The article drew attention to the term “independent” and how it is often misunderstood and misused.

David Choo

David Choo

Founder, Chairman

Since there is a guideline issued by the MAS on the use of this term, it is best to go back to it and understand clearly what is meant by this term and what “circumstances” would constitute whether an adviser (the firm) or a representative (the individual) can be said to have complied with it, or breach it.

The MAS guidelines referred to are “Guidelines on the Use of the Term ‘Independent’ by Financial Advisers” (Guideline No. FAA-G05) issued on 1 October 2002 and last updated on 1 July 2005.

A BBA (Hon) graduate, David is a Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC), Fellow of Chartered Insurance Institute (FCII) and Certified Financial Planner (CFP). He has won both industry examination and essay competition awards.

The guidelines list the “circumstances” financial advisers may use the term “independent” but adopt a principle-based approach in determining whether a financial adviser can use the term “independent”.

The guidelines state that “the term ‘independent’ suggests to the investor that the financial adviser operates with objectivity and impartiality and does not have any potential conflict of interest when recommending an investment product as a result of commercial or financial links with a product provider.

The guidelines take the approach of first stating the three conditions to be met by the adviser:

  1. It does not receive any commission or other benefit from a product provider which may create product bias and does not pay any commission to or confer other benefit upon its representatives which may create product bias;
  2. It operates free from any direct or indirect restriction relating to any investment product which is recommended; and
  3. It operates without any conflict of interest created by any connection to or association with any product provider.

The guidelines state that “the basic test for independence is whether a reasonable investor knowing all the relevant facts and circumstances would perceive the financial adviser as having conflicting interests with the investor and for the advice or recommendation not to be objective and impartial”.

The “circumstance” or condition which is most prone to misinterpretation is the matter of commissions. The guidelines do make a presumption that a financial adviser which does not receive any commission or, if it does, rebates it in full to clients is presumed “independent”. But the guidelines also state that a financial adviser which does not meet this test is not necessarily precluded from using the term “independent”. The guidelines provide guidance on other circumstances where a financial adviser may not be restricted from using the term “independent”.

The key issue is whether such commission or other benefits is likely to create a bias in favour of a particular investment product, class of investment product or product provider. For example, if the commission or other benefit that the adviser receives is insignificant relative to its total revenue, they may not tend to create a product bias, or capable of influencing the recommendations of the adviser, e.g. business lunch or free seminar. As a general rule of thumb, the commission or benefit should not be more than 20 per cent of the financial adviser’s total revenue. If the financial adviser receives a broadly similar level of commission for similar products or classes of product it recommends, such compensation may not create a bias in favour of a class of products

The guidelines spelt out certain specific examples or tests of independence.

1. Commissions and Other Benefits

  1. Should not create product bias or product provider bias.
  2. If they are insignificant relative to the financial adviser’s total revenue, they may not tend to create a product bias or influence the financial adviser’s recommendation.
  3. The level of commissions in cash or in kind for similar products or classes of products, if broadly similar, may not tend to create product bias.
  4. The percentage of commission to be shared with representatives for the different product providers and products should be broadly similar.
    1. For differences to be “significant”, the 20 per cent rule of thumb is used.

      2. Product Restriction

      1. Contractual agreement whereby the financial adviser is confined to selling that product provider’s investment products selected by the product provider, and not other product providers’ products, would render the adviser not “independent”.
      2. If there are special sales targets for any contract, it would create a product or product provider bias. As a rule of thumb, a financial adviser must represent not less than four product providers for each class of investment product, to be independent.
      3. If there is any direct or indirect product restriction in relation to which advice or recommendation is provided, the financial adviser is not independent.

      3. Relationship With a Product Provider

      1. If the financial adviser is a product provider itself, such as a bank, fund management company or life insurance company, the financial adviser is not independent.
      2. If the financial adviser is related to a product provider, it is not independent, e.g. subsidiary, advisory arm, sister company. The test is ownership structure, relationship and any product restriction.

      The article by Lorna Tan mentioned that some FA firms in Singapore give the impression that they are “independent” by saying so verbally to customers through their advisers perhaps solely based on the fact that they are not tied to any product provider.

      This is clearly not a sufficient basis for independence.

      The article quoted the payment of volume commission or bonus given to FA firms for hitting a certain quota of sales and renewals of specific products which I agree will clearly lead to product and provider bias. Whether this volume commission is paid upfront (with the feature of possible claw back) or paid when the targets are met, they are precisely intended to influence the objectivity of the FA. Firms which enter into such deals with the product providers have clearly catered more to their interest than clients’ interest and should not claim to be independent or convey any impression to be independent. Being tied down by volume commissions is also clearly against the spirit of fair dealing and should be disclosed to clients.

      What will be in clients’ interest?

      Clients must be aware that whether a financial adviser decides to operate as an independent adviser or not, and whether to be on a commission system or fees, depends on many factors. Clients’ interest is best served by financial advisers who are able to provide the following:

      • Competent, fair and objective advice
      • Wide range of choices by product providers to obtain “best of class” products
      • Best value for money
      • Continuous and reliable service

      The quality of advice depends more on the integrity and competence of the financial adviser, and less on the system of remuneration. The wide range of choices depends on the number of product providers the financial adviser is able to distribute for. Obviously, there is no point in getting good advice only. You want good solutions as well.

      The best value for money comes from both the quality of advice and effective solutions. There are situations when commission exceeds fees and vice versa. Where fees are concerned, do not just look at upfront fees, but recurrent annual fees. Where full rebates of commissions are offered contractually, ensure you get full rebate of all commissions and other remuneration connected with the sales for the first year and subsequent years.

      It is Promiseland’s avowed policy not to enter into any contracts or agreements with any product provider other than the standard agreement which is available to all FA firms.

      We do not tie ourselves down to so called additional commissions based on higher volume of production. Although we are compensated by commission, it is because the market is not ready for fee only and we implement certain measures to look after clients’ interest, such as product comparisons, product recommendation based on client’s needs, disclosure of important facts and compliance checks.

      We agree that clients should ask questions of their representatives to ensure that they are truly independent.