Getting financial advisory services is like choosing what to eat in Singapore. You have so many choices but each of them comes with its own merits. You end up in a decision dilemma and become unable to make an informed choice on which to go for. To save you some headache, we decided to build this guide to help you understand the differences between different financial advisory representatives. This guide consists of all the knowledge you need to know to make sure that your best interests are met.
1. Tied agent
Who are tied agents?
Tied agents refer to insurance agents that are appointed as insurance representatives by life insurers. They are hired by the life insurer to represent them and advise you on insurance or investment needs. For example, AXA’s tied agents will only advise on products from AXA. Similarly, AIA agents will only sell products from AIA. While it is not a black-and-white rule, tied agents have the responsibility to act in the best interest of the life insurer that they represent.
How are tied agents paid?
In Singapore, most tied agents are paid based on a pure commission model. Whenever the tied agent closes a case with a customer, he/she is paid a percentage commission. The paid-out commission is usually phased over 6 years based on a percentage of the 1st-6th-year premium. The 1st year commission is usually the highest and declines from the 2nd year onwards.
Another element of tied agents’ pay is the incentives trip. This is how the incentives trip works. The life insurer first decides on a timeline for qualification to the incentives trip (e.g. May to August). If the tied agent is able to meet the target set by the life insurer, he/she will qualify for the incentives trip. Sometimes, incentives trip can include a holiday to Europe. However, such incentives trip will have a higher sales target that needs to be hit. While incentives trip are not exactly cash paid to the tied agents, it is still part of their remuneration.
Who can be considered IFAs?
IFA, or independent financial advisors, are just like tied agents. They also advise you on insurance, savings and investment products from life insurers. However, the key difference between IFA and tied agents is that IFAs do not only have to sell products from a single life insurer.
For example, IFA firms like Promiseland, Ray Alliance, Financial Alliance and Providend can advise you on products ranging from Aviva, NTUC Income to Tokio Marine. The driving reason for such a practice is to allow IFAs to be independent in their advice to you. They will not only recommend insurance or investment products from a single life insurer.
How are IFAs paid?
There are three methods of remuneration for IFAs. They can either be paid by a pure commission model, a salary plus commission model or a fee-based model.
a. Pure commission model
IFAs that are remunerated under a pure commission model are just like tied agents. They are only paid when they sell an investment or insurance product. If they do not close any sale for the month, they will not be paid a single cent.
Within the pure commission model, there is a slight variation. Some people call it the ‘fake salary’ model. IFAs might be paid a fixed salary every month but they need to hit a certain sales target. If they do not hit the sales target, their ‘salary’ will be clawed back. For those IFAs who are on the ‘fake salary’ model, the focus is still on closing sales.
b. Salary model
IFAs can also be remunerated under a salaried model. These are IFAs who are paid a real salary with CPF contributions from their employer. IFAs who operate under this model are similar to the relationship managers. Then do IFAs who are salaried still get incentivised to sell more products? Well, they do.
For salaried IFAs, they have a minimum quota target to hit in terms of sales. If they are able to hit those targets, they can qualify for an additional bonus every quarter. However, compared to IFAs who are on the pure commission model, their ‘commission’ is much lower. After all, they are already paid a base salary.
c. Fee-based model
The third model for remuneration is an increasingly popular option for IFAs. It is also becoming increasingly popular among consumers to go for fee-based IFAs. Here’s how a fee-based model works.
Instead of making money out of the commission, fee-based IFAs charge a fee for reviewing your portfolio and offering you his/her recommendations. You are under no obligation to buy whatever your IFA has recommended to you. It is his/her professional opinion based on his/her understanding of you, your current life stage and life goals. At the end of the session, you just have to pay your IFA the fee that you have agreed upon beforehand.
One reason why this fee-based model is becoming increasingly popular is that it removes that conflict of interest between you and the IFA. The IFA is under no pressure to close the sale on you. Even if you don’t buy the insurance or investment product from the IFA, he/she is under no loss. This allows the IFA to offer his/her most trusted and conflict-free recommendation that puts you in the best interest.
