Keynote Address by Merlyn Ee, Executive Director, Monetary Authority of Singapore, at the Association of Financial Advisers (Singapore) 14th Annual Conference 2015 on 2 July 2015
Mr Raymond Ng, Congress Chairman
Mr Vincent Ee, AFA President
Distinguished guests, ladies and gentlemen
1 Thank you for inviting me to speak at the 14th Annual Conference of the Association of Financial Advisers or AFA. The theme for this year’s conference is “Mission Possible”. Indeed, as the financial advisory (FA) industry begins its implementation of the recommendations from the Financial Advisory Industry Review or FAIR, we will be taking an important step towards raising overall standards in the industry.
2 Licensed financial advisory firms or LFAs are an important segment of the FA industry. There are about 3,000 LFA representatives in Singapore. While LFAs may not have the resources and reach of larger financial institutions, they do have their strengths and unique value proposition.
• LFAs can offer advice on a wide range of products from multiple product providers. They are in a good position to compare products offered by different providers and recommend one that suits the customer.
• Many LFAs provide a holistic approach to financial planning. They not only look after their customers’ protection and investment needs but also provide services such as estate and will planning.
• Being boutique players, LFAs are able to respond more nimbly to changes in the financial landscape and offer more personalised services. There are CEOs of some LFAs who personally attend to customer complaints and know many of their firms’ customers well.
Evolving Financial Landscape
3 In an industry dominated by larger financial institutions, LFAs have leveraged on these unique strengths and secured a niche for themselves. However, the financial services industry is one that is rapidly changing. LFAs have to keep up with the changes so as to stay relevant and thrive. Let me share with you some of these emerging trends that will shape the future of the industry.
4 There will be new business opportunities and areas of growth for the FA industry. This is underpinned by two key factors:
5 One, Singapore is getting older. Singapore’s population is ageing as life expectancy lengthens and birth rates remain low. By 2030, the number of elderly citizens aged 65 and above will double to 900,000. With the current birth rates, the number of working-age citizens to each elderly aged 65 and above will fall from the current level of 4.9 to 2.1 by 2030. As Singaporeans live longer and have fewer children to support them, there will be rising demand for financial planning. They will need to build a retirement nest egg to tide them through their golden years and cater for their healthcare needs.
6 Two, Singaporeans are becoming more affluent. On an aggregate basis, household financial assets have grown at an average rate of 7.8% per annum in the past 5 years to S$967 billion in the first quarter of 2015. Investors have more cash to invest and are seeking to put their funds into a wider range of financial instruments in search for better yield. Industry players who have the capability to provide advice on multiple asset classes would have a clear advantage.
7 However, there are also several developments that the industry has to prepare for:
(a) First, there is growing retail investor appetite for simple and low cost investment products. We have improved retail investors’ access to such products including the Singapore Savings Bonds, exchange traded funds as well as corporate bonds. Financial advisers will need to consider how best these products fit into the broader financial needs of their customers.
(b) Second, there is a trend towards disintermediation. There is an emerging class of independent, knowledgeable consumers who prefer self-service when it comes to financial advice. Singaporeans increasingly prefer searching for and making purchases online. This preference extends to financial products.
• Today, Singapore consumers can use the web portal compareFIRST to easily compare the premiums and features of similar life insurance products offered by different insurers in Singapore. This will empower consumers to make more informed decisions when buying life insurance.
• Consumers can now buy direct purchase insurance or DPI directly from insurers. These are simple, low cost life insurance products that are sold without commissions as no advice is provided. There are also commercial web portals where consumers can purchase general insurance and unit trusts directly.
• In countries such as the US, automated online financial advisory platforms or robo-advisers are becoming popular. Such robo-advisers help consumers to construct their own financial plans and investment portfolios online. They provide an efficient and low cost alternative to traditional modes of financial advice. It is only a matter of time before robo-advisers make their appearance in Singapore.
(c) Third, regulatory standards worldwide have been tightening following the Global Financial Crisis. In Singapore, we have FAIR, which aims to raise the standards and professionalism of the FA industry. In the case of LFAs, we have raised the admission criteria and financial requirements to improve the quality of these firms. We are not alone in raising regulatory standards. UK, Australia and many other jurisdictions have done the same.
8 Technological innovation, higher financial literacy among the internet-savvy generation and a proliferation of lower cost financial products are transforming the industry. Financial advisers should strive to move up the value chain to a role that provides greater value to consumers.
9 While each of you may have your own business strategies, the key to having a sustainable business boils down to trust. Gaining the trust of customers essentially means that financial advisers have to look beyond short term gains and act in their customers’ best interests. I believe three fundamental principles underpin success in the industry – Culture, Competence, and Customer Centricity.
10 First, culture. It is the culture within the firm that influences the behaviour of its staff . While regulators can set rules on what is permissible, it is not possible to impose rules to promote a certain corporate culture. The changes have to come from within.
11 The Board and Senior Management play a pivotal role in setting the right culture. Under FAIR, MAS will be assessing the Board and Senior Management’s efforts in promoting a culture of fair dealing within their organisations. This will be incorporated into MAS’ risk assessments and regulatory reviews of FA firms.
12 Embedding fair dealing principles in an FA firm involves the management setting the right tone from the top and it goes beyond coming up with company policies and procedures. It also entails setting key performance indicators that do not over-emphasize profits at the expense of customers’ interests. Let me share with you an example. In the course of MAS’ supervision of the FA industry, we came across an FA firm that has a comprehensive set of policies and procedures to demonstrate how fair dealing is central to its corporate culture. But in practice, the company management also set unreasonably high sales targets for its representatives. Those who were not able to meet sales targets were singled out and made to attend sales training during weekends. It is no surprise that the company received complaints from customers. MAS does not tolerate such practices and has taken the firm to task.
