The first time I had a look at an agency contract, I was shocked that it was dated 1985 and not 1685.

Although not legally trained, I had done the subject of law of contract in university, and it struck me that the agency contract I was holding in my hand, was a classic case of a one-sided contract which screamed out “unfair”, “unfair”.

The Principal (or Master in some contract wording) had the right to terminate the contract at any time without having to give any reason, and the agent (or servant in some contract wording), would then forfeit rights to commissions and other payments, whether he terminates the contract or the contract is terminated by the Principal.

I knew immediately that I would be out of my mind to sign such a contract. But so many thousands of agents had done so. “What to do?” All of them said: I need to make a living and what is the alternative?

The tied agency contract went one step further and bound the agent to selling only the firm’s products and not any other company’s products, whether the firm was a competitor or in a totally different company. I was rather taken aback that this kind of contract was still around in spite of all the talk about “clients’ interest first” and consumers’ rights, because by tying the agent down, you also limit the clients’ choices.

I was pleasantly surprised to read later that some states in the USA had by then already decided that agents must be given the freedom to represent other companies as well. They were called General Agents (different from General Insurance agents). However, the more modern and client-friendly concept is the Independent Broker who legally represents the interests of the client and not the insurance companies. The rise of the independent broker in the USA and UK and Australia lent some encouragement to my starting a brokerage.

When I looked at the legal status of the agent and the broker, I knew that I had no choice of which business model to use if I had my clients’ interest at heart.

But it was not without cost. Forming a brokerage is a costly affair. Since a broker does not represent the insurance companies, it has to finance its own operations – rental, staff, marketing and sales expenses, training, compliance etc.

But counterbalancing the cost is the advantage of ownership – the brokerage owns the business and will not be subject to unpleasant surprises sprung by the Principal. Of course there are terms to observe and these are only fair.

The question which naturally followed was what about the individual brokers and Representatives who bring in the clients? Will they have a right to enjoy the business even when they terminate the contract or have their contract terminated?

Any agent or Representative who had to leave a company would know how painful it was to forfeit the future commissions and fees and in some cases, be legally prohibited to take the clients out of the firm for a period of one to two years or permanently.

Natural justice and fairness soon led to the granting of ‘vesting’ rights for the broker or Representative. It started with conditional vesting i.e. vesting may depend on the number of years a broker has been with the firm, or on achieving certain production targets, or other criteria. Moreover, the vesting may be of varying percentages of the normal compensation.

However, the most significant question is whether vesting could be granted immediately and without any other condition – so called unconditional vesting.

This means that even if the broker or Representative terminates the contract, he will be entitled to take out his clients even if he joins a competitor. This is a noble and extremely fair and “generous” policy because most firms would have provided training and benefitted the Broker or Representative.

Having implemented this unconditional vesting scheme, I am pleasantly surprised how well received and appreciated it is.

The only retention “power” now lies only with what the Principal can offer to the Broker or Representative and not using threat of financial penalty or loss of clients.

It is my prediction, that it is only a matter of time when even all agency contracts will have this fair term of vesting. How soon it will take place depends only on the Agents themselves.

There are enough FA firms who offer immediate and unconditional vesting to Representatives to give choice to new entrants and also existing Agents who now realize how restrictive and one-sided the Agency contract is.

But a warning note. A firm which offers immediate and unconditional vesting and which for some reason, starts losing Representatives, may be tempted to hold back their Representatives by other means.

One way is to find grounds, whether reasonable or not may be questioned, to take action against the Representatives, leading to disciplinary action like suspension.

The motive may be to scare the Representatives so that they remain, as it may be difficult for the Representative to apply for license (if he has not been licensed before).

It is also a temptation for unprincipaled firms to find grounds to terminate the Representatives and forfeit the payment of all commissions and fees which would otherwise vest with the Representative.

The point is that a Representative must still recognize the importance of joining a firm which can be trusted to do what is right and fair and not change terms (as is their right contractually), or take unfair action to disqualify Representatives from enjoying their compensation.

When clients are treated unfairly, they have FIDREC and ultimately the MAS, to get justice done, while retaining their legal rights under contract or common laws.

When Agents of Representatives are treated unfairly, they cannot seek help from MAS, MOM, or FIDREC because their rights are considered under the specific contract terms. Breach of contract has to be pursued in a court of law. This is onerous and it is not easy at all to gain a favourable judgment because the powers and rights of the Principal are general and wide-ranging, especially on the right to terminate a contract.