3. Relationship manager (or personal banker)
While relationship manager (or personal bankers) have a different title compared to IFAs and tied agents, they are also appointed representatives. Relationship managers will advise on insurance or investment products that the bank has agreed to distribute. The three major banks in Singapore each have their own insurance partners that they tie up with.
DBS has a partnership distribution agreement with Manulife after Manulife edged out Aviva in bidding for the partnership. If you meet with a DBS relationship manager today, you will only get advice on Manulife insurance or investment products. OCBC relationship managers only represent Great Eastern, given that Great Eastern is a subsidiary of OCBC. Similarly, UOB also has a partnership with Prudential to advise UOB customers on Prudential’s insurance, savings and investment products. So, don’t expect your relationship manager to be independent in their recommendation. They aren’t incentivised to be independent.
How are relationship managers paid?
Relationship managers are typically remunerated on a salary-based model. They are paid a monthly salary that comes with an additional bonus if they are able to exceed their target. While banks do not have a clawback mechanism, they adopt a more extreme method: Letting the relationship manager go. For non-performing relationship managers, they are often let go if they are unable to meet their targets for a few consecutive months.
Which one should you go for?
Now, here comes the headache. Which one should you go for? From the sound of it, tied agents, IFAs and relationship managers sound pretty similar. Well, they do. As a shrewd and savvy consumer, you need to discern between your choices.
IFA vs tied agents vs relationship managers: Shop around for the best service
There is no obligation for you to be tied down forever by the same financial advisor. You can always shop around for the best service that you can find. One key factor that you should look out for is whether the financial advisor offers good follow up service.
Of course, you can’t tell from how punctual he/she is before he/she closes the sale. You need to observe his behaviour after he/she has closed the sale. This can only be done by observing how he/she treats his/her existing clients. If the financial advisor is referred to you by your friend, make sure you find out his/her behaviour after he/she closed the sale.
Another way is to observe how many clients the financial advisor has. If he/she is a good financial advisor, his/her existing clients are likely to recommend their friends and relatives to him/her. You wouldn’t want to be recommending a lousy advisor to your friends or relatives, right? It is much more likely that you want to make sure your friends and relatives avoid him/her.
IFA vs tied agents: They aren’t that different
According to sources on the street, commission-based and salary-based IFAs aren’t that different compared to tied agents. While they might have the option of selling different life insurer’s product, they might not be that independent after all. Some of them could resort to selling you the product from the insurer that pays them the highest commission. That being said, it doesn’t mean that they are putting their interest ahead of yours. It is more of a ‘win-win’ for everyone, i.e. you cover your financial gap while they get the most commission they can get.
Go for fee-based IFAs if you need an independent view
If you are looking for an independent view and recommendation, then fee-based IFAs will be the go-to for you. The way they are incentivised ensures that there isn’t any conflict of interest. You can ask them as many questions as you like, and the questions can be critical and straight to the point. You don’t need to hold back.
Another thing that is good about fee-based IFAs is that they will do a thorough portfolio review for you. Tied agents and relationship managers also do that, but they have a tendency to focus on gaps where they can sell their products. The other gaps might sometimes be left there even though it stares in their face.
Use the advice from your fee-based IFA and get the most suitable product from the representatives
The unfortunate thing is that each type of insurance, savings and investment product that life insurers designed is specifically targeted at a certain segment of the market. In other words, it means that Prudential’s savings product could suit you the most while AIA’s insurance product is the most value-for-money for you. This means that you need to get in touch with different representatives (be it tied agents, IFAs or relationship managers) to get the most suitable product.
Here’s what we would do if we were in your shoes. We recommend you to first get an independent view from a fee-based IFA. Once you have gotten an independent review from the fee-based IFA on your portfolio, get his/her recommendation on how to close the gaps in your portfolio. Then it is your job to get in touch with the relevant representatives and get the most suitable product for yourself. If you prefer IFA doing the job for you, you can also engage his/her help.
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