Richmond Tung

Ever since I started as an Independent Financial Adviser practice, I’ve probably heard of complains from clients that their “advisers” do not contact them at all until there is a new product to sell to them. These clients often felt that their “advisers” were just out to make money and after that, no more after sales service.

For the answer the crux of this problem lies in the way these “advisers” are remunerated. Let’s take a look at the various models of remuneration in the industry.

For some illustration purpose let’s have a example to guide the discussion. Let’s say the adviser wants to earn $2500 per month in commission (take home salary). Assuming that the adviser has a company level banding rate* of 60%, the gross revenue to earn is 2500/0.60 = $4166 approx.

*The banding rate is a calculation basis used by some company to derive a payout of commission to advisers based on their productivity levels. The higher banding rate you are, it means you are a top producer with a bigger total gross revenue before payout. It usually ranges from 50% to 80%.

Model 1 – Transaction Based Earnings / Revenue

Assuming each sale can provide $500 in gross revenue, the adviser needs to close nearly 8 cases / clients per month to hit a total gross revenue of  $4,000. For illustration purposes let us assume this $500 is the present value of current and future revenue commissions.

Therefore in one year he would have accumulated 8*12 = 96 clients. In just under 2 years, there would be accumulatively 200 clients approx. In 5 years time maybe 500 clients?

Of the 365 days per year, only 252 are the official working days in a year. Will it be possible to provide any “after-sales” service for more than 252 clients then? Some advisers I have seen seems to think so, hence to their clients who do not generate any more new sales for them are cast out. Some advisers think that, “hey, in 1 day I can definitely catch up with 3 clients per day, each ranging between 2 to 3 hours.” Hence their limit would be stretch to 700 over clients.

This particular model allows for bias product selection and hard selling from the advisers part, so that revenue targets can be met. As you can see, this model does not provide for the adviser to retain existing clients because earnings have to be based on new sales.

Most “advisory” firms employ this model. Most financial institutions tend to use this model because of the focus on short-term profit rather than long term relationship with client. Most banking institutions’ front line staff are salaried with a variable performance bonus hence the need to meet sales targets. If they cannot meet their sales targets, they will be fired. So they end up chasing short-term transactions and get into these same problems as everybody else in the industry.

Model 2 – Asset Under Management (AUM)

In this model, the adviser would get clients to invest with them and hence generate their revenue via an annual management fee. Using the same illustration on the gross revenue required, he need to earn 4166*12=$50,000 per year in gross revenue approx. To achieve such a gross revenue, the adviser would needs to have an AUM of at least $5,000,000 assuming a management fee of 1% per annum.

Therefore, to reach such a target, assuming that the investment each client need to invest is an average of $100,000, the adviser would have 50 such clients.

This model will allow the adviser to be more selective to the clientele he/she works with and give more attention to those he is already working for.

The major disadvantage is that, each client must invest at least $100,000. Regardless of whatever investment risk profile the client is, that sum of cash or CPF monies is quite a large amount to bear with on the clients part. In Singapore alone, not many will be able to fork out such a sum without blinking the eye.

Model 3 – Agreed Annual Fee

In this last model, each client agrees to remunerate the adviser based on an agreed yearly fee.

Assuming that the annual fee agreed is $2000 per client per year. This means that he need to have at least 4166*12/2000 = 25 clients.

This figure means that the adviser now can afford to meet each client on an average of 10 times a year based on the number of working days.

There is a provision on how the adviser will be able to support his existing clients. Moreover, clients do not need to invest or buy products. The adviser is free to advice on a wide ranging of financial matters such as tax, estate planning, investment bought from another adviser and insurance.

The slight disadvantage of such a model, is that unless the agreed annual fee can be adjusted for inflation; the adviser will still need to acquire new clients just to maintain his earnings at the same level on a long-term basis.

In Singapore, most “advisers” employ Model 1. Some uses a combination of Model 1 and Model 2.