Friday 29 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly on June 10, 2019 - June 16, 2019

Financial planning services are playing an increasingly prominent role in helping individuals achieve their life goals. This is reflected in the growing number of financial planners and financial planning firms over the past decade.

Financial planning has become an important practice among individuals as the country continues to develop and its economy grows. As the income of the population rises, the need to manage their money well becomes stronger, says Bryan Zeng, general manager of FA Advisory Sdn Bhd.

“The awareness [of the need] for financial planning is an important thing that developed countries focus on. The financial well-being of an individual impacts his or her family. It also has a broader effect on the nation’s economic growth and productivity. A country is only as good as its people,” he says.

A growing financial planning industry benefits consumers as it provides better services and increases accessibility to financial advice. The Securities Commission Malaysia’s (SC) annual report shows that the number of financial planning firms grew from 39 in 2014 to 43 in 2018 while the number of financial planners rose from 500 five years ago to 833 last year.

“The growth in the number of financial planners was especially encouraging last year. There was a 17% increase [from 711 to 833], which is the highest in the past five years,” says Linnet Lee, CEO of Financial Planning Association of Malaysia (FPAM).

She says the growth in the number of licensed financial planners can be attributed to two initiatives, one of which is the Malaysian Financial Planner of the Year Awards (MFPYA) launched by FPAM in 2015. The organiser invites local and foreign judges to select the best financial planner in town based on the financial plans submitted.

The other initiative is the launch of smartfinance.com, an educational website that also allows the public to make an appointment with a financial planner. “It has received 370,000 visitors since July last year. A lot of people have visited our website and viewed the educational videos that we sourced from independent parties such as the regulators and government retirement fund,” says Lee.

While these are positive signs, the financial planning industry is very small compared with the insurance and unit trust industries. “There are about 20,000 unit trust agents and 50,000 insurance agents in the country. So, you can see that the financial planning industry is still quite small [at 833],” says Lee.

If one takes this a step further and defines financial planning as the capability to provide clients with holistic solutions (including estate planning, retirement planning, investment management, tax planning and insurance) and cater for their financial needs, the industry is even smaller, says Yap Ming Hui, managing director of Whitman Independent Advisors Sdn Bhd.

He points out that not many financial planners provide their clients with holistic solutions. Instead, most of them continue to sell products or offer segmental solutions.

Segmental financial planning, according to Yap, only looks at a person’s specific financial needs, such as retirement or children’s tertiary education, before making product recommendations whereas in holistic financial planning, one would look at the financial needs of an individual throughout his life cycle. “Of the 833 financial planners, perhaps only 10% to 20% of them provide holistic services,” he says.

In terms of revenue and profit, financial planning firms in general would have grown in the last five years, says Zeng. “I will not be surprised that the more established firms are experiencing double-digit growth as they have come from a low base. You could see more new firms being established in the market in the past three years. This can only mean there is demand in the market.”

 

Reasons for slow growth

Several factors have contributed to the slow growth of the industry. A key reason is that there are not enough people willing to invest in and set up financial planning firms. Also, there are not enough insurance or unit trust agents willing to transition into being financial planners.

Yap says it is more challenging for a person to set up a financial planning firm compared with an insurance or unit trust agency. According to some players, the rate of return provided by financial planning services does not justify the amount of time and effort spent on setting up a firm.

“It is not easy to hire and train a meaningful number of financial planners. The firm’s owner would need to implement processes that ensure the services provided clients by his planners are of a certain standard. The planners would need to be able to gather facts from clients, analyse these and provide the clients with holistic solutions,” says Yap.

“It is comparatively easier to hire [insurance or unit trust] agents and train them to select and sell products. People tend to take the easier way out.”

Also, the industry would develop further if owners of financial planning firms are willing to make a significant investment in the growth of their businesses, he says. “Let’s use the insurance industry as an example. There were very few people who knew what insurance was in the early days. Some of those who bought policies could not get a claim from the insurance company when something untoward happened as fraud cases were more common back then and regulations were less than perfect. However, those foreign insurers with huge war chests continued to invest and the market grew slowly and steadily.

