The financial advisory scene in Singapore is not as simple as it seems. The most common differentiating point for consumers when choosing a financial advisor (FA) is to decide whether to engage a tied advisor or an independent financial advisor.
However, there’s another level of thought that you should put into when deciding to engage a financial advisor – how they’re being paid.
There are currently 3 main ways FAs are paid in Singapore – commission-based, fee-only, and fee-based.
In this article, we talk about the pros and cons of each type of financial advisor, and how you can decide on which type is suited for you.
Types of Fees
Before we begin diving into the differences between these financial advisors, you first need to have an understanding of the types of fees you can be expecting between them.
There are usually 2 types of fees – consultation fees and investment fees. Consultation fees are well… you guessed it, consultations. These fees cover, and are not limited to, the professional’s time, costs, and expertise. Most of the time, these fees are a one-time fee upfront.
The next type of fees are investment-related fees. If you were to get a financial advisor to invest for you using an investment platform, they will be charging you a percentage of your total investments. There are usually 2 layers to this.
The first layer is the sales charge. The sales charge will be imposed every time you place an investment, be it monthly or a lump sum. This covers the time and effort needed to take your investments and purchase the relevant funds based on your portfolio. You can expect a sales charge between 0.75% – 1.5%.
The second layer is the performance fee. This fee is usually called “Asset Under Management” (AUM). As your money grows, the financial advisor will take a performance fee for helping you grow your wealth. This fee usually ranges between 1% – 1.5% per annum for your total assets under the advisor’s management.
On top of fees, the other ways of remuneration are commissions. Commissions are from financial products that you purchase. Such products are health insurance plans, life insurance policies and even investment-linked policies.
Depending on the financial plans purchased, commissions range anywhere up to 50% of the first year premium.
It is also important to note that a financial advisor can earn from either 1 or more of the above remuneration methods.
Now that you understand the different ways FAs are paid, let’s move on to the pros and cons of the various types of financial planners.
Commission-Based Financial Advisors
These FAs are the most common type that you will find in Singapore. They mainly earn commission through the products they sell.
Basically, the more they sell, the more they earn. These FAs usually earn little to no salary and have both consumers and firms as their clients.
Advantages of Commission-Based Financial Advisors
There is no upfront fee you need to pay as a client. If you’re looking for the most cost-efficient way of doing financial planning, you can engage multiple financial advisors for “free” advice. That is, of course, that you don’t buy anything from them. You also trade your time to save money.
Commissioned-based advisors take control in entirety when buying a product on your account. This means that they handle everything from paperwork to claims on your behalf. All you need to do is sign a few documents and your financial advisor will do everything else for you.
Cost of Engagement
Although the commissions they receive are usually an immediate lump sum amount, the cost you incur is technically dispersed over the long-term through the premiums you pay. The insurers are the ones bearing the immediate costs of paying the FAs.
Disadvantages of Commission-Based Financial Advisors
You might meet commission-based advisors that are non-fiduciary. They will sell you products that earn them the highest commission without regard to whether they are beneficial for you. This means that you might be purchasing products that are more expensive for lesser coverage / potential returns. Yikes!
Conflict of Interest
As a consumer, financial planning would mean having sufficient insurance coverage and higher returns for your investments. However, we’ve seen financial advisors asking their clients to buy more than what they need at a coverage amount larger than what suits them.
Worst off, we’ve heard of FAs who asked their clients to buy multiple ILPs instead of topping up their current premiums. More plans sold = more commission. Double yikes!!
Fee-Only Financial Advisors
Most people often mix between fee-based and fee-only advisors. More on fee-based advisors later.
A fee-only advisor does not earn any commission from any financial products sold.
They usually take a fixed amount as their consultation fees or a percentage of your asset value, or a mixture of both.
This group of financial advisors are probably the smallest group of FAs in Singapore.
Advantages of Fee-Only Financial Advisors
Since they don’t earn any commissions from products recommended, it’s safe to say that they can be unbiased. This means that they will take into consideration your personality, your goals, and your needs before providing you advice on the next best step.
