On June 15, the Monetary Authority of Singapore (MAS) issued a statement reprimanding four financial institutions for violating risk management and supervisory remuneration standards.
While each institution was reprimanded for different things, the main issue was the breach in the Balanced Scorecard requirements (BSC) for the sale of investment products and the Spreading and Capping of Commissions requirements (SCC) for the sale of regular premium life policies.
Under the BSC, supervisors’ and representatives’ variable income are determined with reference to the fulfilment of non-sales key performance indicators (KPIs).
Under the SCC, insurers and FA firms are required to cap the variable income payable to representatives and supervisors in the first year and spread the remaining variable income payable over a prescribed period.
MAS
These guidelines were set in place by the MAS to ensure that the motivations of financial adviser (FA) businesses, representatives, and supervisors are aligned with the interests of their customers. A violation of these guidelines could suggest a conflict of interest.
When I saw this, it piqued my interest in the remuneration of financial advisors.
How much do financial advisors get paid?
Is it really an appealing career, even with so many people in the field?
Financial advisors salary
Before I begin, let me state that I am not a financial advisor, therefore what I share here may not be exact figures. Nonetheless, I believe the figures you see below are reliable indicators of their income. (If I’m mistaken, please let us know in the comments section below!)
A casual search online will not reveal any official statistics on how much financial advisors really earn. This is normal as the amount that financial advisors make varies according to how many clients they can get.
However, if you were to read on Reddit or other forums, we can see some advisors in their 20s making $30,000 to $100,000 per year. These advisors may still be schooling and are bringing home $2500 to $8000 monthly, which is pretty impressive.
I also manage to get this figure from Indeed on a particular insurance company in Singapore. The average pay for financial consultants aka financial advisors is around $4,366 per month.
That’s not all.
As financial advisers advance in their careers and begin to expand their teams, they could earn between $200,000 and $500,000 annually, which is about $16,ooo to $40,000 monthly.
On top of that, we should also consider the bonuses that agents may receive in addition to their commission, which will boost their earnings.
Of course, none of the figures above covers business expenses such as transportation, telephone, and gifts. Furthermore, unlike office workers, most financial advisors do not have a CPF contribution or medical coverage.
Still, we can confidently assert that it is a profitable industry.
Insurance Commission Structure
We managed to get some commission data from one of Singapore’s biggest insurance firms. I’ve compiled them to the best of my ability in this table.
Of course, different companies have different commissions rate. However, the table below should provide general sensing.
The table above can be read in the following way.
Suppose you purchased a 15-year endowment plan that required a $300 monthly deposit ($3600 annually).
Your financial advisor would earn 30% of your first-year premium, which is around $1080. In the second year, he would receive 15% and subsequently 6%, 3%, etc.
From the table, it’s easy to see why certain financial advisers might prefer specific products like Investment Link Policy over others like term insurance. The commission is simply too tempting.
That isn’t to imply we shouldn’t use ILPs or whole-life plans because everyone’s situation is different.
Are you surprised by these numbers?
Now let’s break down to individual products and see how much my financial advisor could be earning from selling me insurance products.
My situation
For the calculation of the premiums, I would be using data collected by ValueChampion, a website I highly recommend for comparing different insurance policies.
Hospitalisation insurance
First up is hospitalisation insurance. This, in my opinion, is the most essential insurance, and everyone who can afford it should get it.
As Singaporeans, we are covered by MediShield Life, a national insurance plan. Under this policy, part of our medical bills are covered by it. However, the remaining which are not covered has to be paid in cash or with our MediSave.
This is where hospitalisation insurance covers the gap. With hospitalisation insurance (Integrated shield plan), the amount of cash required to fork out for our medical bill would significantly decrease.
A recommended benchmark is to get a Private Hospital (or at least a public A ward). The reason is that there are differences in treatment from both private vs public hospitals, and it’s quite a world of difference in terms of waiting time and services.
For a 25-year-old policyholder (with no pre-existing conditions), the average yearly cost of Integrated Shield Plans for A Ward and Private Hospital Coverage is $90 and $300, respectively.
While the average cost for someone 45 years old is roughly $233 and $1061, respectively.
Source: ValueChampion
Critical illness
Next is Critical illness coverage. Critical illness insurance offers a lump sum payment when you are diagnosed with an illness covered in the plan. This money can then be used to pay for your medical treatment or cover day to day expenses.
There are two types of critical illness insurance. One is a standalone plan which you can purchase independently from other policy while the other is an add-on to a life insurance plan.
The recommended benchmark would be 5x your yearly income, which is around $316,000.
The average monthly cost of adding a critical illness rider to life insurance with CI coverage of $400,000 is $52 for a 25-year-old and $145 for a 45-year-old. On an annual basis, it would cost $624 for a 25-year-old and $1740 for a 45-year-old.