“By comparison, the financial planning industry is small and players hesitate to invest more to grow their businesses and industry. Some do not invest anything at all. That is why consumer awareness continues to be very low.”

Yap says not enough insurance or unit trust agents are transitioning into financial planning due to a knowledge barrier. A person with a bachelor’s degree would need to pass the Registered Financial Planner (RFP) or Certified Financial Planner (CFP) examination to qualify as a financial planner. “It can be quite challenging to pass the exam, even for a degree holder,” he adds.

The RFP is issued by the Malaysian Financial Planning Council while the CFP is issued by FPAM. The key difference between the two qualifications is that the CFP is recognised internationally.

 

Ways to advance the industry

There are several ways to give the financial planning industry a substantial boost, say players. For one, the government could provide a tax relief for those who use financial planning services.

“This is one thing I would like to see happen. The government has given a tax relief for contributions made to the Private Retirement Schemes and the Employees Provident Fund. So, why not for financial planning?” says Lee.

Yap concurs. “This could be a quick solution. For instance, tax relief could be provided for 50% of the amount of money paid for financial planning services. [This way,] the public would definitely want to know more about financial planning.”

Regulatory measures would be another way to grow the industry within a shorter time frame. For instance, some industry players suggest that Bank Negara Malaysia allow insurance companies to set up financial planning firms. The market would be able to grow much faster if huge investments are poured into the market to drive change in consumer awareness and behaviour.

Financial planners have mixed views on the proposal. However, Lee and Yap are positive on such a regulatory change as it would give the industry a much-needed boost. While there are concerns that such a move would be at the expense of independent financial advice given to consumers, they do not agree.

Lee says insurance companies and other financial institutions should be allowed to provide financial planning services as long as their planners make full disclosure. “For instance, a financial planner tied to a financial institution comes out with a plan for his or her client. Then, the planner tells the client, ‘I am with this company and I am more likely to recommend the products of this company. Are you fine with it? If not, you can approach another firm.’ In short, the financial planner does not hide anything from the client.”

Yap agrees. “Consumers will find ways to engage an independent financial planning firm if they want independent advice,” he says.

However, FA Advisory’s Zeng is more cautious. “There would be both upsides and downsides if such a regulatory change were made. Consumers should be aware of whether the advice they receive is independent or not,” he says.

Zeng proposes that the RFP and CFP examinations be simplified and the minimum period to pass these exams be shortened. “While theoretical knowledge obtained through textbooks and exams should not be neglected, the practical knowledge that you learn on the job is more important. A shorter examination period would help in letting more people join the industry. I know such a view could be controversial and others may not agree with it,” he says.

Robert Foo, principal consultant of MyFP Services Sdn Bhd, says the regulator should come out with guidelines to let financial planners be remunerated by their clients instead of commissions. “This is important to ensure that the financial planning industry always takes care of the clients’ interests and grows sustainably.”

 

Fee-based, commission or hybrid?

The growth of the financial planning industry should not be judged based on just the number of firms or financial planners. Rather, it should be based on the type of remuneration and advice given, says Robert Foo, principal consultant of MyFP Services Sdn Bhd.

According to him, in addition to providing holistic services, the financial planning industry should be fully independent when it comes to providing advice and product recommendations. A financial planning firm should only be rewarded for the value it creates for its clients.

“It should not be remunerated with commissions from third parties by selling or recommending their products to clients,” says Foo.

It is only by doing this that the interests of the financial planners are fully aligned with those of their clients, he adds.

Foo says because there is a lack of firms offering a fee-based model, the financial planning industry may have grown only a little, or not at all, in recent years. “The majority of the financial planning firms, or all except us, are still remunerated by commissions.

“Even worse, some unit trust and insurance agents promote themselves as financial planners to sell products to clients. This has created confusion in the market and consumers cannot differentiate between financial planning and product selling,” he says.

Financial planning firms in the country typically adopt one of three broad-based remuneration models — commission-based, fee-based or a hybrid of both.