You will usually need to pay a predefined one-time fee. The costs are transparent and you don’t have to worry about any other costs you incur (apart from the actual products you buy).
With fee-only advisors, you have the flexibility to craft your insurance coverage and investments by yourself. You decide on the insurance you need and invest your money yourself. This means higher returns for you as there’s no management fee involved in your investments.
Disadvantages of Fee-Only Financial Advisors
They may charge more as you are buying their expertise for your financial portfolio. If you can afford it, this wouldn’t be a problem. However, this can pose a huge barrier for many when engaging fee-only advisors.
Fee-only advisors only render advice. This means that you have the responsibility of managing the entire execution of your financial portfolio. Of course, this is the downside to the flexibility you have.
We’re not entirely sure if they can help you with this execution – especially if you’re looking to get financial products, but if they do, it’s presumably a small percentage of the premiums you pay as their fees.
Fee-Based Financial Advisors
In contrast to fee-only financial advisors, a fee-based advisor takes a consultation fee from the client and earns a commission from the firm whose products he sells.
Fee-based advisors focus on the client’s interest while making commissions. This means that they charge you a fee for their advice and then make commissions on the products they sell.
Advantages of Fee-Based Financial Advisors
Similar to Fee-Only Advisors
Scroll back up to read the advantages of a fee-only financial advisor. You have the same flexibility, you pay a predetermined amount of fees, and fee-based financial advisors are supposedly unbiased as well. Leverage their advice and use the flexibility to make your own decisions.
Disadvantages of Fee-Based Financial Advisors
Similar to Commission-Based Advisors
Because fee-based advisors also earn a commission, you have the same disadvantages as a commission-based advisor. Some fee-based advisors started as commission-based and decide to charge a fee for their services. This means that you’re paying and risking two-folds.
There are also fee-based advisors who earn lesser commissions for what they’ve sold. The difference is usually passed on to you as savings. Thus, do your due diligence and ask the FA how he or she is being remunerated.
Which do we prefer?
Singaporeans need financial advice, and no advice comes free. You either pay through commissions or fees, and that’s a constant reality you cannot ignore.
Another fact of the matter is advisors also need to cover overheads. Some examples are licensing costs, insurance, financial research, which can be unpredictably variable.
Let’s not forget that they have a family to feed and need to get paid for their time and efforts to meet you to provide you with advice.
After discussing the pros and cons of both kinds of financial advice, the moment comes for deliberation and making a sound decision. And, here is why we prefer fee-based advice (not to be confused with fee-based advisors).
We have seen over the years that professionals and experts commonly use the fee-based model. For instance, a doctor charges a consultation fee, a lawyer charges an hourly fee, and an accountant takes a retainer amount.
In all these cases, the common fact is you get what you pay for, a service.
To us, why should financial advisors be any different?
The unique selling point of fee-based advice is its a-la-carte feature.
They will give you their advice whether you are seeking advice on better estate planning, retirement planning, or debt management, with no product sales involved.
You are buying their devotion to creating a tangible value for your investment by paying a fixed fee, unlike in commission-based advice.
Besides these, there are also areas of fee-based financial planning for which you need not buy products.
Your advisor will still give you their advice in these areas although they don’t make a commission out of them (you’re paying them for their time instead). They are,
- Managing and minimising income tax
- Managing cash flow
- Balance sheet and ratio evaluation
- Advice on employer-sponsored insurance selection
- Investment planning using mutual funds
- Mortgage loan and instalment evaluation
- Advice on amount eligible for a mortgage, retirement sum scheme, etc. from Central Provident Fund (CPF)
- Identifying and discarding duplicate insurance policies
Fee-based financial planning is also a fairer way of pay because it follows transparency in deciding the fee. You know how much you are paying because it is a fixed rate that you and your advisor decide beforehand.
Clients pay according to the work provided and the FA’s portfolio. A simple case will cost lesser, while a complex one will cost higher. This model removes hindrance from advisors to suggest what’s best for the client. They do it without worry because the fee is already decided upon by both parties beforehand.
