"Why Do We Need a Market for Financial Advice" - Speech by Lee Chuan Teck, Assistant Managing Director, Monetary Authority of Singapore at Singapore Management University ‘Market for Financial Advice’ Symposium on 6 July 2012
1 Good morning. I would like to thank Professor Koh and the Sim Kee Boon Institute for inviting me to speak at this conference. The market for financial advice has been much discussed since MAS announced the Financial Advisory Industry Review (FAIR) in April. To date, we have received more than 1300 responses and have also noted many more that were published on newspapers and blogs. The comments span an entire spectrum. Some believed the system was working fine and we should just leave it alone. Others said the system was fundamentally flawed and needed a complete overhaul. Between, these two extremes, we have received many more good suggestions on how we can make progressive but significant improvements to the industry. The FAIR process is still ongoing and we continue to welcome feedback from the industry and the public.
2 Discussions within the FAIR panel are necessarily comprehensive and detailed. We examine every aspect of the industry, from qualifications of the financial adviser, to how he should be paid, to how he should behave and what should be disclosed. I don’t intend to replicate those discussions today. Instead, I would like to step back to ask a more existential question: why do we need a market for financial advice? This is the first question we ought to ask ourselves because if we can agree on the fundamental purpose for the industry, we can better assess how it is doing relative to this purpose and how we can do better.
Why we need financial advisers
3 So let’s start from the beginning: “Why do we need financial advisers?” Contrary to popular belief, it is not to sell financial products. If it’s just to sell products, there are far more efficient ways. Financial advisers play two key roles, defined along the two main types of advice they give. The first role is to impart basic financial planning skills to clients: how to draw up a savings plan, how to build an investment portfolio, and what kind of insurance protection is needed. In this sense, they play the role of a teacher. They provide the knowhow, customize it according to the client’s needs and guide the client in putting these into practice.
4 The second key role is to help clients understand the specific products they invest in. In this, financial advisers play an important levelling role in a disclosure-based regime such as the one in Singapore. In a disclosure-based regime, the issuer or distributor of a financial product has the obligation to disclose all critical information about the product, but the onus is on the investor to understand this information, place these in the context of the investment environment and then arrive at a judgement on whether this is suitable for them or not. The reality, however, is that investors have different starting points, with degrees of financial knowledge and experience, and thus will likely have different capacities to process the information disclosed. Professional financial advice fills in the knowledge gap for the less knowledgeable investors.
Current State of the Industry
5 So when we measure the state of the financial advisory industry, we should not be looking at how large the industry is, how many financial advisers there are or how much has been sold. We should be measuring its ability to deliver on those two roles. On both counts, I would say that there is still significant room for improvement. With regards to basic financial skills, I’ll cite two examples: retirement planning and insurance. A survey by HSBC Insurance last year reported that 42% of Singaporeans do not have a financial plan for their retirement. The old adage that if you fail to plan then you are planning to fail applies strongly to retirement planning. Why are people not making plans? In the HSBC survey, 14% feel it is not useful to have one, 23% have no idea how to form one and the rest feel they do not have sufficient income to make a plan. It is interesting that about a third of those without financial plans have had some dealings with a financial adviser, which suggests that either the adviser had not conveyed the appropriate advice or he has chosen not to take it. The same is true for insurance. Singaporeans are still substantially under-insured. A 2009 study by the Nanyang Technological University, commissioned by the Life Insurance Association, Singapore, found the average Singaporean to be underinsured by about 65%.
6 What about the second role for the industry which is to offer advice on specific financial products? MAS conducted a mystery shopping exercise towards the end of last year. 126 shoppers made 500 visits to the branches of major banks and insurance companies over a period of three months. The shoppers had diverse profiles: different ages, educational qualifications and investment experience. Each mystery shopper approached the FIs with the following scenario – he wished to invest a sum of money and was looking for a suitable product . The advisers spoke to them, assessed their needs and recommended a product. The shoppers then reported back their experience and a panel of industry practitioners was asked to assess the suitability of the products recommended.
7 We will be publishing details of the mystery shopping exercise on the MAS website today. Let me just highlight two areas that I find particularly disturbing. Firstly, while most of the advisers did some form of fact-finding on the investor, this often did not extend beyond asking for basic information such as their names, personal particulars and employment. 40% did not ask about their investment experience. About half did not ask about their financial objectives or risk tolerance. Secondly, the panel of industry practitioners assessed that 30% of the products recommended were unsuitable for the investor. The investments did not suit the time horizon, investment objective or risk tolerance of the client. There is a clear link between the two areas. If we do not make an effort to understand our clients’ needs, how do we expect to recommend the right product to them? I believe that some of the representatives could be acting more as product distributors than as financial advisers.
