I support the new Balance Score Card (BSC) framework that all financial advisers will be subject to ("Financial sales reps face audits from next year"; Dec 11).
However, I also agree that clawing back commissions is unfair ("Unfair to hold back sales reps' commissions" by Mr Cheang Weng Keong ; last Thursday).
The BSC framework seeks to impose a financial penalty on financial advisers who fail to meet certain key performance indicators (KPI).
However, the framework does not encourage anyone to excel in his advisory duties.
Employees usually receive extra bonuses or are given a promotion for meeting certain KPIs.
Any human resource practitioner will agree that people work best when they are given incentives, since they encourage excellence.
The lack of bonuses, or being denied an expected promotion for failing to meet their KPIs, would already be a penalty for poor performance.
However, the financial advisory industry in Singapore seems to be the only occupation that deducts remuneration but provides no incentives for excellence.
I am aware there is nothing stopping financial institutions from rewarding advisers who demonstrate excellence in their work.
But many financial institutions have decided to cease deferred compensation such as a year-end bonus. The rationale is that if the remuneration has an unknown deferred component, it is administratively difficult to calculate the amount of remuneration to deduct in the event of an infraction.
While the BSC framework will ensure customers receive advice that is of a minimum standard, this could be all that they will receive.
But customers will not be satisfied with an adviser who is only required to meet just a minimum standard.
The Financial Advisers Act, (Section 27), in a nutshell, states that products that are recommended to customers must be done so on a reasonable basis.
Yet, advice that is "reasonable" does not necessarily take care of customers' interest.
If there are two products that are deemed suitable for the client, it is now more likely the product that provides a higher commission, probably also the more expensive product, will be recommended instead.
This is more likely than in the past as many financial institutions are now faced with lower profit margins - due to higher compliance costs - and know there is no financial penalty for recommending more expensive products, as long as they pass the "reasonable basis" test. Customers will have no recourse in such cases.
The authorities should consider replacing the penalty-based regime with one centred on incentives, in line with practices in the human resource industry.
Advisers who continue to flout the law by recommending unsuitable products should be dealt with separately, through mechanisms such as counselling, suspension or even termination.