Vacuum cleaners and the financial service
Thursday, 26 June 2008, 8:00 am | 996 views
Wilfred Ling
One week ago, a salesperson came to my house to demonstrate and sell a vacuum cleaner. It was an impressive vacuum cleaner with many capabilities:
The machine was highly sophisticated and her four hour demonstration was highly impressive. My wife and I felt that this is a good product. The catch? It cost 10 times that of a traditional vacuum cleaner that we had bought one year ago.
The salesperson (let us call her Promoter A) was highly persistent and told us that if we decide to buy on another day, the cost will be 15% more. To get the “good” price, we must buy on the spot. Of course, my wife and I never make purchases on the spot. We would discuss privately before making a purchase. This person made us feel obligated because she said she is commissioned-based. If we were to make the purchase later, it becomes a direct sale and she gets no commission. After much persistence, the salesperson gave us two days to think about it.
My wife and I discussed and felt that it is necessary to evaluate whether the purchase of the vacuum cleaner is a need or a want. Moreover, we recognized that it may become a white elephant since we might not use it often. Considering its sophistication, we may not fully utilize all its functions. In fact, we realised that our need is to have a vacuum cleaner that can remove dust mites and at the same time perform the traditional vacuum function. The children and I have sensitive noses and so a dust mites removing machine will be useful for the family. We do not need to purify the air because our house windows are frequently opened. Additionally, we prefer to engage a professional air-conditioner service person to maintain our air-conditioner. I have no desire to clean the air-conditioner myself for fear of damaging it.
The next day, we went to an electrical department store and asked whether they have a dust mites removing vacuum cleaner. Promoter B told us that they do not sell it. As we were about to leave the store, another salesperson (Promoter C) who overheard our query came to us and told us that she does sell it. Although it is the same store, apparently each salesperson only represents a certain range of products. She recommended the lowest-range product which she said is suitable for us. I also noticed that her vacuum cleaner employs a different technology. The price is just 1.5 times that of the traditional one. My wife and I decided that when our present vacuum cleaner breaks down (which can be soon since electronic products do not last so long these days), we will do a thorough research in vacuum cleaners as it is apparent to us that there are many choices in the market place.
Similarities with the financial service
There are many similarities of the above to that which transpires between a financial adviser and a client. Whether it is a private banker, an insurance agent or an independent financial adviser servicing their clients, there are similar issues that arise:
1. Just as Promoter A did not ask us what we really need, many financial practitioners do not ask their clients what they really need. The result is hard-selling of products which may not be suitable for the client. Since their remuneration is based on commissions, clients are often pressured into purchasing a product. Some salaried financial practitioners have high quota to meet and so they may be hard pressed to close a sale.
2. Some financial practitioners are restrictive in their product range. Frequently they are only able to represent one product manufacturer and thus cannot give accurate information – just as Promoter B gave us incorrect information.
3. There are also many financial practitioners that desire to do a good job by seeking to understand the client’s needs. This is good. However, if they are restricted in their product range like Promoter C, clients may still have their doubts.
Before anyone thinks that the solution is to seek a financial practitioner who can carry products from many manufacturers, I like to highlight one more problem. Just as Promoters A, B and C are compensated through commissions only, the commission-only financial practitioner may not serve the interest of the client. The client may feel obligated and the practitioner may be tempted to recommend expensive products.
A fee-based approach
The work of a financial practitioner can potentially be as short as half an hour to as long as 20 hours. This depends on the nature of the work involved. The process of setting objectives, fact finding, analysis, recommendations and product comparisons can at times involve hours of preparation and answering queries from the client. With this in mind, financial practitioners should charge their client a fee for this work. However, this is easier said than done.
Recently, I met up with a client who had asked for a financial planning service. I told him that I prefer a fee-based approach. There is no obligation to buy anything from me. He hesitated. I asked him this question, “Would you pay your contractor for providing a renovation service? Would you pay a consultation fee to your doctor when you are ill?” He did not say “yes” but answered, “I know where you are coming from.” I continued, “Since you desire a financial planning service, would you then pay for that service?” His answer was: “I am not ready for it; I want a commission-based service.”
Although most clients will not be that explicit, the truth is that most people expect financial practitioners to work for free. Is it any surprise that some financial practitioners make clients feel obligated to buy something? Therefore, I suggest a fee-based approach when engaging a financial service.
