Be A Model Of Best Practice

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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 a 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 the 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.



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.



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



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 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.



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 which is understood by the client, and getting 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 a 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.



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.



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.


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 benefit 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.



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’ interest. He represents the interests of his Principal, the insurer, legally and practically. By definition and restriction of his agency agreement, he can never put client’s interest first.

When I entered the insurance industry in 1985 at age 36 being better informed and knowing a little about 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 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.



The business model which is best able to take care of clients’ interest best is the Independent Financial Adviser who 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!

Who Takes Care Of Clients’ Interest?

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The saddest lament in the Bible is “no one cares for me”.

In this “dog-eat-dog world” and “rat race”, one can ask “who will take care of our interest?”

Even in business, when we pay for goods or services, we have a right to ask whose interests are the vender or sales person serving – the clients or their own?

In Philippians 2:20-21, we read of Paul complimenting Timothy and commanding him to the Christians of the church in Philippi for being one “who takes a genuine interest in your welfare. For everyone looks out for his own interests…”

In the financial services industry, the existence of regulations and the threat of disciplinary action of the regulators are important but anecdotal evidence is aplenty that there is still misselling and other malpractices like churning and use of unlicensed subagents in some cases.

There are big differences in the sales process and the basis of recommending products differs from firm to firm. The level of training and knowledge of the advisers also differs. The moral and ethical standards of advisers obviously depend on their advisers’ religious and moral code and upbringing.

Although the Financial Services industry is considered regulated in some ways, there are obvious differences in practice standards and often it is a case of what minimum standards to maintain rather than maximum standards to strive for which translates to higher cost and greater sacrifice of time on our education and clients’ education.

The point is that best practices are only appreciated by people who are in the know and not many clients are in this category. So product pushing, pressure selling by emphasizing only the good and not the downside and use of gifts and prizes to attract those shoppers who are looking for good bargains rule the day.

What can be done and who is to do it?

The regulators can only do so much. The practitioners ought to do much more to raise standards of professionalism and client interest. But the most important person to bring about changes is the CLIENT.

Clients are the only one who can make the practitioners shape up – both companies and advisers. What should clients look for and insist on?

  1. Appoint an adviser who looks after your interest and not one who represents the interest of the financial institution. Do you know that only licensed independent financial advisers legally represent your interest in the full sense of the word? Unlicensed Financial Advisers do represent clients interest to a certain degree but are not required to give the fair and objective advice which IFAs are mandated to give.
  2. Get the adviser to reveal his credentials and experience and capabilities. Demand      full disclosure of:

(i)                  Which product providers he can distribute for

(ii)                The product details, especially the risks and not just the benefits

(iii)               The type of service you will be getting, especially if the adviser charges a service fee or wrap fee. Ask also about the continuity of the service and whether the same person can be expected to be your adviser

(iv)              The comparison of the product being offered with what are offered by competitors. Also, what other alternatives are there. Instead of focusing on what is being offered, focus on what the market offers

(v)                Always take your time to consider and deliberate over your decision. Sales people are notorious in wanting to make you make quick decisions by dangling offers and gifts which only apply for the day in question. Shun these sales tactics
Take your time
Ask for second opinion
Most advice is free
The thing to remember is that faced with the reality that everyone can be expected to look out for his own interests, only deal with a person you can trust with your money.

What evidence is there that you can place your trust in the adviser and his advice?

Lehman Brothers Saga – A Root Cause?

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Perhaps the first subject to zero in on is this Lehman Brothers saga.

Should those who know the Book do differently from what was done by the Relationship Managers or Financial Advisers who recommended and even pushed the product to their clients?
Proverbs 10:22 is a verse many wealthy people like very much.

“The blessing of the Lord brings wealth, and the Lord adds no trouble to it.”
This verse means that wealth which is a blessing of the Lord comes without any troubling side-effects or undesirable consequences.

Many people have traded their health for wealth.

Many people have got into a lot of trouble in their desire for wealth.
1 Timothy 6:9

“People who want to get rich fall into temptation and a trap and into many foolish and harmful desires that plunge men into ruin and destruction.

For the love of money is a root of all kinds of evil. Some people eager for money, have wandered from the faith and pierced themselves with many griefs.”