Yap Ming Hui, managing director of Whitman Independent Advisors Sdn Bhd, and Bryan Zeng, general manager of FA Advisory Sdn Bhd, agree with Foo that services provided by financial planners should be independent and holistic. However, the reason fee-based financial planning services (where financial planners are remunerated solely for the value they create for their clients) have not taken off in the past two decades is due to a lack of demand from consumers.

Yap points out that those who accept the fee-based approach are usually high-net-worth clients and not those from the middle or upper-middle class. “If the fee-based model worked, Whitman would have grown into a much bigger entity than it is today,” he says.

Consumers do not widely accept the fee-based approach because they are used to the commission-based model and do not understand the full benefits of financial planning, says Yap. “They have a more transactional mindset and are not willing to pay for a holistic financial plan. They may come to you and want you to look at a certain section of their financial needs (such as their retirement or children’s tertiary education) and opt to remunerate you through a commission. They would need to experience the financial planning process to really appreciate it and pay a fee for it.”

So, what Yap is doing now is providing free simplified financial planning solutions to consumers through his firm’s apprentices, who will guide them through the financial planning process and provide them with advice to help them achieve their financial goals. The apprentices earn a commission by recommending products to clients based on the financial plans.

“Yes, it is still commission-based. But the financial planning process is being applied to the clients. This will allow them to understand how financial planning is different from product selling,” says Yap.

“Then, if they want a more in-depth analysis on their financial status and opt to pay a fee, instead of a commission, we can provide them with such a package too. I believe that once consumers see the benefits of financial planning, they will not go back to engaging the services of those who merely compare and sell products.”

Zeng says most of the existing financial planning firms earn their income through commissions while a smaller number of them have adopted a hybrid model, which means charging clients a fee for providing them with a financial plan and also receiving commissions through product recommendations.

The amount of commissions received by a financial planner or insurance agent is the same. However, the sales charge of a unit trust fund could be lower when one buys through a financial planner compared with agents who are linked to big fund houses.  

According to an industry player who wishes to be anonymous, a financial planner usually does not charge more than 3% when recommending a unit trust fund while agents linked to large fund houses could impose a sales charge of up to 6%.

Zeng says there is a lack of demand for a fee-based-only approach as consumer awareness of financial planning is not as high as in the more developed markets. “Consumers here are more transactional in nature, which means they go to financial planners and want only, say, a review of their life insurance product and insurance coverage. They are not willing to pay a fee for a thorough review of their financial status.

“However, I believe the potential demand for the fee-based approach is there. People will accept it once they experience it and understand how they can benefit from it.”

Financial planning firms have to be more aggressive in engaging and educating consumers for the fee-based approach to gain traction, he says.

Going forward, Zeng believes that the three models — the commission-based, fee-based and hybrid — will co-exist in the market and that the market size will grow in tandem. “The market is still small, but the potential is big. There is enough room for growth to cater for firms that adopt any of the three models,” he says.

 

Financial planner versus financial adviser

People tend to use the terms “financial planner” and “financial adviser” interchangeably as they could mean the same thing — a professional who provides clients with financial planning solutions. However, from a technical point of view, the terms do not mean the same thing.

To become a financial planner, a person has to complete four modules and an examination to receive the Registered Financial Planner (RFP) or Certified Financial Planner (CFP) certification. Then, he would need to be hired by a financial planning firm that will help him apply for a Capital Markets Services Representative’s Licence (CMSRL) from the Securities Commission Malaysia. Upon obtaining the CMSRL, a financial planner can begin charging a fee for his services.   

Financial planners can also earn commissions by selling products, such as insurance plans or unit trust funds, based on the solutions they come up with for their clients. However, they will need to apply for two more licences, one from Bank Negara Malaysia and the other from the Federation of Investment Managers Malaysia, through the firms they are working with.   

Meanwhile, financial advisers are governed by Bank Negara. Approved financial advisers can only analyse the insurance needs of their clients and make product recommendations. They can sell a range of products offered by various insurers, compared with insurance agents who can only sell the products of one or two insurance companies.

A person needs to pass at least three modules and the exam for the RFP or CFP certification and join a financial advisory firm to apply to be an approved financial adviser.   

So, unlike financial planners, financial advisers are not allowed to charge clients a fee for providing financial planning solutions or selling unit trust funds.

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