By the way, did anyone wonder why I allowed Promoter A to come to my house to do so much work in demonstrating her vacuum cleaner? The reason was because the telemarketer prospected my wife stating that they are offering a cleaning service and have ceased the business of selling vacuum cleaners. My wife was keen to know more about the cleaning service. Unfortunately, it turned out to be a product sale. Despite being willing to engage a cleaning service for a fee, we were disappointed that it turned out to be a commission-based product sale. We are already accustomed to hourly-charge cleaning services.
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About the author:
Wilfred Ling is the Associate Director of Promiseland Independent Pte Ltd. He is licensed by Monetary Authority of Singapore to provide financial advice to individuals. In his professional capacity, he manages investment portfolios for high net-worth individuals. In addition, he is also a regular columnist for various financial magazines.
Website: http://articles.wilfredling.com
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Some people with more sophisicated portfolios or in the high net worth range are less likely to reject a fee based advices because their portfolio can be complicated and the work the adviser need to do can be tremendous.
For many people on the street, they may not fancy a fee based advice because their needs is simple and they already have an idea of what they want.
It is not easy to tap into this area as there are still many advisers offering advice for free and there are no known benchmark on how much an advice is worth.
Singaporeans, being Singaporeans. They like things for free or pay for a service for as low as possible. They generally demand best service and make a lot of complains against service provider, but when it come to paying for it, they will keep quiet.
Adrian Khiat
http://akhiat.blogspot.com
Dear Wilfred,
What you need are some product providers who are willing to offer products based on their cost, with no loading for marketing.
If the customers know that they can buy the products from you based on cost (and they can save two years of savings – which is typical for a life insurance product), you will be able to get your fee. Your fee is small, compared to the saving in the product.
Alternatively, you can tell the customer that you are refunding the commisison on the product to them, to be offset against the fee.
You will need to have a way to reduce the time taken to make your recommendation. You can give a handout to the customer which explains the basic. This will reduce the time taken to give the advice.
You can also approach the fee-baesd financial planning in stages. So that the fee for each time is kept at a modest level.
Take the example of a doctor. If my doctor tells the patient that he will do a full health check and charge me $500, the patient is unlikely to pay for it. So, the doctor focus on the immediate medical problem, spend 10 minutes, and charge $20 in consultancy fee.
The patient comes back for further consultation on other problems. Later, the doctor tells the patient to do a health checkup, but it can be focused on a specific problem. So, the cost is still modest.
Maybe, financial advice should be approached in small steps as well.
I wish you all the best. I believe that your approach is correct and best for the future.
I feel that the promoter A should not make their customers feel obligated as what in this article stated because she said she is commissioned-based. It is not an good ability that show Promoter A is capable in her job. Instead it makes the customer feel bad about it and also to Promoter A’s interest. By doing so, it also make people feel uneasy, embarassed, unable to decide properly which might led people to have a rush to buy it but then later on find it unuseful. Singaporeans tend to getting the most cheap and worth things at an advantage. In the case above, it will make singaporeans have the rush to buy if upon hearing it has discount and very worth. But this disadvantage is people might have the wrong information about it actually. Like the example stated, when went to other places or shop and compared, then we will know what we really wants. This conclude that people should be calm when choosing and buying things, should compare all information regards of monetary terms or usefulness.
There are things you can compare, especially tangible things which you can touch and test but not intangible products like financial products.
Financial products are complicated . Consumers think they can compare; they think they are clever, but i am puzzled what they actually compare.
Why it is not easy to compare is because insurers are not idiots. They throw in a little bit of this and that to be different and to confuse and to make their product look new and special. You can call them reshaped or restructured or repackaged or rewrapped products. The objective is to confuse and fool the “clever consumers and using well trained and incentivized salesmen to abet . To complicate things ,actually consumers don’t know what they need but they know what they want. They want because their sisters, brothers or neighbours or colleagues have these products so they must have.So they use ‘want’ as a benchmark and there you have consumers getting
a few insurance quotations and compare. Just wonder whether these consumers are trained in finance or insurance to be able to evaluate. The insurance agents themselves are not able and some of them are as idiotic as the consumers.
Well, a sucker is born every minute so they say. it is wonder that the insurance companies ever go out of business and the insurance agents run out of victims.
Hi all. Is it appropriate to discuss this subject – what Mr Ling first wrote. No I am not being critical or judgmental nor sarcastic. I am a financial planner myself.