We all know CAVEAT EMPTOR. Buyers Beware. It’s good to know too: Agents Beware.

The Money page in the Straits Times on the 23rd of December 2008 carried news about MAS ordering three firms to stop giving financial advice.

Three insurance brokers which had also ventured into providing financial advice and distributing financial products, were found to have inadequate management oversight or control over policies and procedures for their financial advisory operations.

They were also found to lack adequate monitoring of the conduct of their representatives or introducers as well as complaints investigation and resolution process.

These three firms are licensed insurance brokers but were given exempt financial adviser status to advise and distribute financial products under the Financial Advisers Act.

MAS withdrew this exempt status and they would continue to be insurance brokers.

MAS’s action has hopefully drawn the public’s attention to the existence of two types of distributors, the licensed Financial Advisers and the exempt Financial Advisers. What’s the difference?

Licensed Financial Adviser firms have to apply for a license from the MAS, and have to fulfill stringent criteria. Their Representatives also have to apply for individual licenses and have to fulfill the “Fit and Proper” requirement.

On the other hand, Exempt FAs do not have to apply for a license for the firms or their Representatives. What this means is that many of the Exempt FAs have been tempted to grow their business quickly by relaxing their recruitment criteria and also their way of doing business.

The most rampant malpractice, from the grapevine, is churning of investments particularly for clients using CPF funds, with the bait of offering cash rebates for every buy decision.

For example, if the fees charged was, as previously 5 per cent, the cash rebate given to the clients would be 2 to 2.5 per cent. With the capping of fees reduced to 3 per cent, perhaps 1 to 1.5 per cent could be rebated to clients.

Many CPF holders who may be financially strapped and in need for cash have been lured into the scheme either by the Representatives or organizers / introducers who recommended their friends or colleagues. Reportedly, this business is so lucrative that small groups or even big syndicate groups have operated for a few years. These are the ones which have either roped in Managers and Representatives of FA firms into their scheme, or have successfully planted their men in companies. In some companies, the practice is so rampant that it would be hard to believe that the Directors and Management are not aware of it.

It is also easy to investigate whether a firm or a Representative has done churning of investments. All buy and sell trades have to be recorded and can also be obtained from the unit trust platform providers, which understandably would have to furnish their records to MAS routinely or on request.

The action taken by MAS has been long expected and variously seen as strict and lenient. The opinion heard often is that if this is all the action that is going to be taken, then it is too lenient as thousands of clients have lost tens of thousands of dollars by way of fees to the churners.

Although the clients were unwise and wrong to be led or misled to join the scheme, and had pocketed the rebates, this does not diminish the responsibility and culpability of the Representatives and the firm. In the frenzy to make money, many had resorted to getting clients to sign blank forms or obtained the online code from their clients. Many had resorted to getting business from unauthorized introducers who unlawfully did the ground work of getting forms filled, and the Representatives merely signed the forms.

There was no mention of fines and prohibition orders in the MAS action, but this may have been imposed as well or still contemplated.

The other point that is heard is that there are more than just three firms involved and surely this would not have escaped the eagle eye of MAS. The view expressed is that the syndicate groups will just move their business to other firms, or even induct existing firms or set up new firms, so concerted action is required.

It is relatively easy once you have knowledge of the clients involved in churning to trace where they have been moved from firm to firm.

There are still adverts in the papers to attract people to access their CPF money through the churning of investments. The present market is not so attractive, but when the economy and investment markets recover, will churning rear its head again? A lot depends on the action taken against offenders who have fallen short.

Most financial institutions have found that offering gifts works wonders for their sales. Gifts have been used as carrots to attract people to visit them and to buy certain products, or to buy more.

Where gifts are genuine and add to the value of your purchase, they should be received with thanks.

But if gifts are mere gimmicks to grab your attention and to lower your defences, and to lead you to think they are getting a good deal when in reality they are not, the ethics can be questioned.

For example, if a financial institution like a bank charges upfront fees of 5 per cent for a unit trust, and offers a gift of upfront cash of 2 per cent of the investment sum to the client, the client is obviously delighted and thinks he has got a good deal. But in fact, the same product could be distributed by other FAs for a fee of 3 per cent or even lower, but without a gift.

You can argue that the institution offering the gift knows buyer psychology and is better at marketing. It is clever and creative and likely to be successful, but it has taken advantage of the ignorance of clients of the market and product. In any event, clients must beware that gifts are not needed when something is good. Sweeteners are often applied to hide the bitter taste.

