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Monday, July 09, 2007

Independent Financial Advisers Or Other FA

I am writing this post to show my perception of Independent Financial Advisers (IFA) and representives of tied Financial Advisers (FA).

Independent FAs are able to advise consumers on a wide range of investment products from various product providers. Only FAs who can clearly show that they do not have financial or commercial links with product providers that may influence their recommendations to consumers can use the term "independent". He should have no direct or indirect commercial arrangements with product providers that will create product bias and should operate freely from any form of product restriction. A IFA provides service like Cash Flow and Budgeting, Income Replacement Planning, Children’s Tertiary Education Planning, Home Loan and Debt Financing, Retirement Planning, Savings and Investment Planning, Tax Planning, Estate Analysis and Planning, and Corporate Risk Management. Financial consultants from exempt FAs such as banks and insurance companies are barred from using this term as they contravene at least one of these key considerations. Representatives of tied FAs, on the other hand, can only recommend products of selected product providers that the FAs are tied to.

Since there's no sales quota to meet set by product providers, IFA is possible to represent the interests of client's first instead of product provider's. Instead, they may have more bargaining power with product providers since they are not tied to them and can move to another product should they are less competitive. With the IFA in place to research and compare products from various product providers, product providers must constantly innovate to create better products. IFAs can pick the best combination of products from different companies to create best value for their clients, with different companies having different strengths in different areas.

So ask yourself this question - "Who has a wider range of products?". If you were to buy fried kway teow, would it be better to limit yourself to Ang Mo Kio area or would it have been better if you have the whole Singapore's eateries to choose from? I bet the answer is clear and obvious.

As IFA are independently owned, their marketing budget is smaller. In order to survive long term, they will need to provide quality service and advice. They grow through word-of-mouth effect. Part of the positive client experience is attributable to client education. Meaning to say, IFA actually educate clients on how what is financial planning. Follow-up services like periodic portfolio reviews (often 6 months interval), with rebalancing of investment portfolio and investment objectives, also goes a long way in building client's confidence.

IFAs renumeration structure comes in various models. There is the traditional transaction-based pure commission model where the IFA earns a cut from the upfront fee or sales charge from the products sold, or the fee-only model where all commissions from product providers are rebated to the client and the IFA only collects a fixed fee. There is also a mixture of fees and commission, or the "wrap account" model. The "wrap account" model is seen to align the interests of both the IFA and the clients by tying the IFA's renumeration to the client investment portfolio's performance. This wrap account method encompasses an annual recurring fee for managing the client's portfolio. The annual wrap fees are calculated as a percentage of the total value of the investment portfolio. Therefore, if the client's investment portfolio value increases, so will the IFA's remuneration. This model also provides "free switching" where client can switch funds without incurring any transaction cost. This helps to promote active rebalancing. For your information, there will be a switching fee incurred if you switch from one fund to the other through other FA. Thus, such a structure ensures that the client's long term interests are well taken care of by the IFA as the IFA will be rewarded for growing the client's investment portfolio value.

Needless to say, not all companies are strong in all areas and not all companies will offer all the services. For example, only 5 companies namely AIA, Prudential, Great Eastern (GE), Aviva, and NTUC Income provide Health Shield plans. Other companies like AsiaLife, HSBC Insurance, etc. do not provide Health Shield plans. Let's say if there's a product in AsiaLife or HSBC is good, would it be better if you buy from a AsiaLife or HSBC agent or a IFA? If you were to buy from a IFA, then the same IFA will be able to service you Health Shield plans since he is also qualified to sell them. In other words, you will only have 1 point of contact. There's no need to engage different agents to buy from different companies.

The trend of IFA in Singapore is obvious and is currently moving in the direction of UK and US. For your information, even a substantial portion of Prudential (UK-based company) plans sold in UK are actually by IFA. Who knows one day Singapore will be like UK and US.

I definitely want someone who will be able to do long term financial planning and not someone who come and leave after a deal is closed. IFA or other FA? You decide.

Disclaimer: I agree on the above statements and this does not mean you will have to agree with me.

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