However, despite what we think should be the superior way of financial planning, we expect things to be the same over the next 5-10 years, at the very least.
Why are Fee-Only Financial Advisors Scarce in Singapore?
Although theoretically fee-only financial advisors are ideal for consumers, they are scarce in Singapore for many reasons.
Consumers Are Used to Free Advice
A possible reason for this is that financial advisory firms are already established as commission-based while offering free advice. Consumers are used to getting free advice.
Think about it, why would you pay a financial advisor a 4-figure fee (sometimes recurring) for their advice when you can get similar advice by multiple FAs for free?
Furthermore, a study done by the Monetary Authority of Singapore (MAS) identified that 80% of Singaporeans are unwilling to pay for financial advice. Though the exact reasons were not specifically stated, it is presumed that Singaporeans believe that financial advice can be costly.
Fee-Based Advice Can Be Costly
Although the most significant advantage of a fee-only financial advisor is their unbiased advice, the price acts as a large barrier to most Singaporeans. Many people still think it is too costly, and the price is too high to pay for advice.
In all honesty, fee-based advice is a little farfetched for most people who are not investors with a high net worth (Their fees can go up to the 4-figure range, and you still have to do most of the work yourself).
The percentage of the financially wealthy population is relatively low in any economy, and Singapore is no exemption.
It takes a significant amount of thought and calculated risk to pay a fee for an advisor for the average Joe. Many will drop the idea even if they are aware of the benefits of fee-based advice (again, not to be confused with fee-based advisors).
Commission-based advice, if banned, can result in many people with no access to financial advice. The reason being, paying an upfront fee can take a massive chunk out of one’s pocket, and many may not be able to afford it.
Well, they could if the upfront fee were to be split in instalments, but that’s out of scope as fee-based advice doesn’t function in that way.
And this is probably the major reason why most people end up with commission-based advice.
Consumers Will Not Be Able To Afford Fee-Based Advice
According to MAS, if Singapore witnesses a ban on commission-based advice, the immediate impact could be a much higher cost in financial advisory services. The reason is simple.
With lower incentives to earn, there will be lesser financial advisors in the market. Less supply would mean a higher cost in fees, a deterrence for Singaporeans to start financial planning.
This will harm Singapore’s economy and social stability. Without Singaporeans investing to grow their wealth, there will be lesser affluent individuals in the future, slowing down the economy.
And if individuals don’t get sufficient insurance coverage for themselves, Singapore citizens will be demanding more support from the government in the future. This will cause more government spending on welfare and less towards the nation’s development.
Needless to say, unless Singaporeans can afford and are willing to pay for financial advice, commission-based advice will be the most prominent compensation method for financial advisors. And that’s not entirely a bad thing.
We’ll explain it at the end of this post.
Which Type of Financial Advisor is Best For You?
With the above facts and details laid out for you, it’s time to decide which types of financial advisors you should go for and what it means for you.
Do take note that whatever we mention here are generalised opinions and not an absolute way of doing things.
Fee-Only Financial Advisors
Fee-only financial advisors are best for savvy individuals who can afford the fees of these FAs. This is more of a do-it-yourself approach where you take more time figuring out what’s best for yourself while shouldering most of the responsibility.
If you’re someone who enjoys building your portfolio from scratch and don’t mind paying 4-figure fees for financial advice, fee-only advisors are probably for you.
What it means for you
If you decide to engage fee-only advisors, there are a few things that you will need to take note of.
Fee-only advisors are likely to only provide you with advice. This means that you will probably need to do everything by yourself unless you decide to pay them for additional services.
Insurance wise, there’s not much savings for you. Apart from life and term insurance plans, there are currently no Direct Purchase Insurance (DPI) available for other types of insurance.
The only exception is if you get early critical illness and critical illness policies from Singlife.