Even Christians of many years and especially those who have tasted of the pleasures of wealth can be sorely tempted by the “golden calf” of materialism.
Hebrews 13:5

“Keep your lives free from the love of money and be content with what you have.”

One of the hardest lessons is “Enough is enough”.
Wealth obtained other than from godly wisdom and the blessing of God will usually breed greed and develop wings, here today and gone tomorrow.

The recent collapse of Lehman Brothers and crisis faced by AIG and many other financial institutions have a financial cause, but perhaps there is a root cause.
There are many questions which can be asked of the practices of both investment banks like Lehman Brothers and the banks and other distributors of the product like structured notes and minibonds.

Based on news and commentaries by economists, greed or “easy money to be made” was probably the root cause. If banks can lend out money and transfer the risks of the loan repayment to others, then there is lesser need to assess the creditworthiness of borrowers. The sub-prime housing bubble was due to easy credit and also the banks banking on the opportunity to make easy money quickly.

The credit default swap (CDS) allowed the banks to pass on the risks to counterparties (like AIG) which took the can when the cans of worms were opened. The slicing and dicing of the home loans into collaterized debt obligations (CDOs) and selling these off to other institutions across the world further allowed the originating banks to make even more money while also passing on the risks to others.

Whether you call it “unbridled capitalism”, “financial engineering” or plain greed, the effect was that when the original card of the sub-prime mortgages fell, the other cards also fell like dominoes.

Unfortunately, the buck has to stop somewhere and this led to the fall of the financial institutions which held the eventual risks.
In retrospect, this whole thing is like an accident waiting to happen. A lot of business was generated by the derivative products but it is business which stand or fall with the original product. In this case the original product was the home mortgage. Arguably, if the home mortgages were all done properly (i.e. only creditworthy home buyers qualify), there wouldn’t have been a crisis. But Alan Greenspan’s years of low interest rates could logically be expected to lead to easy credit and sub-prime loans which became the “toxic assets” of today.

Governments will have to grapple with the issues of whether derivatives have their role and how their trade should be regulated.

I am more concerned about how we should view the financial products that have been manufactured and how these are marketed and to whom.

The things which all of us like to see are transparency, full disclosure of the benefits and disbenefits and risks, identification of the needs and financial objectives of client, attention to the investor’s risk appetite and tolerance and the investment time horizon. Another important factor is respect for client’s confidential information and also no taking advantage of any of their weaknesses or vulnerabilities.

Many of these important requirements stipulated in the Financial Advisers Act were not kept.

If what I am informed about banks getting their RMs to get their clients to agree to sale option 4 is correct, then it is clear that the recommended approach of financial needs analysis and proper recommendation was not followed. Option 4 states that the clients does not need advice and means that he is making the decision on his own without relying on the advice of the RM.

If the structured products are high risk and complex products, how fair is it for the distributors to state that no advice is required? It is no wonder that the banks are asked by the authorities to do what is right and not what is legal, to resolve the claims for compensation. For legally speaking, any client who has signed Option 4 has weak legal legs to stand on. He can go for misrepresentation or misselling, but these are harder to prove, especially if the clients are educated and can be reasonably expected to know what they bought.

It is interesting that the typical Financial Adviser Representative takes a minimum of two to three meetings of a few hours each to complete the sales process for even a simpler medical product or life insurance product. The objective of the banks is to close the client in one meeting. Is the “reasonable advice” stipulation in the FAA observed?

Clients should also be informed that the banks are not required to provide fair and objective advice and a choice of products, when the Independent Financial Adviser Representative is required to do.
Why then was there so much sales of structured products and even life insurance products through banks?

Many reasons have been given – trust, the banks knew the financial standing and amount of money the clients have with the banks, the convenience of just filling in some simple forms.

The main factor is trust. Banks are known to be big, strong and friendly. But in the recent crisis, client’s need to pay excessive tuition fees to learn that banks are also motivated to make money. Many clients were not aware that generally banks charge bigger upfront fees than Financial Advisers. Banks also have sales people who are driven by quotas and threat of termination. In fact the quotas set by banks are higher than that set by some FAs and insurance companies, to recover the salaries that are paid to the RMs.

The lesson learnt from this recent Lehman Brothers saga is that power lies with the Financial Institution or the Financial Adviser. What can be done to ensure that advisers use all their knowledge of products and process in only recommending products which are in the best interests of clients?