Month: March 2018
For many years, independent financial advisors in the UK have operated on a sales-driven commission model. This has meant that instead of being paid directly by those who came to them for impartial financial advice, they received a commission from the providers of the financial products as a marketing cost, with the advice function being a secondary consequence of the transaction.
While this offered short-term benefits for the cash-strapped consumer looking for financial advice, it brought a host of problems. The most obvious was that financial advisors were incentivised to recommend products that paid them attractive commission not necessarily those that were right for their clients.
This problem reached its peak with the pensions mis-selling scandal, which saw thousands of people move out of occupational pensions schemes when they would have been better advised to stay put. Although it first came to light many years ago, pensions mis-selling was still a problem as recently as 2008, when unscrupulous financial advisors were found to be encouraging investors to switch their pensions at a total cost of 43m per year.
As things stand, advisors can take commission when they sell products such as pensions or unit trusts, as well as a trail or recurring commission for every year the consumer holds the product. According to the FSA, these commissions amounted to an average of 5.6% of the sum invested. So while financial advice might be free at the point of sale, it certainly does have an impact on the performance of an investment and, more importantly, it is clear that the advice given to the consumer can never be truly impartial.
However, there is a different way, as Neil Shillito, Director of leading financial advisors SG Wealth Management, explains. Stephen Girling (my fellow director) and I wrote our business plan in 2000, and we felt that the best way to run a higher-end financial advice business was on the basis of what is now known as Customer Agreed Remuneration, he says. Put simply, what advice and service can I expect to be given, over how long and at what cost? People in the industry looked at us as though we were mad. But we were ten years ahead of the thinking at that time. Slowly, the Regulator and the industry have accepted the changes.
The firm has a completely transparent model, where clients are simply charged a percentage of their investment in return for first class advice and service, irrespective of and unrelated to investment products. It took time for the firms offering to catch on, but it soon proved popular. It was very tough in the early years, recalls Shillito. We didnt have enough clients to generate referrals, so we worked hard to build up our presence in the local community and demonstrate that our business proposition added real value to the right kind of client. Despite the horrendous market downturn in 2001/2003 as a result of the bursting of the “tech bubble”, we became profitable in our fourth year, and have become increasingly profitable ever since. Even the recessionary period of 2007/2009 has failed to make a dent in the robustness of our financial stability.
It seems the rest of the financial advice industry is now coming round to SGWMs way of thinking: from 2012, UK financial advisors will be forced to charge the consumer directly for their services. Is SGWM concerned about the influx of new competitors? No, not really, Neil replies. We have a ten-year head start in terms of what the FSAs RDR [Retail Distribution Review] will bring in 2012. Firms that are changing slowly or reluctantly are going to find it hard to adjust, while were already accustomed to delivering our financial advice this way. If anything, it will be good for us, because it will raise awareness and acceptance of the direct-charging model.
Singapore private banking has grown massively over the past decade. Assets under management at Singapore private banks have grown to around 300Bn, 6 times what they were 10 years ago. It is estimated that Singapore manages around 5% of the world’s private wealth, while Swiss private banking manages around a quarter.
Singapore has benefited from tight bank secrecy regulation, in addition to a rise in the number of Asian millionaires, especially the type that want to invest with private banks and financial instruments rather than in property.
Yet in response to demand from the G20 group of developed countries, Singapore has promised to rethink its ultra private secrecy laws. Like Switzerland, Singapore has to walk the tightrope between keeping its sovereignty and international acceptance of its laws and banks.
One of the reasons why Singapore has grown is because it already was a large financial center in its own right. Unlike smaller tax havens and dependencies of other countries which have been accused of ”inventing” laws to benefit from capital flight, Singapore is a long-standing trading hub and center of international financial settlements.
There are several arguments in favour of Singapore keeping its privacy laws. Many private banking clients in Singapore are very powerful people among neighbours like China, Indonesia and Thailand. It’s in their interest to ensure that Singapore bank secrecy is not relaxed. Furthermore, Singapore is an international financial center – it cannot be blackmailed in the same way as other jurisdictions.
However Singapore has made concessions, and may not necessarily see its future in harbouring Western tax evaders. Singapore has signed TIEAS with a number of countries and promised to adopt article 26 of the OECD model tax convention on information exchange over tax matters.
After Swiss banking secrecy was put under the spotlight, it was widely reported that bankers were urging a massive flight of capital to Singapore, where bank secrecy rules still held strong. But in reality, basing any structure on bank secrecy is like building a house on a fault line, it’s bound to change. The smartest investors instead used techniques which do not depend on bank secrecy in any single country.
Savvy private banking clients are now using distinct structures which operate independent of bank secrecy such as investing through trusts or trust companies.
Further, the reasons for banking in an offshore centre like Switerland do not depend entirely on tax. In fact the biggest reason is security. Hundreds of banks have been going under in the US, not Switzerland. Investors are also escaping from currency devaluations, civil forfeiture and frivolous lawsuits.
Singapore wealth management is certainly growing in sophistication, but it is still in a learning phase. During the mid 2000’s when Singapore’s private banking industry was growing rapidly, it was alleged that ther were not enough bankers to meet demand. Singapore private banks were instead employing local hairdressers and carsalesmen with good people skills and turning them into private bankers.
Singapore private banking is modelled closely on Swiss private banking, even down to its family trust law. In terms of weathering geo-political events like the war on bank secrecy, Singapore may have to follow the Swiss lead also.