How to Enhance the Industry
8 So in both the primary roles that the financial advisory industry plays, there is room for improvement. The natural question that follows is what we can do about this. I believe there is a lot we can do. Let me start with basic financial education. It is important to recognize that this role should not be borne by the industry alone. The public sector and academia have a role to play. For this reason, MAS started the MoneySense programme in 2003 to enhance the level of financial literacy in Singapore. MoneySense is publicly funded and we draw on the expertise of the industry and academia. To maximise our reach, we have utilized multiple channels: internet, print media, television, seminars, school talks and even fun-fairs.
9 I would like to mention one seminar series, “My Money”, which was organised in partnership with the Sim Kee Boon Institute, Association of Banks in Singapore (ABS) and Securities Investors Association Singapore (SIAS). The seminars feature industry practitioners explaining key features of common financial products. Speakers from SKBI explain concepts of asset allocation and how the product(s) featured could fit in a consumer’s portfolio. Speakers from SIAS highlight the risks and things to watch for, as well as run through key questions consumers should ask before deciding whether to purchase a product. This is a good example of the industry, public sector and academia pooling their resources for general financial education. Since its launch in 2009, “My Money” series has been very well-attended with about 500 participants per seminar. Recordings of the seminars are available online, and these receive about 5,000 hits per month.
10 We can do more in two aspects. First, we will need to continue to extend our reach, especially to those who have no interest or time to think about financial matters. Some of you may be aware that we ran a very successful TV programme last year called “Mind Your Money”. In each episode, celebrities were invited to share their personal experiences on a wide range of topics including budgeting and saving, health insurance, home loans and investments while industry practitioners provided their perspectives on these topics. The programme was shown over Channel 5 and Channel NewsAsia and had attracted over 1.15 million viewers. This year, we hope to show programmes in Mandarin, over one of the Mandarin channels. This will reach out to a new and bigger audience.
11 Second, we not only need to get our messages out, we need to help people put these into practice. For some, the messages may be heard, understood but forgotten within a week. Here is where I believe financial advisers have a key role to play. Because it is at the point when the person is making a financial transaction that the messages are most relevant. We need financial advisers to continue to send out the messages of sound financial practice: live within your means, invest within your risk tolerance, insure against unexpected events and so on, even if these do not result in a sale.
12 How do we improve on the advice for specific products? Over the years, MAS has been working with the industry to raise the standard for financial advice. In 2009, we issued a set of Fair Dealing Guidelines, which we use in our supervision of the financial institutions. This year, we introduced the Customer Knowledge Assessment (CKA) framework which requires financial advisers to assess their customers’ knowledge and experience before they sell him a complex product. If he does not have sufficient knowledgeable or experience, he will need to be appropriately advised before he can buy the product.
13 While we can regulate on what an adviser needs to do and who needs advising, it is harder to regulate the quality of advice given. There are three things we can do on this front. First, we need to look at other means of shaping behaviour in addition to regulations. The FAIR panel has thus been focussed on topics like how advisers are remunerated, how they are supervised and potential areas of conflicts of interests, factors that will influence how advisers perform their roles. Second, we should use mystery shopping as an additional tool for our supervision of individual institutions’ performance. The exercise we just did was just to get a high level assessment of the state of the industry. For supervision purposes, the process will have to be tightened and more robust. MAS will be working with the Life Insurance Association and the Association of Banks in Singapore to carry out regular mystery shopping exercises on their members. The findings will be used in our supervision of the banks and be made public.
14 Finally, the ultimate assurance of quality advice is a knowledgeable investor. If an investor knows what his rights are and what he should expect from a financial adviser, he will be better able to protect himself. On the MoneySense website, we have listed some of the key questions clients will want to ask financial advisers. This is the most basic information that every investor should have before he invests in any product. We will be sharing this over other channels. We believe it is also in the interest of financial institutions to make their clients more aware of this.
15 To sum up, I believe the market for financial advice plays an important role in our society. There is room for improvement in how we perform this role. In my conversations with the industry, I’m heartened that most recognize the need to improve. I trust this conference will generate many ideas on how we can do better. I wish you many good discussions ahead.
16 Thank you.