My concern is we may gradually digress further and further without many of us consciously knowing that it becomes a discussion of insurance, (write selling insurance) from the ignorant vacuum cleaner?
Of course Mr Ling made know that he is such and such, and our Mr Tan’s background is undoubtedly widely known.
If we are not careful in our postings, we may end up ‘inadvertently’ as adertisers or promoters of various products or services in the course of honest contribution of our opinions which are neither clearly ‘black’ nor ‘white’
Thanks folks.
Mr. Ling used the vacuum cleaner to illustrate the selling process and how selling process can eventually be misused and manipulated by the seller. Your emotion and your whole being manipulated to make you “piah say” and hope you make the buying decision. The fittest will survive the selling process and the weak will be ensnared . And if this is applied to financial products and this is what is happening today in the market place, leading to dishonesty , misrepresentaion and non disclosure . \Mr. Ling recommended fee based approached to reduce the pressure selling but how is one to be remunerated. This is the question consumers also ask and why they should pay when they can get FREE FROM INSURANCE SALESMEN.
Do consumer really get free? Yes they do. They get nothing from insurance salesmen for free.
I think customers will be willing to pay a reasonable fee upfront for sound financial and insurance advice. Rather than the alternative to pay up to some 24 months of premium for some investment linked product or what not.
I know I would =)
Hi Wilfred,
I am glad you wrote about this issue. Our partner in Australia have been charging fees for advice for many years already. In Singapore, I suggest you talk to Christopher Tan or Evelyn Goh of Providend. But I have seen their work. Personally, for close to $4,000 for a partial planning I don’t think it’s worth for money.
Just my observation, I do think you sound a bit hao lian like that.
June
The best lawyer charges $8000 per court appearance and the lowest, need not be the lousiest, charges $2000. How? “hoa lian? or low kwio?
If Christopher Tan can command so much it must be to the agreement of his cleint otherwise the cleint can cry ‘raped’. Of course, expecting the man in the street or the aunties to pay the aunty insurance agents a fee, they may think you are “seow”.
Your standing and reputation is very important and that decides the fee you charge
It is better than to see the run of the mill insurance salesman where every thing depends on luck.
Wilfred should be thankful that he got a free four hour cleaning from the promoter.
Can you imagine if one should go to an independent mite busting consultant and pay him a fee before he tries to understand your needs and then recommend you to various options and contractors. Perhaps the conversation can be something like this:
Wilfred: Hi, I have a concern with mites in my house, especially on my bed.
IndMiteCon: I understand where you are coming from, we can meet up and we will discuss your problem. Just like to let you know that I am a fee-based consultant and I charge by the hour. We will meet 5 pm at my office next week as I am all tied up this week. See you.
Will Wilfred be interested to go to this Independent Mite Consultant? I think he will prefer the promoter A and her free four hour cleaning demonstration anytime.
At least he will get four hours of highly effective mite removing action instead of having to go to the IMC to listen and pay for advice without getting the job done at all.
$4,000 for a fee-based advice may probably be affordable only for the high networth clients with a complicated situation. For most people, whose situations are simpler, I agree it is not worth the money.
A suggestion. For a fee-based advice, the consultant could upfront show the usual commission charges for whole life policies, and the benefits of paying a smaller fee first. With this common picture, the client may be more persuaded to continue the process.
A personal view. For most people, I think they can also DIY without an adviser. Most of the tips given in Kin Lian’s blog are good and practical. Also, follow the rule-of-thumb in choosing simple products. It is hard to go wrong.
The value of the advice depends on the standing of the person giving it and whether it can be easily gained elsewhere. If the advice comes from Warren Buffet, many people will likely not hesitate to pay huge amounts of money for it.
Conversely, the range of financial products in SG is quite limited compared to advanced markets like US. This limits the scope of financial planning advice. People with exposure to financial knowledge, or who knows someone who does, will not need such advice because the financial planners cannot provide any additional benefit over that possessed by these people.
Rainbow,
You are ridiculous. What about this?
You are at a foodcourt and before you get admitted the jaga stops you.
Jaga: Mr. Rainbow, you can’t go in just like that. You need to be admitted.
Rainbow: Why do I need to be admitted?
Jaga: You need to consult our dietary consultant first and get a stamp of approval,COE ( certificate of eating).
Rainbow: Don’t I have the freedom of choice?
