I want to write something about how bureaucrats have trapped financial advisers severely and at times to the detriment to their clients. Bureaucrats often imposed a long list of requirements for the sake of compliance. They also impose how advisers are remunerated.

First, the most obvious way which Bureaucrats trap advisers is the fact that advisers rely purely on bureaucrats to pay them the commissions. Advisers’ entire pay checks solely rely on these bureaucrats. Advisers cannot easily go to another company like salaried staff because of the lost of recurring commissions. So how are commission rate determined? The bureaucrats determine it. Different products have different commissions. Who decides which product pays the most and least commission? The Bureaucrats. Does it matter that the adviser spent 100 hours on a case to make the sale? Does it matter that the adviser spent 1 hour on the case to close the sale? Does it matter that the adviser spent 1000 hour on a case for which no product sale was made? It does not matter because bureaucrats have absolutely no concern what really happens between the adviser and the client. The bureaucrats just simply assign a commission rate to each product regardless of what transpire between the adviser and the client. Why is a regular premium ILP has a higher commission rate compared with say a term insurance? Is the latter less important? Bureaucrats are least concern about the concept of importance. They just assign the commission rate to each product in a rather arbitrary fashion and thus trapping advisers.

Second, some bureaucrats try to reward advisers for hitting a sales quota. So the commission goes up if the advisers are able to bring in more sales. But doing that actually further trap the adviser deeper into the hole. Advisers now have to work much harder trying to make the sale because they can get more money if they can sell more. But you think about it, who are really benefiting from it? Two parties benefit from it: Advisers themselves (since they are getting more commission) and also the bureaucrats. But what did the bureaucrats do to get more sales? Nothing. They just set an arbitrary sale quota (by issuing Bureaucrat Circulars) and update their computer system to change the commission rate to a higher value when the advisers’ sale quota is exceeded. On the other hand, the adviser has to work very hard meeting clients at odd hours and weekends in order to exceed the sales quota. Advisers have to provide hard labor while bureaucrats sit in their air-con room emailing Bureaucrat Circulars. If you think about it, advisers are just going deeper into the hole. What about Clients? Do they benefit from it? What Clients? Bureaucrats have never bothered about Clients in the first place because at the end of the day it is the Profit & Loss statements that must look good to the Bureaucrats’ shareholders. Thus, Clients’ interest are detrimented and advisers are further trapped into the Commoditization Trap.

Third. Bureaucrats want advisers to think that they need their products badly. Advisers have been “brainwashed” by Bureaucrats that without these products, advisers are NOTHING. Bureaucrats do this by ensuring that advisers can only be paid by the Bureaucrats and not by clients directly. Bureaucrats spread false information that advisers are not permitted to be paid by clients. Bureaucrats give an impression that getting commission through product sales incurs less liability as compared to fees paid by clients. Bureaucrats tell their advisers that if clients pay fees to advisers, advisers tend to have a greater probability of being suit. Perhaps that’s true in the past when clients are uneducated and not aware of their rights. These days, clients can sue regardless whether the advisers get commission or not. As long as the advice was wrong, advisers are always open to litigation. Bureaucrats want advisers to have a false sense of security that as long as they are receiving commission and not charging a fee, they are OK. But if you look at the massive mis-selling in year 2008, clients join class action suit despite advisers receiving commission. From grapevine, it was rumored that some Bureaucrats “force” their advisers to take sole responsibility for the advice given when complains started coming in. So is it true that advisers receiving commissions have less liability compared to fees? My personal opinion is this: If adviser does a bad job, he will be in trouble regardless. When come to the “heat” of the moment, Bureaucrats are not obligated to shield the advisers from all liabilities. Actually, being paid by clients directly can potentially have a lower risk of litigation. Consider this: An adviser sells a product that cost $X and he receives $Y as commission. What is the difference to the client if the product sells for $(X-Y) and he receives a fee of $Y directly from the client? Economically and numerically there is no difference to the client because the total cost is exactly the same in both scenarios. So why can’t the adviser charge a fee? The reason is this: If the adviser receives $Y from the client as fee, there is no reason why he should sell that product. He could source from another product that cost $(X-Y-J). Economically the client stands to benefit because in the latter case the total cost is lowered by $J. Financially, the adviser continues to be remunerated at the same dollar value but he is now a happier person. He is happier because he is not Trap by the Bureaucrats. In fact, the Bureaucrats become commoditized once advisers charge a fee because they are no longer bound to sell the Bureaucrats’ own products. Bureaucrats are commoditized because they now have to compete based on price. Bureaucrats do not want the adviser to do this. Thus they spread false information about the disadvantages of charging fee. To make things worst, some, Bureaucrats even email Circulars stating that advisers are NOT permitted to charge fee. Advisers faced in such a situation only have two choices: remain to be held hostage or leave the Bureaucrats altogether.

