The government of Singapore has laid out its plan to reduce the sales charge applicable on investment and insurance products as per the Central Provident Fund Investment Scheme. Presently, all CPFIS investments entail the up to 3% sales charge.
This allows financial advisors to earn more commissions as they sell more products or manage greater sums of money, which obviously increases the funds being transacted or invested. This sales charge will be brought down to 1.5% by October 2018. The government intends to do away with the sales charge completely by October 2019.
The cap on sales charge will be reduced and eventually done away with over a year and a half to allow the industry to adapt to the changes. The government has expressed the intent to review the developments as and when the markets respond to the changes. However, most experts are of the opinion that the change will not have any adverse effect on financial advisors.
Consumers or investors will definitely enjoy some hitherto unavailable benefits. The government wants to encourage more investments by reducing the costs involved. Also, financial advisors often push some of their products for personal gains and not necessarily for the benefit of their clients. This would change as well.
There are already platforms where people can invest in unit trusts without paying any sales charge. Removing the sales charge would eliminate the unnecessary incentives for financial advisors as they push products that benefit them, whether it is the ordinary accounts or special accounts where members usually invest their central provident funds.
The government is also reducing the wrap fee that financial advisors charge their clients. Many members go for wrap accounts and the annual wrap fee is usually anywhere up to 1% of the total fund being managed. The wrap fee usually includes the cost of advisory services and other related expenses for managing the fund.
Such a fee is seen as unnecessary since members who go for wrap accounts are anyway familiar with many financial products and they don’t really need any advisors to help them channel their investments. This wrap fee is going to be reduced to 0.7% by October 2018. The wrap fee would be further capped to 0.4% by October 2019.
These changes may not have any substantial impact on how financial advisors operate. There are already platforms and cash markets where wrap fees or similar charges are pegged at 0.4% or lower. The CPFIS investments do not account for more than 15% of all premiums for all types of insurances. There is a possibility that CPFIS included policies will undergo a slowdown and the volume or number of transactions will plummet to an extent. But long-term and serious implications are unlikely.
All nine life insurers including Aviva, AXA Insurance and AIA Singapore have pledged to work with the Central Provident Fund Board to ensure all investors get the necessary help to accomplish their goals and that financial advisors reflect the changes being brought about by the government.