Jaga: Yes , you do but our dietary consultant must interveiw you first and gather info from for analysis.
Rainbow: I haven’t heard of this before. Why do I need to consult?
Jaga. Mr. Rainbow, you certainly look you need consultation and our consultant can help you with the correct diet. Oh, don’t worry we charge a flat fee. Other foodcourts are charging hourly because some clients are long winded. Don’t you know that it is mandatory to have your dietary habits checked first? It is a new legislation. Have you not read it?
Rainbow: it is getting ridiculous.
Jaga: Oh, no . Our citizens are getting more litigious. We have to play safe and to make sure that you get the right food so that your needs are accurately met and our recommendations are of the best and will not give rise to complications that give you reasons to take us to court. Protection is both ways.
But Mr. Rainbow, don’t worry, our consultation fee is factored into the food that you eat. But if you choose not to let us “implement” our recommendation you may be charged a fee. It is your choice. You have the best deal in town. We waive the fee if you eat in our foodcourt.
Rainbow: I rather eat at the roadside stalls if that is the case.
Jaga: It is your choice. But let me tell you, you risk being fleeced and get stomach upset. That is no warranty. You also risk being rounded up when Ministry of Environment conducts a raid on the stalls. Good luck.
Zhummeng,
I have always respected your views but your comments about Rainbow is puzzling and obnoxious? He was obviously commenting his views on what the IFA has written about the exchange between the promoter and the concept of fee-based consultancy and commission based. Your rather blunt reaction has led me to think that you are also an IFA. Why else did you write such an exchange that have no bearing in our society? Normally I do not like to label people but I think here you are the ridiculous one for lowering the standards of the discussion here by such an outburst.
To zhummeng: your last post doesn’t make sense and i really cannot see any relevance to rainbow’s analogy.
To wilfred ling: there are thousands of job that are commissioned based, are you implying that everyone of these commissioned based salesperson does not “serve the interest of the client. The client may feel obligated and the practitioner may be tempted to recommend expensive products”?
By the way, using the doctor’s analogy of paying a consultation fee is not exactly appropriate. Most GPs I know who runs their own clinic also charges for the medicine that they prescribed and they too earn a commission from that.
There is nothing wrong with commission based jobs.
Fee-based consultation can be subjected to abuse too. Can a fee-based consultant just keep talking and talking without getting straight to the point? Sure he can. If you really want to go fee-based, can, but let the customer decide how much of the hour is worth paying. If the fee-based consultant is recommending nonsense for 2 hours, why should he be paid for 2 hours? He should be paid NIL and instead the client can asked to be compensated for the 2 hours he wasted on the consultant. It should work both ways.
I have listened to some of these fee-based “consultants” talk their shop before and I really do not agree with their analysis and yet have to pay. As a consumer, I am powerless and it is a waste of my time. That’s why I rather go for free advice. At least, if I don’t like it, I don’t pay.
I prefer the fee for a basic financial planning advice, which is suitable for most people, to be $200 for a 2 hour time slot.
The client should be asked to read some basic information (such as the FAQs in my website) to get some idea of the basics of investment, insurance and financial planning. The client should also get some data ready.
The fee-based financial adviser can do some calculations with suitable financial tools, and explain the outcome to the client.
If the financial planner handles 3 cases a day, the gross earnings of $12,000 over a 20 day working month, can be quite adequate to cover the office expenses and leave a good net income.
Some clients may need additional sessions to address more specific issues. This can be charged separately.
Passerby and Singaporean,
your are right that my post looks out of place. I have intended to be a tongue in cheek post to illustrate something Rainbow posted. My point is that if every thing you sell requires a consultation and a fee and if it is applied to all services and products as Rainbow was trying a ‘what if’ then we’ll be wondering what will become of our cost of living and inflation , pay and pay and we don’t even know what we are paying..
Some services are chargeable and some are not . Of course , it depends how the consumers percieve and how willing are they to pay. It is for the consumers to decide whether they should pay a fee or not for a service before a product is bought. It is the fee justifiable? They cannot suka suka charge ,right?
Just like a lawyer, preliminary first 1 hour discussion is free and thereafter it is charged hourly . Again it depends on the lawyer; there are variations of it and the lawyer must get the agreement from the cleint first.
Likewise in financial planning, first the client is asked if he prefers an advisory approach or a sale approach. If the cleint prefers advisory, he signs a letter of engagement which spells out the scope of his service to the cleint and the fee.