13 But there are also many companies which strive to do right by the customer. I have seen examples of FA firms giving the benefit of the doubt when dealing with vulnerable customers who raise disputes on their transactions.
14 So why is having a good corporate culture important? For all FA firms, their reputation is arguably their most valuable asset. Yet this is something so fragile. One or two instances of serious misconduct in the media headlines can do significant damage to a company’s reputation.
15 Second, competence. There are two key aspects to competency – one is in offering quality advice to customers and the other is in service effectiveness.
16 FA firms should invest more to upgrade the skills and knowledge of their representatives. There is a wide array of financial products in the market and the needs of consumers are becoming more complex. There is a need for representatives to constantly upgrade their knowledge and skills to offer quality advice. This is in line with the SkillsFuture programme for the financial services sector. We want to prepare individuals to meet the fast changing needs of the financial services industry and deepen their competencies in their chosen profession.
17 Given Singapore’s rising educational level, and higher expectations from a more sophisticated public, we have under FAIR raised the minimum academic qualification requirement for new FA representatives. We will also be introducing a more structured continuous professional development or CPD framework for FA representatives. As the CPD framework allows programmes on ethics as well as rules and regulations to be accredited, we hope this will offer FA representatives a wider range of recognised training programmes, beyond those offered in-house by their firms.
18 Other than the CPD requirement, there are other schemes to support the competency needs of the industry. One good example is the IBF Standards for Financial Planning introduced this year. These Standards aim to equip FA representatives with the competencies to perform holistic financial planning. They also offer a professional development roadmap for FA practitioners to progress into specialist roles, such as management of FA representatives or advising high net worth individuals on life insurance needs. I encourage all FA firms to support such competency programmes.
19 For FA firms, continuous training is also crucial in attracting and retaining talent. It is not true that smaller FA firms cannot offer good training. I know of LFAs which have developed structured training programmes for their representatives. These include induction courses for new entrants, and developmental courses for more senior representatives to further hone their financial planning skills. These companies also identify the training needs for each and every representative on a regular basis. They then send their representatives for appropriate training, and chart their progress over time. It would be good to work with IBF to have these programmes recognised as it would also allow for these programmes to receive training subsidies, where applicable.
20 The other aspect of competency is service effectiveness. This can be achieved through greater use of technology. For instance, in sales and advisory, FA firms can equip their representatives with mobile electronic equipment to assist them in gathering customers’ information during the fact-find process and in presenting product details to customers. FA firms can also develop analytical tools to help their representatives analyse their customers’ risk profile and needs more efficiently. Such initiatives enhance the capacity of representatives to manage a growing client base.
21 Paper-based documentation and manual processing of customers’ information and purchases could expose FA firms to greater risks of operational lapses and human error. Technology can be used to enhance an FA firm’s systems and controls through automation of key processes such as record keeping and compliance reviews.
22 Third, customer centricity. Financial advisory is a people-centric business. Customer centricity is about putting your customer first and providing them with excellent service. It is about building a long term relationship with customers.
23 FAIR seeks to address some of these issues by improving the remuneration structure of the FA industry to better align the interests of financial advisers with those of their customers. Let me provide a brief recap of three key proposals:
(a) First, implementing a balanced score card remuneration framework or BSC: Under BSC, a significant portion of a representative’s remuneration will be based on whether he has taken steps to understand his customer’s needs, recommend suitable products, and make adequate disclosures. This is aimed at motivating FA representatives to provide quality advice to their customers and mitigate the risks of product pushing and aggressive selling.
(b) Second, capping of first year commissions and spreading of commissions: These requirements seek to address a common complaint among consumers that representatives do not provide good after-sales services as the commissions currently paid for the sale of life insurance policies are often heavily front-loaded.
(c) Third, banning product-related incentives: Payment of incentives over and above the commissions typically received by financial advisers create a bias towards the sale of products that pay out a higher remuneration. This initiative will mitigate such conflicts of interest so that representatives can focus on providing quality advice to their customers.
Partnership with the industry
24 The FA industry has seen several transformations over the last decade. Since the introduction of the Financial Advisers Act, a number of initiatives have been implemented to raise standards in the industry. The Fair Dealing Guidelines were issued in 2009. Following the Lehman Brothers episode, we introduced measures to enhance safeguards for consumers buying complex products. More recently, we have FAIR.
25 MAS has a well-established consultation process where we actively seek views and inputs from key stakeholders before introducing new policies or changing existing regulations. AFA has over the years provided useful comments to our policy reviews.
26 AFA continues to be an important partner in our effort to enhance the FA industry:
• It is an active participant in our consumer education programmes. Some of AFA’s members have volunteered their services at MoneySENSE seminars and publications.
• AFA has provided valuable feedback and suggestions during FAIR. This has helped us to strike the right balance and formulate rules that enhance safeguards for consumers without being overly onerous or impractical.
27 MAS will continue to engage AFA closely in our ongoing regulatory reviews and consumer education efforts. We also welcome opportunities to co-create initiatives with important stakeholders such as consumer bodies and industry associations so that we can achieve win-win outcomes for consumers and the industry alike.
28 Financial advisers today operate in a vibrant, competitive and fast changing environment. Such an operating environment is not entirely new to LFAs. Many of them have proven their ability to adapt to changes over the years and have steadily grown into well established and professionally managed firms.
29 LFAs should continue to tap on their strengths and build on the trust and confidence placed by customers in the services they offer. They should focus on building a corporate culture of fair dealing, raising the competency of their representatives, and investing in technology to improve efficiency. Putting customers first will be key to helping LFAs secure the trust of their customers that is so critical to taking their business forward.
30 On this note, I wish you a successful conference. Thank you.