BIG changes are in the offing for insurance and financial advisers as the Financial Advisory Industry Review (Fair) gets underway. But Friends Life managing director (international) John van der Wielen believes the changes will favour good advisers, going by the experiences of the UK and Australia.
“In my experience, very good advisers continue to flourish and probably do better than ever. They end up doing more for less (pay) but they end up with more customers.
“My belief is that if legislation comes in, independent advisers will grow and agency force will shrink, provided the process is very transparent.”
The areas that Fair will examine include competency of financial advisers; the quality and financial resources of FA firms; making financial advice a focused activity; and distribution costs of insurance products. While most of the public concern has centred around the debate on fees versus commissions, there is little indication that MAS would go the way of Australia and the UK to ban commissions. Commissions and the distribution structure of insurance products, however, will be reviewed.
Mr van der Wielen says there is a growing convergence among regulators following the 2008 financial crisis. “Worldwide regulators are conferencing and communicating. Post-crisis, regulation is moving far closer together. Financial services are really going through a revolution, a duplication of what people see as the best legislation.”
Underpinning this is the reality that as populations age, and the burden of providing a post-retirement income falls on individuals themselves, a framework of fair dealing must be in place. “You can read technical differences among legislations because of tax or cultural issues, but in reality they are almost the same – to increase the professionalism of the distributor, to make sure commission disclosure is transparent, to see that products are appropriate for people and that the underlying assets are right for pensions and annuities.
“As a company, that doesn’t frighten us. Ultimately I try to be a community advocate regardless of the pressures put on the company and the changes in the industry – it’s the right thing to do,” said Mr van der Wielen.
Insurance products in the UK and Australia are understood to be exempt from the commission ban to take effect next year – that is, they can continue to be structured to pay commissions to advisers. Fees or commissions: It’s a “big play on words”, he says.
“Commissions, fee for service – it’s the same thing. A lawyer would disagree but I’m a practical person. If I said – here’s the premium you need to pay for life insurance. Would you like to pay me a fee via a cheque or would you want me to deduct the fee from the premium? One is a fee, the other a commission.
“The issue of commissions is that usually providers are not transparent about what they are paid. I have no preference; it’s just that you need to know the charges. Good advisers provide continuing advice because they know that’s where they make their money.”
Friends Life Group is the UK’s fifth largest life and pensions provider, based on UK market capitalisation. In Singapore, Friends Provident products are unit linked insurance plans, typically distributed through FAs.
There is concern that lowering distribution costs would exacerbate Singapore’s under-insurance gap. But Mr van der Wielen says there is no evidence in developed markets that advisers remunerated by commission help fill the gap. “The way to fix under-insurance is government tax incentives, education and making sure that people understand what they should have.”
He says Singapore’s legislation relating to financial product distribution lags those of developed markets. “I see how sophisticated Singapore is in many ways ... but its current distribution legislation does not lead the world. It’s quite far behind. Commissions remain very high; the level of professionalism in independent advice; accessing an independent adviser is a lot more difficult than in other markets.
“The MAS’ intent is to bring financial services up to best practice. While they evaluate what’s happening in Australia and the UK, they’ll end up with the right outcome.”
Meanwhile, Wee Tiong How of IPP Financial Advisers – a veteran with well over 30 years of insurance advisory experience – is concerned that efforts to compress distribution costs of insurance products may not actually benefit policyholders. He said that following a directive in the mid-1990s on agency standards and commissions, insurers’ management, marketing and business costs rose, which negated the benefit to consumers.
He is concerned that further lowering distribution costs – and the earnings of advisers – may result in substantial attrition among advisers who may be unable to earn a living.
In Australia, he says, the number of advisers plunged from 24,000 to 7,000 in the initial years following tighter regulation. This, he maintains, is one of the causes of the under-insurance gap there, as there are fewer advisers who find it financially rewarding to give advice particularly to young savers.
In a paper to the MAS, he wrote that more than 50 per cent of advisers and managers today “are unable to make a reasonable living and income”. “The current commission structure is such that only the most productive and hardworking advisers and managers will be able to make a good living in this profession.”
On potential moves to flatten the distribution structure, Mr Wee said this may compromise the quality of training and support given to representatives.