Usually, the product with a gift is more expensive than others. I remember a friend excitedly sharing with me how he conceived a marketing scheme to sell a product which was quite highly priced but with a free handphone thrown in, and the product sold like hot cakes. We know of “bargain discounts” which are not really discounts because the prices have been jacked up before the discounts are applied. “Removal Sale” signs are put up permanently in some shops.

One way salespeople put pressure on buyers is to offer a very special discount or feature, but which only applies if the purchase is done on the spot.

Just recently, I was intrigued by an offer made of a free trip for two to any destination, if my wife and I were willing to visit the company and hear a presentation. Being curious about what the marketing strategy is, I went along with my wife and discovered that it was a firm offering a holiday club membership. If we accept the offer on the spot, we would enjoy a hefty discount. Since we did not think we’d benefit from being members of the holiday club at even the discounted price, we declined. For the record, we declined the free trip too. What I reckoned was that even if one out of ten who went for the presentation joined the club, the free tickets would have been covered.

It was a clever marketing strategy and a dangerous one at that, but my point is that the cost of the free tickets would have been paid by those who do sign up. One thing I did not do and should have done was to check whether the free travel included the fuel charge and airport tax.

The hotel stay was likely true because the organization also had a timeshare company and there would be excess capacity and anyway, it is always “subject to availability”.

When is a gift really a gift?

When you don’t have to “pay” for it and when others don’t have to pay for it except the giver.

This reminds me of the definition of a true dinner treat – when the people you invite don’t have the means to invite you in return.

Everyone loves to receive FREE gifts, especially the ones given by genuine friends with no strings attached and no gifts expected in return.

The word FREE is actually redundant because gifts are by definition FREE. But the commercial world has bred a cynicism that nothing is for free nowadays, not even a gift.

Gifts are generally considered good and Christmas is to most people still a time for giving and receiving of gifts – a practice no doubt inspired by the Magi bringing gifts of gold, frankincense and myrrh to lay before Jesus. For these Magi gifts were an expression of worship.

But for many, “a gift opens the way for the giver and ushers him into the presence of the great” (Proverbs 18:16)

And “many curry favour with a ruler and everyone is the friend of a man who gives gifts” (Proverbs 19:6)

So effective are gifts for opening doors and getting favours and goodwill, that they can become bribes.

“A bribe is a charm to the one who gives it, wherever he turns, he succeeds.” (Proverbs 17:8)

But bribes are often to prevent justice.

“A wicked man accepts a bribe in secret to prevent the course of justice.” (Proverbs 17:23)

In the financial services industry, there are widespread giving of gifts and incentives which can easily become “bribes” and colour the Financial Adviser’s judgment.

There are guidelines provided by the regulator, and these are summarized here.

But there are many ways to get round these guidelines.

E.g. a product provider is not supposed to offer any financial payment which are production-related as this would incentivize the Financial Adviser and the Representative to sell more of this product provider’s products to gain a higher compensation, and this MAY be at the expense of client’s interest.

But there are other ways to compensate the Adviser which are off the record. Willing parties can think of ways to get round any problem. As the saying goes, “Where there’s a will, there’s a way.”

And what about “incentive trips” given to Representatives who do well? Are these offers by certain companies permissible if they are known beforehand (e.g. if you hit certain targets)? What if the selection is made only after the period of production? And what if this is made a regular practice so that it can be expected year after year?

Obviously, the answers are not so clear. The fact that only certain companies have implemented incentive trips and of various kinds show that interpretations can differ.

The ultimate factor is whether the Representative is being influenced by these incentives to recommend products which are not the most suitable or “competitive”.

When the products are suitable and competitive, and the Representative receives the incentive, it may be argued that it is a win-win situation for the Representative and the client.

Some FAs think that an easy way to avoid any problem is not to call themselves independent. They reason that if they do not claim to be independent, they are subject to less stringent rules. They think that they can now receive incentives and special payments for supporting certain product providers more than others, and not get into trouble with MAS. But what if the products which they now recommend most of the time are not the best of class from the stable of companies which they are able to distribute for? Even if they don’t get hauled up, what about their conscience?

And what if they have not mentioned to their clients that they need not recommend the best of class product?

Do the clients know that there is a difference between the Independent FA and the non-independent FA? Shouldn’t the clients be informed by the FA that he is getting additional payments if he promotes a certain company’s product?

The acid test and fundamental question is whether clients’ interests are served best in every sale.

One of the decisions I made is not to receive any form of payment from any product provider, which will tie my firm down to supporting any product provider. The grapevine says there are firms which have done so.