The contract also says that the fee is forfeited if the cleint chooses someone else to implement the recommendation or waived fully or partially, and all this to be agreed at the outset
Now let’s analyse this arrangement. People may think that they are paying more than an insurance agent. It is not true except for HNWI. In fact , at the end of the day consumers pay lesser . This HNWI group don’t mind paying extras because they apprecaite and understand the work of the practitioner and their reputation in the industry and financial planning is an on going and it is not a one off, like sale. Most of the time the consumers get more and pay the same or lesser. The fee is also useful to prevent some people from abusing the relationship’ ie. get free advice and implement it through another adviser.
Another question you may ask? What is advice? Insurance salesmen also give advice. They give it freely. Do they really give? Why planners charge?
It is a lengthy discussion and this is not an appropriate place .
I am not an IFA .
Zhummeng,
You misunderstood me. My analogy was used to indicate how ridiculous the situation will be if we expect everything to be fee-based. Isn’t this the same thinking as yours? I am quite sure Wilfred will understand what I am saying. In fact, if it achieved its intended purpose, it is to stimulate Wilfred to think outside the box of his approach. I hope he understands what I am trying to do to stimulate his thinking and self-discovery into his present approach. Many times a person learns best through self-discovery and reflection. This way, the learning is deep and longlasting and life changing.
[...] I posted this reply to an article on fee-based financial service posted by Wilfred Ling in http://theonlinecitizen.com/2008/06/vacuum-cleaners-and-the-financial-service/#comment-12869 [...]
I read on Kin Lian’s blog on how Wilfred implements the fee-based approach.
I quote.
For “advance” financial planning, I’ll charge $200/hour. Typically this takes 10 hours to 20 hours depending on the complexity of the work done, A timesheet is maintained for audit and a report will be generated for the client at the end of the entire process. The report is vetted and subjected to approval from my company’s appointed financial planning specialist so as to ensure all report meet a minimum standard of quality.
My comments.
Very professional approach. If you compare the fees to the commission-based adviser, it is very likely this will be more value-for-money. I like the part on audited timesheet very much too. If Wilfred can perhaps post a pdf of how the eventual report is like, I think it will be great!
The only issue I have is with the ‘appointed financial planning specialist’.
As this specialist is from the company, I feel there may be a vested interest. One way to counter this will be for this specialist to be paid executive, and holds huge responsibilities in signing-off to ‘pass’ the report, analogous to the CPA. Of course, this person should have clocked a number of years of experience and be highly accredited (somehow).
Then, these will further be audited by the regulator (MAS) by taking samples to add an additional layer of check. If MAS finds the appointed FP specialist and adviser to be unprofessional in their dealings, the company can be fined and the respective licenses be suspended. If this can be down for all insurers, brokers, distributors, I think the amount of product pushing will go down drastically.
Thinking further, maybe the report to MAS can include stipulated scenarios, assumptions made, limitations, and how the financial solution will be triggered in all the scenarios, followed by a conclusion of the limitations of the solution (afterall, no plan is perfect).
In his latest posting, Wilfred mentioned that investment in the yuan currency is only available to accredited investors. I have invested in the Yuan currency for the past year, and getting more than 4 percent interest as well. It is very possible to do it. I am surprised that Wilfred find it difficult to do. I wonder how he can charge 200 dollars an hour for financial advice if he is not financially savvy enough to know that it is quite easy to invest in the Yuan currency without going to the money changer and keeping it under his pillow without interest. I am posting here because his blog does not allow non-accredited investor to post a reply.
After re-reading your “ridiculous” posts many times it dawns on me you are also actually reinforcing Rainbow’s subtle message in showing how ridiculous it can be to be charging hourly for everything. It seems that it is also poking fun at those FAs who will waive the fee if the customer buys a product from him otherwise the fee is chargeable. Tongue-in-cheek indeed. Profound.
Hi everyone, I was from the insurance industry and I’m planning to return to the financial-services industry. I prefer giving investment/retirement/financial planning advice instead of selling insurance and doing so on a fee basis as I believe in giving unbiased advice, and not saying “my company’s products are the best” all the time. I have M5, M9 and HI. I’m aware that currently Providend is the only fee-based financial-services company. Any idea on how their employees are renumerated and what qualifications are required?
I would appreciate any advice given, and sorry if I use this space for Q&A purposes.