To all financial advisors

There are generally 3 types of financial advisors.
1) solely commission based
2) solely fee based
3) A hybrid of the 2

Let me tell you the problem with the first one...

I had 2 friends over the course of the last month voice out their dissatisfaction at the pushy tactics that were metted out to them by soely commission based financial advisors. I have a theory about financial planning and I would like to share it with everyone. Please note that these are purely my own personal views.

I would first ask a person,"How much do you think your qualification can get you right now if you head out to get a job in the market?"

Let's take a case study of a degree holder, Mr Joe. Hypothetically, he can easily get a job that pays him about $40,000 per annum based on his qualification. It would be prudent to cover him about 5 times of his annual salary. That works out to be $200,000 worth of coverage. I would recommend a traditional basic whole life policy that participates in the bonuses of the insurance company. ie, the policy will accrue value over time. In the long run, the surrender value will accrue to a substantial amount.

1st product to buy: 1 traditional life policy with $200,000 sum assured.

Next I'll tag some critical illness rider to it. This is essential as in modern times, dread disease is an issue. Especially the cost after diagnosis.

2nd product to buy: A rider to cover critical illness

Likely scenario: 5 years down the road and this person's income has increases to $100,000 per annum due to his numerous promotions and his venture up the corporate ladder. His typical insurance agent will call him and say,"Hey Mr. Joe. Congratulations on all the promotion! Wah! Your pay very high! Time to top up your insurance coverage. Why don't you buy another life policy or endowment to complement your current $200,000 sum assured life policy? You should cover yourself 5 times your annual salary. Which means you are $300,000 short in coverage! Let me sell you a $300,000 whole life policy!"

Blur as a sotong and being just an average Joe, Joe buys the policy from his agent. He trusts the agent and as he is not well versed in insurance products, he leaves it to the insurance agent. He is now covered with a sum assured of $500,000.

Another 2 years down the road and the recession strikes! Joe loses his job. He has to find a new one! He takes a huge pay cut and accepts a $30,000 per annum job. He realises that the premium he is paying is too high and he cannot afford to service the premium. He calls his insurance agent and asks him for a solution. The insurance agent replies,"No choice! Whole life means must pay all the way! Anyway I have left the industry. Bye bye!"

He lapses the policy and loses all the premiums that he has surviced. Feeling distraught with insurance, he decides to cancel his initial firsst policy as well. 10 years down the road he is diagnosed with lung cancer and he dies after a year battling the disease. His family is left with nothing but a large debt from his medical payments.

Let me tell everyone this: The scenario I've just painted out is a very real one. It has happened and will happen again. Why did the agent sell him a 2nd life policy? Because the commission is very very HIGH. Most sales agents are commission driven. They will sell products that yield higher commission.

The solution for Joe? He should have taken a term policy. If he has a shortfall of $300,000 in coverage after his promotion, he should get a renewable term policy. This is because term is 1) Cheap 2) He has the option to renew or stop the policy after every year. 3) You are paying exactly for what mortality charges that you need for your age. If he loses his job, he can just stop the term policy and revert to his basic coverage. Why is no one recommending the term policy to Joe? Because it pays much lower commission!!!

This is very myopic on many fronts.
1) Client may have cash flow issues in future if the agent pushes expensive products to him
2) Long term relationship is more important. The client may look to invest in future, be it CPF or cash. He may refer friends and family to the agent.

In an insurance company that I worked for...
I was instructed to push saving plans. Not to push financial plans.
I was asked to look at short term profits. Not to look at clients' long term goals.
I was asked to think about the car of my dreams. Not about making sure that my clients do not have nightmares.

Is this what is to become of our financial planning industry?

My advice to the paying client: Ask your agent clearly about what he is recommending to you and paint as bleak a picture to him to try to solve it. Make sure everything is documented down in the fact finding process and please hunt around and have an idea of why you are buying certain products. Your agent is REQUIRED by The Financial Advisers Act to disclose his commission to you.

My advice to agents: If we take care of clients' long term interests, they will take care of our long term income. Short term business only yields short term profit.