In Singapore, Advisor legally refers to the firm (ie banks, insurance companies etc) and they have individuals known as FARs (Financial Advisor Representative) to represent them. This post attempts to sort FARs between 2 extremes of salesmanship and true blue advisers. Let us not forget that there exist as many as fifty shades of grey (if not more) between the extremes. Hopefully after reading this post, you may have a better understanding of where to place your FAR on the said monochrome gradient.
First understand that in this financial advisory industry, it is a craft. To fully know the difference that separates science and craft within this industry, read more here. And if you are enlightened, you realise that the industry is not diagnostic enough, a problem inherent for a considerable period of time into the future. Bolam and Montgomery Principles do not apply.
As such, the legal requirement is just a reasonable basis for recommendation. This means that it is possible for a whole life plan to be recommended for the financial objective of children’s education funding. The industry can point out what is wrong (proposing only an insurance term plan for children’s education funding) but cannot pinpoint diagnostically what is the right thing to do.
Whilst I firmly believe that morality (as well as ethics) and legality should converge in the long run, they are however, different. So let’s dissect.
- RIGHT (absent otherwise an elusive ideal)
- Not RIGHT
- Not WRONG
- WRONG (Compliance department should and will holler)
To add more shades of grey, there are different approaches to ethics, so here are the few:
- Friedman Doctrine – A firm should maximise its profits without going beyond social expenditures mandated by law.
- Where rules are not explicit or clear, businesses maximise profit for shareholders.
- If shareholders then wish to share proceeds to make social investments, that is their right, but managers of the firm should not make that decision for them.
- Utilitarian Ethics – Maximisation of good, minimisation of bad. Go for greatest good for greatest number of people.
- Use cost benefit analysis, risk assessment.
- Serious drawback are where benefits, cost and risks often cannot be measured/hard to measure.
- Another drawback is when justice, the action that produces greatest good for greatest number of people may result in the unjustified treatment of a minority.
- Kantian Ethics – Duty to the moral law – an action can only be good if the principle behind it is duty to moral law.
- People are not instruments (like in Utilitarian ethics) and therefore to treat humans like cogs in a machine is bad.
- There is no place for moral emotions or sentiments such as sympathy or caring.
- Rights Theories – Recognising human beings having fundamental rights and privileges, which must be “protected”
- Rights establish a minimum level of morally acceptable behaviour.
- Fundamental rights “trump” over a collective good ie stakeholders’ rights to be protected.
- Obligations also fall upon more than one class of moral agent, ie obligation to secure the rights of others.
- Justice Theories – All economic goods and services, should be distributed equally except when an unequal distribution would work to everyone’s advantage. Inequality is justified if the least advantaged is better off.
- Veil of Ignorance – is a method of determining the morality of issues. It asks a decision-maker to make a choice about a social or moral issue, and assumes that they have enough information to know the consequences of their possible decisions for everyone but would not know, or would not take into account, which person he or she is. The theory contends that not knowing one’s ultimate position in society would lead to the creation of a just system, as the decision-maker would not want to make decisions which benefit a certain group at the expense of another, because the decision-maker could theoretically end up in either group. An example of this practice is upon slavery, whereby you would outlaw it because you might end up in the slave group.
Combining all these, consider also the major participants of this industry, the (i) advisor firms, (ii) the representatives of those firms, (iii) the regulator and of course, the (iv) prospects and clients. It does not take much effort to notice that not all participants’ interests are aligned. (We shall return to alignment of interests later)
Consider the simple act of transferring CPFOA to CPFSA; or even at times after thorough analysis, the simple advice of reigning in spending to generate savings first, is the best advice of all. Advisor firms and their representatives are not able to earn anything unless an advisory fee is charged under a recommendation.
Consider the best plan at a given point in time, to be defined as a prospect’s weighted multi-factored preference expressed. The loyalty to firm contractual bind may restrict the representative to just stating,”Dear so and so, based on your situation, this is the best proposal of arrangements within this firm represented.” Which is purely respectable and brutally honest. Every firm will want its own set of sales advisor representatives.
Currently the remuneration structure of the industry is largely commission based. And it does not bring forth the best alignment of interests. The regulator also has to consider the financially challenged parts of the population and agrees that an entirely fees based structure will make financial advisory access prohibitively expensive.
Representatives should be allowed to charge a fee to take a prospect through the FDM process. That is actual work done and if no implementation of any plans take place, the representative is not worse off and really aligns interest better. Current loyalty to firm contractual bind, commission based remuneration and the balance scorecard, sets the situational dilemma analogy that truck drivers faced (or still face). Truck drivers have to adhere to speed limits yet are remunerated based on the number of trips, such conflicting desires you might say. Dead children have been reported, I still remember.
The time is probably ripe to push for more advisory fee based environment for applying the FDM process. This will spur product manufacturers to develop even better and lower distribution cost products from their actuarial births. The financially challenged have better products to Do-It-Yourself online and so do those financially savvy ones who use the FDM for themselves. Those who wish for the FDM work to be done can also pay a fee that is justified to the amount of work efforts required.