Source: ValueChampion
Life Insurance
The final plan which I would add is life insurance. Life insurance will provide a payout of the sum assured when you die or are diagnosed with a terminal illness. In general, there are three types of life insurance policy, namely term plan, whole life and investment-linked policy.
The difference is this. Term insurance has no investment in it, whole life invests in insurance company participating fund while ILP invests in unit trusts of your choice.
The recommended benchmark is 10 x your yearly income (up till retirement or no more dependents)
I am a ‘buy term invest rest’ type of person as I believe we should not mix insurance and investment. As such, I prefer term insurance to ILP or whole life. From the two charts below, you can also see why I like a term plan over whole life or ILP.
Source: ValueChampion
So, with a term life plan, a 25-year-old is expected to spend around $23.77 to $32.69 monthly. While a 45-year-old is expected to pay approximately $54.24 to $76.78.
Others
Other plans that I will not discuss in this article are disability income, accident plans, and annuity plans. These are policies that you can consider depending on your life circumstances.
For guys, you can also take a look at Mindef Aviva Insurance which is an excellent supplement to your insurance at a meagre cost.
Total cost for my insurance
To sum up the three insurance plans, here is how much I have to pay if I were to get the plan when I am 25 years old.
- Hospitalisation (Private) – $300 annually
- Critical illness ($400,000) – $624 annually
- Life Insurance (1 million*) – $982 annually
Total = $1906.5
Total commission my agent could earn for the first year = ($300 X 0.30) + ($624 X 0.55 ) + ($983 X 0.55 ) = $973.85
You should notice that insurance cost increases exponentially as we thus let us consider how much I have to pay when I am 45 years old
- Hospitalisation (Private) – $1061 annually
- Critical illness ($400,000) – $1740 annually
- Life Insurance (1 million*) – $2303 annually
Total = $5104
Total commission my agent could earn for the first year = ($1061 X 0.30) + ($1740 X 0.55 ) + ($2303 X 0.55 ) = $2541.95
*I feel $1 million is a much better coverage than $400,000 for life insurance. Hence, I have scaled up the annual premium of the life insurance to match the coverage.
Am I paying too much for insurance? Do let me know in the comment box below!
How to find a good insurance agent?
The profit from selling insurance to us is undeniably enticing. As a result, it’s easy to see why so many people work in this profession and why some might promote things that aren’t right for their customers.
Of course, that is not to say we should all avoid getting insured. In fact, getting insured is important and is one of the first steps to achieving financial freedom. You do not want an unfortunate accident to turn your whole life upside down, do you? Recent findings from MAS have also shown that financial advisers’ product recommendations have improved from 70% to 88% between 2011 to 2019.
The challenge now is to find a good insurance agent that genuinely cares for their clients. These are the agent you should look out for and stay with!
Fun fact: these agents are unlikely to come from roadshows as in the same MAS study, it is reported that there were more unsuitable products being recommended during a roadshow (15%) than customer referrals (7%). In addition, there is a higher chance of 'inappropriate' influence through the use of gifts or incentives during roadshows (35%) compared to customers referrals (11%).
To help you with your search, here are some ways to spot a good insurance agent.
- They take time to understand you
Before selling any plans, your agent should understand your life circumstances, goals, and dreams before recommending any policies. Because different policies are catered to different groups of people, a policy that is good for another person may not be suitable for you.
So if your agent does not take the time to understand you, it is a red flag. (When a policy is recommended, do not be afraid to ask why it was suggested)
- Provide regular updates
A good financial advisor would keep in touch with you and, if necessary, provide regular updates on your plans. Some would even go so far as to examine your insurance coverage with you on a yearly basis!
This is beneficial because our circumstances may change over time, and our insurance coverage should alter as well.
- Remains contactable
After purchasing a policy, your insurance agent should remain contactable in the event you need help with insurance claims.
Finally, I’d like to say something before ending.
In the insurance industry, a commission-based system would almost certainly result in a conflict of interest. It is naive to believe that financial advisors are uninterested with the amount of money they are paid based on the sort of policy they recommend.
I believe that a system reform is required to improve moving forward. Yes, we’re seeing more firms like MoneyOwl where advisers are entirely salaried rather than commission-based, but I believe there’s still more work to be done. Meanwhile, here are some resources you can refer to for make better decisions:
- SingSaver (Best Travel, Home, Maid and Cancer Care Insurance comparison)
- ValueChampion (Best Insurance comparison)
- Gobear (Car, Travel and health insurance comparison)
- BudgetDirect (For Car/Motorcycle/Travel Insurance)
- CompareFirst (Comparison Site)