Sunday, June 27, 2010

Independent Financial Adviser - Really Independent?

Are Independent Financial Advisers (IFAs) really independent in Singapore? "A financial adviser who claims to be so may not be telling you everything" as reported by Lorna Tan in The Straits Times Saturday, June 26 2010 article - Excuse me, are you an independent adviser?

So, what is so special with the word "independent" before a Financial Adviser? With the word "independent", firms market themselves as champions of the consumers by recommending financial products based on consumers' financial needs and not by pushing or hard-selling financial products because of commissions. Is that really the case?


The next time a Financial Adviser tells you he is Independent or from IFA, you may want to rethink what it really means. As defined in Singapore's Financial Advisers Act (FAA), "only financial advisers who can demonstrate that they do not have financial or commercial links with product providers that could influence their recommendations should use the term "independent". Just like perfect competition in  Economics, is it really possible in the real world? The only way IFAs can be truly independent is IF they have access to all the products in the market and that is not the current situation.


Most financial advisory firms actually do not qualify as independent if the definition from FAA is strictly adhered to. So some firms skirt the issue by only saying so to their customers verbally and being smart enough not to label "independent" even on their stationery for fear of being revoked of their licenses.


The main issue as highlighted in the article? Volume Bonuses - which can be in the millions, given to financial advisory firms as bonuses for hitting quota of sales or renewals of specific products. The even more shocking thing? Volume Bonuses may be paid in advance when financial advisory firms make commitment to the quotas they will be hitting. Failure to hit the targets will result in financial advisory firms having to repay these volume bonuses. 


As the article rightly pointed out, these financial incentives may result in not so independent advice as financial advisory firms may skew their remuneration structures to fulfill their commitment to avoid returning bonuses. What makes these firms' pro-consumers and independence stance even more questionable is that often times, these volume bonuses or commissions are not transparent and are hidden from customers.Which makes it a greater hidden danger.


Instead of basing your judgement and decision when selecting a Financial Adviser on whether they are independent or tied-company's Financial Consultant, judge them on their merits and professional advice.

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