Apart from the above exception, this means that you only save money from life & term plans if you buy directly from the insurer. If you’re thinking of buying health, disability, and other critical illness insurance plans, you still have to engage a financial representative from the insurance company you want to buy from.
This means that you’re still paying the same premiums as if you were to engage a commission-based advisor. This goes the same for endowment plans, annuities, and ILPs if you decide to purchase them.
The biggest savings here for you is if you decide to invest by yourself through an online brokerage. This means choosing the right investment tool, coming up with a strategy, and managing everything by yourself. Doing so will remove the management fees involved in paying for an advisor.
Well, this means more returns for every dollar you invest!
If you’re paying an advisor to manage these for you, expect to pay a percentage of your asset value as their fees – which can be significant since you’ll probably be investing large amounts.
This would then defeat the purpose of engaging a fee-only advisor in the first place since the main reason to engage them is for their advice.
If you pay them for their advice and their work, you might be paying more than a commission-based financial advisor in the long-run.
Commission-Based Financial Advisors
This would probably apply to most individuals in Singapore. The reason being is that they are affordable (in essence, free) and everything is done through your financial advisor.
If you’re someone who’s not so financially savvy and have little to no time to explore the world of personal finance, commission-based advisors are probably for you.
What it means for you
From the purchase of your policies, managing your assets, and submitting your claims, commission-based financial advisors will do it for you.
However, as per the disadvantages mentioned above, you will have to take note of the biases involved in promoting their highest-paying products.
Because of the nature of compensation, commission-based financial advisors might be recommending excessive products with coverage amounts you don’t need. That’s why it’s important for you to educate yourself on the various insurance products available and what extent of coverage you’ll need.
Doing so will prevent you from spending more than what you actually need to.
Commission-based financial advisors will recommend you to get either endowment plans, annuities and investment-linked policies. These products are straightforward as you’ll only have to pay monthly premiums while everything is taken care of for you.
However, the downside to this is that the fees involved in these products can be rather high than doing your own investments. With higher fees, expect a longer period to breakeven and see returns on your investments.
I mean, either way, investments are a long-term thing. When comparisons are made here, it’s made against doing and managing your own investments as compared to letting FAs doing it for you.
The upside is that it’s fuss-free. Just pay your premiums and you can expect your wealth to grow while you focus on what you need to.
Fee-Based Financial Advisors
Fee-based financial advisors are likely suited for those who can afford the fees while wanting someone to manage everything from them.
If you’re someone who wants the benefits of unbiased advice and doesn’t mind paying the same person commissions for purchasing financial products for you, fee-based FAs are probably for you.
Because fee-based financial advisors are a combination of both fee-only and commission-based advisors, you can expect a mixture of the things you’ll need to take note of from the above break down.
Although we’ve tried our best to break down the ways financial advisors are remunerated in Singapore, whatever we mentioned are just generalised statements and some common concerns that you should take note of.
You have to understand that financial planning is not about just buying financial products. It encompasses more than just insurance and investing. As previously mentioned, financial advisors can offer you advice on a wide spectrum of issues.
And as per any occupation, you can’t expect free advice after all the years of education and training they’ve been through. You don’t go to the doctor and just ask to pay for medicine or surgeries.
However, the reason why individuals associate financial advisors with financial products is that it’s one of the first few things you will need to consider when doing financial planning.
Also, the way financial advisors are remunerated isn’t a representation of how “unbiased” they are. There are fee-based and fee-only advisors who are biased in a way that they will get you to pay more than what you need. Their advice might even be the same as commission-based FAs!
After all, everyone needs to feed their families. It’s only second nature.
Similarly, just because you are paid through commissions doesn’t mean you sell as many products as possible to make money. There are still many commission-based advisors who have integrity in truly providing you financial advice and recommending you based on what you need. You just have to make the effort to look for them.
At the end of the day, you’re not buying financial products. You’re buying into the financial advisor. You need to be able to trust and build a relationship with your FA before you decide in engaging his or her services.
If you’re looking for a financial advisor you can trust, fill up this form and we’ll connect you with one of the FAs in our network.