIs). Hence, the way the KPIs are designed will be important.”
Nurturing fee-for-service professionals
In view of the transition towards fee-based financial advisory services, Whitman Independent Advisors Sdn Bhd has launched its Fee-For-Service Financial Advisory Mentoring Programme.
“By having this programme, we can help address all the issues financial planners are facing. We want to change their mindset because once they see that it can be done, they will be more open. Seeing is believing,” says managing director Yap Ming Hui.
Training, he says, is conducted in the workplace. This allows the participants to gain practical, real-world experience. “With Whitman taking the lead, we hope other financial advisory firms will follow suit and work with the Financial Planning Association of Malaysia to offer more mentoring programmes. Only then, will the industry really take off.”
To complement its mentoring programme, Whitman will run a Money Optimisation Summit in the near future. “We have been talking about a money optimisation system (MOS) for some months in the media. But I find that the majority of practitioners or industry players still do not know what it is. We want to showcase our proprietary methodology for MOS at the conference so that it will open the minds of the naysayers and those who still have doubts [about our methodology],” says Yap.
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.