This is an important decision as we operate as an independent financial adviser.

We do receive small gifts and sponsorship for certain events, but we rotate these and always ensure that we are not obligated to any product provider.

When our advisers qualify for incentive trips, we look into whether clients interest have been upheld.

When is a gift a bribe? When your conscience, if it is still sensitive and not dulled by years of rationalization, tells you so. And when you can’t talk about it openly.

Perhaps no greater warning could be sounded against ignoring the fine print than that by Minister Mentor Lee Kuan Yew reported in the local papers on 10 November 2008.

Commenting on the losses suffered by many who had bought the high notes and minibonds which were affected by the financial crisis, particularly the collapse of Lehman Brothers, he said, “Higher returns mean higher risk. So when somebody tells you you get 1½ per cent from the bank, I give you 5 per cent, read the small print carefully because how can they pay you 5 per cent unless they are in dire need of the money? And if they are in dire need of the money, would you want to buy what they sell you?”

The Bible says, “Let your yes be yes, let your no be no.” James 5:12

In other words, say what you mean and mean what you say, and no need to swear by anything. Speak the truth always and make no false or empty promises. Plain speech on plain truth, no double speak or cunning use of words and twisting of meaning of words to mislead, deceive or confuse.

There is a proverb which says the more the words, the less the meaning.

I think it was Lord Byron who mentioned having to “explain the explanation” of certain people. And we know of the bombast of people full of sound and fury signifying nothing.

Ideas and words have great power and spin doctors and advertisers are paid handsomely to promote the popularity and sales of people and products. In modern economies driven by keen business competition for markets, it is expected and accepted practice for the sellers and the creative people they employ or engage, to do their best to sell their products.

But the phrase “Terms and Conditions apply” is now generally taken to mean “These are the real terms – the big print is mere advertisement.”

WHY MUST THIS BE SO?
Lest I be misquoted, I support advertising and marketing as essential business practices. Advertising has its place and play an important role in modern commerce. If the saying is true that nothing moves until a sale is made, it is just as true that nothing moves in sales without advertisements.

It is said that the salesperson is the company’s best direct advertisement. Print ads, radio ads, and TV ads also play a great part in building brand recognition and also promoting specific products and services.

Every time I read the Straits Times, I have a strong urge to buy SPH shares – just look at the number of ads, whether in good times or in bad times. And some ads are really creative in a good sense, although their constant bombardment can be wearisome.

What I don’t like about ads is when the advertising brains exercise “poetic license” and creative license and play fast and loose with facts or use deceptive means to make claims which are fictitious or false. I am tempted to quote examples, but out of prudence I will not.

Suffice to just refer to the different techniques that are used. It is tempting to mention about the beauty and slimming ads, but I will stick to ads in the financial services industry.

TECHNIQUES TO GRAB ATTENTION AND REDUCE DEFENCES
One technique is to show a very high interest rate e.g. 8 per cent. The intention is that the person seeing the ad will be attracted by the figure. The first thing which comes to mind is that, wow 8 per cent per annum. But on closer examination, it may be 8 per cent only for the first three months and then it’s something else.

There is such a thing as the effective interest rate which is a very important concept, but if this is shown at all, it is not in the ads but the fine print. For a better understanding of interest rates, see article “A Matter of Interest”.

The mention of a big interest rate or returns “up to 10 per cent” immediately focuses one’s mind on the 10 per cent, but up to can mean 0 per cent to 10 per cent.

This reminds me of the CDs with labels showing “songs by” followed by the name of a famous singer e.g. Elvis, but when you play it, the sons are truly by Elvis but actually sung by another unknown singer.

Another variation is that if a investment product is for five years and the simple interest return is 5 per cent per year, the big Ad grabber will cry out 25% interest.

You have to go some way down before you note that it is for 5 years and that it is actually simple interest and not compound interest.

It used to be more common that some insurance policies offered simple interest return, while others offered compound interest return. When you see simple interest being used, you have to be careful to compare apple with apple.

The moral of the story is to be careful to read the terms and conditions.

The chairman of DBS, Mr. Koh Boon Hwee was quoted in the Straits Times on 12th November saying that DBS will preface every investment it sells with a summary sheet and customers must affirm that they have read the prospectus.

It would be better if the summary sheet contains the material facts or the main points of the product – e.g. features like effective rate of interest per year, whether capital guaranteed or capital protected, whether derivatives are involved, whether there are currency risk exposures. And of course all the fees and charges and penalties for early redemption.