Fourth. Bureaucrats dictate how service fees are paid by clients. “Service fees” are often associated with investment service. Bureaucrats permit wrap fees to be used. Wrap fees are fees paid by client based on an agreed percentage of the asset under management. If you think about it, service fees are paid directly by the client as they are not paid by any product manufacturer. Why clients can pay the investment service fee and yet for other type of products like insurance, they cannot pay such fee? There is no consistency. Bureaucrats just allow this but disallow another without logic. What about other type of service such as yearly insurance review, estate planning, tax review, budgeting review and advising on debt management? Why can’t the client pay such similar fees for these services? Why Bureaucrats say that advisers are not permitted to charge fee for these services and yet Bureaucrats permit Wrap Fees? There is no explanation to this other than the fact that advisers just have to listen to them. If advisers are free to charge a service fee for services actually rendered, advisers no longer have to sell products or even use the Wrap platform to do investment. They can just recommend almost anything under the Sun because clients pay them service fee directly. Again, the Bureaucrats will not permit this because doing so will commoditized the Bureaucrats. Thus, advisers remain trapped by the Bureaucrats.

Fifth, because Bureaucrats will not permit advisers from charging service fee for most services, advisers must continue to sell products. The initial commission is definitely not enough on a long run. So they have to continue selling products to earn a living. As a result, existing clients are neglected. That’s why clients complain about their advisers not servicing them or ignoring them after the sale is made. Bureaucrats want the advisers to continue selling their products but stop these same advisers from charging any service fee to their existing clients. If advisers can charge an on-going servicing fee, many advisers will stop selling products for the Bureaucrats. Bureaucrats will thus suffer and they have to slash down their product prices in order to attract new customers and hence becoming commoditized. But the Bureaucrats will not permit that to happen. And so Bureaucrats spread all sort of falsehood about charging servicing fee. Therefore, clients are often ignored after the sale is made and there will be no on-going service because their advisers are trapped looking for new customers to sell these products constantly.

Sixth. Bureaucrats have their own Bureaucrats to deal with. The ultimate Bureaucrat is the Regulator. In order to protect themselves from Regulator’ wrath, Bureaucrats impose on advisers to fill up tons of forms. Some of these forms run into 30 or more pages regardless of the product actually sold. Advisers who want to get their commission must fill up these forms and thus being trapped further deeper into the well. But what the Bureaucrats will not tell their advisers is that if an adviser can fill up more than 30 pages of forms, these advisers could well be really to charge fees because Comprehensive Financial Planning require advisers to deliver a near 30 page document. But the Bureaucrats spread falsehood that the advisers are not competent to charge fee. This falsehood is a self-fulfilling prophecy. As long advisers are stuck selling products, they cannot improve their competency in other non-product based services such as estate planning, investment portfolio management, tax reduction, mortgage advice, insurance claims, etc. As the saying goes – practice makes perfect. So if the adviser does not have the chance to practice, he is indeed not competent to charge fees. Thus, the Bureaucrats continue to have a stronghold on these advisers. As far as clients of these trapped advisers are concerned, these clients have no access to competent advisers.

I’ve written more than 1600 words at this point. At the end of the day, what does this long essay has to do with the man-in-the-street? It implies that the man-in-the-street must NOT engage financial advisers who are trapped by their Bureaucrats. Their Bureaucrats have no concerned over the welfare of these man-in-the-street. Financial advisers trapped by the Bureaucrats have no choice but to provide poor after-sales service and lousy advice due to the above SIX reasons.

For existing financial advisers still trapped by their Bureaucrats, here is my advice:

1. Negotiate with your Bureaucrat your desire to escape from control. For many organization, it is impossible for you to talk to the relevant Bureaucrat because they sit in some ivory somewhere which you have no access. Thus, you may have to leave this Bureaucracy altogether.

2. Upon leaving the Bureaucrat, you have to find another Bureaucrat who is more friendly and compassionate. Find a Bureaucrat that permits you to run your own Bureau (i.e. your own business) in which you gets to own your own clients. The terminology for this is “absolute vesting.”

3. At the same time, improve your competency by attending professional financial planning courses such as the CFP or ChFC or similar. If you already have this title long ago, you will still need to have a refresher course because having done product sales for so long, likely you’ve forgotten many important things about financial planning.

4. Finally, you’ll need to come together with other like-minded people to learn how to put clients’ interest first without being trapped by Bureaucrats and Commoditization.

On the last point, there appears to be no organization or association to cater for this. Perhaps, it is time someone setup one for those wishing to escape from Bureaucrats’ control.

Finally, do take note of this: There can only be two scenarios. Either the Bureaucrats control the financial advisers (thus making these financial advisers becoming commoditized) OR Financial advisers escape from their control (thus making these bureaucrats becoming a commodity). There is no in-between.