Be A Model Of Best Practice

Be A Model Of Best Practice

If we believe in God being the ultimate Truth and Perfection of every virtue or characteristic that is good, then we naturally progress to the concept of there being the best model for everything.

Young Timothy was challenged to be an example to the other Christians in “speech, in life, in love, in faith and in purity”. (1 Timothy 4:12)

Likewise, Christians are exhorted to focus on and display these virtues in their lives – “whatever is true, whatever is noble, whatever is right, whatever is pure, whatever is lovely, whatever is admirable – If anything is excellent or praiseworthy”.

All these Christians are not just to admire, but to put into practice in their own lives.

The concept of “Best Practice” is a laudable one and Christians must champion it because it surpasses market standards.

REGULATORY STANDARDS

The Financial Advisers Act and its Guidelines and Notices lay down high standards of professionalism and practices for both Financial Advisers (the companies) and Representatives.

CONCEPT OF BEST PRACTICE

The industry is also encouraged to adopt best practices that often go beyond the regulatory requirements.

EXAMPLE: BEST PROCESS

An example of best practice is for the Representative to adopt the financial planning process or at least the total financial needs analysis approach, instead of doing product pushing and transactional selling.

While it is not illegal for Representatives or Relationship Managers of banks to do minimum fact-finding and maximum product pushing, it is certainly not the best practice. In fact, as seen in the Lehman Brothers saga, product pushing without due regard to the client’s investment objectives, risk profile and investment time horizon, often exposes the Representative and Financial Adviser to the charge of misselling.

EXAMPLE: DISCLOSURE

Another “best practice” is to present all the merits and demerits of a particular solution or product, clearly and preferably in writing and in a language that is understood by the client, and get the client to acknowledge this. This process should be done in the right spirit and not just to gloss over the points and to get the client’s signature to fulfill the letter of the law.

Clients are often too much in a hurry and do not give enough attention to details. Representatives should not take advantage of this but rather think of ways to communicate important points more effectively. If the client does not understand the situation or the product, it is very likely he will submit a complaint when things go sour.

There may only be a few clients who may be unethical and even try to seek remedies when they have made informed decisions. The vast majority are decent and moral people who will stand by what they have been informed. However, there can be a wide gap in information and understanding between the Representative and the client which thus means that the sales process will take hours rather than minutes.

Clients should realize that even a product like medical insurance can be very different from company to company.

But best practice requires the Representative to go through the different terms so that the client gets exactly what he needs.

EXAMPLE: PRODUCT LIMITATIONS

Best practice also requires a Representative to inform a client about the limitation of his product range and product providers like insurance companies or fund managers. A tied agent should inform the client that he only represents one insurer. He should also inform the client if the product of the firm is not the best in the market and let the client decide whether he still wants to purchase it or to seek advice from a broker or independent financial adviser.

If the client is not aware of the existence of product choices, best practice requires the Representative to inform the client.

Based on present market practice, we are still a long way from the best practices standard.

Which tied agents would volunteer to inform their clients about the choice available to clients or to say that their products may be inferior to other available products? Often it is the client who has to protect his own interest (buyers beware) rather than trust the tied agents to look after his interest.

BEST PRACTICE: CO-BROKE?

There are some tied agents who will “co-broke” with an agent of another company or a broker or IFA either because his principal (insurer) does not carry the product, or the client knows another company’s product is vastly superior.

For example for many years already, agents of a few insurers would arrange for their clients to purchase the Incomeshield products of NTUC Income and get a cut from the INCOME agent.

While this appears beneficial to the client, often the arrangement breaks a few rules.

Firstly, the insurance agent has signed to be an exclusive agent with his insurer and he is taking some business away to the loss of his insurer.

Secondly, he usually carries the forms of the other company and gets the client to sign these forms. He does so often without the presence of an agent from the other insurer. By doing this, he is actually giving advice and transacting business in an unauthorized way. The other agent who does not see the client then breaches the rule of not seeing the client as the primary underwriter and he also signs the forms under falsehood because he is deemed to have seen the client.

BEST PRACTICE: TEAMING UP?

Another way tied agents have done to overcome limitations of their company’s range of products or inferior products compared to that of other companies is to form an alliance with agents of other companies. So you can have agents of three companies teaming up and taking care of their clients’ needs. On the surface, this looks like a great idea and benefits clients better than the lone-ranger-tied agent. But from an ethical viewpoint, each agent has broken his own agency agreement which requires him to be “exclusive” to his Principal.

AGENCY: ONE-SIDED CONTRACT?

It was this exclusive restriction and the nature of a Master-servant relationship with all the rights residing with the Master-Principal and no rights with the agent, which led me to conclude that a tied agent could never really take care of clients’ interest first without breaking his agency agreement.

Given that no insurance company has all the products to meet all the needs, and given that not all the products are the best of class among all available products in the market, no tied agent of any firm can ever say that he represents clients’ interests. He represents the interests of his Principal, the insurer, legally and practically. By definition and restriction of his agency agreement, he can never put the client’s interest first.

When I entered the insurance industry in 1985 at age 36 being better informed and knowing a little about the law and being concerned about ethics and clients’ interest, it was a foregone conclusion (the term no-brainer wasn’t in use then) that to be able to look my clients in the eye, I had to be a broker.

The temptations to go into an agency were strong – much better compensation and career path, easier job and life, and recognition given by firms and lots of sponsored holidays. But I just knew that this was not an option for me for moral and ethical reasons.

And so I joined a pioneer composite broking firm then, and established a new one a year later with a partner.

BEST PRACTICE: IFA?

The business model which is best able to take care of clients’ interests best is the Independent Financial Adviser which is able to distribute the products of many product providers.

For ethical reasons, I have to disclose that my firm is such a firm so you have to decide whether my views are truly objective!