Commissions continue to go down as the industry rapidly undergoes changes.  Unless the present remuneration model is changed, many financial advisers will leave the industry eventually. Why do I say that?

When the Ministry of Health introduced a radical system of improving the national’s hospitalization and surgical (H&S) insurance, it was a start of declining commissions. MOH innovatively introduce a way in which CPF members can improve their H&S coverage without fear of exclusions. The idea is that all CPF members are covered by the basic medishield administered by CPF Board. Those who desire more coverage can buy “enhancements” from private-insurers. These “enhancements” sit on top of the basic medishield. In this way, those who were covered by medishield continues to enjoy coverage at the basic tier level even if they have pre-existing illnesses excluded at the “enhanced” level from the private insurers. It was an exciting idea for everybody but perhaps not so for commission based financial advisers. The commission for these “enhancements” is pathetic. Depending on the age of the life assured, it can sometime be a joke. Under certain situation there is no commission at all. For example, civil servants enjoy a discount of their shield plan for the first year. However, I know of two insurers that will not give commission (perpetually) to the financial advisers  because it is to be a “direct” business. Yeah, financial advisers who advice their clients working as civil servants to consider these good products will not get anything. In the past, those who desired greater coverage for H&S will get those that are unrelated to the medishield scheme. These days, everybody who desires better H&S coverage will go for the shield products.

From September onwards, the Eldershield program will also be improved. Again those who desire better coverage can get “riders” from the private-insurers. The idea will be the same as the medishield program in which the “enhancements” sits on top of the basic national insurance program. I don’t know the details but I got a very strong feeling that the commissions are again going to be pathetic or even none at all. Since the PM Lee’s announcement of the government desire for  a compulsory annuity program for all CPF members, I got a very strong feeling as well that those who desired more monthly payout can purchase “riders” with again pathetic or zero commission.

To be very sure, the declining commissions are not restricted to just insurances. Investment advisers (like myself) find the remuneration for investment to be extremely low. A unit trusts investment that commands say 3% upfront fee translate to $600 of sales if the gross investment is $20,000. Obviously the adviser isn’t going to get the entire $600 but say the commission rate is 50%, then that only translate to $300 to the adviser. If the adviser aims to have $4000 of monthly salary, he must find 14 new customers every month or 3.5 new customers every week or one customer every other day. Maybe he can do that by standing at the entrance of the MRT station everyday OR alternatively he has to churn existing customers’ investment frequently in order to generate this amount of sales.

Stock brokers are also having a hard time as brokerage charge can be as low as 0.3% for large investment transaction. I have a client who is involved in futures trading and she struggles with her occupation. She has to get new customers very frequently to open accounts. She will get a cut if these clients trade online. But the take home pay is pathetic.

CPF has put a cap in the sales charge of the unit trusts and with the first $60,000 of the CPF monies non-investable eventually, there is going to be impact on investment sales in the industry. This of course means less in volume and less in take home pay.

I personally think that the industry must move away from commission based to something radically different in remuneration. I am not referring to the traditional fee-based renumeration. Rather I suggest another way which is the retainer fee concept. A retainer fee is a regular fee paid to the adviser who manages the portfolio. In the investment realm, this is commonly referred to as “annual advisory fee” or “wrap fee”. This fee is charge as a percentage of the investment portfolio under advice. But I would like to see such retainer fee extended to other financial products such as insurance. Since many insurances these days pay little or no commissions from the product providers, a retainer fee solves this problem by having the FA firm charge a fee to the client directly. In this fashion, the client’s insurance policies become like a “portfolio” which the advisers manages. The portfolio can be potentially complicated because it will include the entire family’s protection needs. The more complex the portfolio, the higher the retainer fee. The retainer fee will also help to reduce the problem of churning in this industry in which clients are asked to terminate and buy new insurance products because the only way which commissions will be paid is when the client purchases new products. In fact, with the retainer fee, the adviser has vested interest in ensuring that the client keeps his policies as long as possible.

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