One week ago, a salesperson came to my house to demonstrate and sell a vacuum cleaner. It was an impressive vacuum cleaner with many capabilities:
The machine was highly sophisticated and her four hour demonstration was highly impressive. My wife and I felt that this is a good product. The catch? It cost 10 times that of a traditional vacuum cleaner that we had bought one year ago.
The salesperson (let us call her Promoter A) was highly persistent and told us that if we decide to buy on another day, the cost will be 15% more. To get the “good” price, we must buy on the spot. Of course, my wife and I never make purchases on the spot. We would discuss privately before making a purchase. This person made us feel obligated because she said she is commissioned-based. If we were to make the purchase later, it becomes a direct sale and she gets no commission. After much persistence, the salesperson gave us two days to think about it.
My wife and I discussed and felt that it is necessary to evaluate whether the purchase of the vacuum cleaner is a need or a want. Moreover, we recognized that it may become a white elephant since we might not use it often. Considering its sophistication, we may not fully utilize all its functions. In fact, we realised that our need is to have a vacuum cleaner that can remove dust mites and at the same time perform the traditional vacuum function. The children and I have sensitive noses and so a dust mites removing machine will be useful for the family. We do not need to purify the air because our house windows are frequently opened. Additionally, we prefer to engage a professional air-conditioner service person to maintain our air-conditioner. I have no desire to clean the air-conditioner myself for fear of damaging it.
The next day, we went to an electrical department store and asked whether they have a dust mites removing vacuum cleaner. Promoter B told us that they do not sell it. As we were about to leave the store, another salesperson (Promoter C) who overheard our query came to us and told us that she does sell it. Although it is the same store, apparently each salesperson only represents a certain range of products. She recommended the lowest-range product which she said is suitable for us. I also noticed that her vacuum cleaner employs a different technology. The price is just 1.5 times that of the traditional one. My wife and I decided that when our present vacuum cleaner breaks down (which can be soon since electronic products do not last so long these days), we will do a thorough research in vacuum cleaners as it is apparent to us that there are many choices in the market place.
Similarities with the financial service
There are many similarities of the above to that which transpires between a financial adviser and a client. Whether it is a private banker, an insurance agent or an independent financial adviser servicing their clients, there are similar issues that arise:
1. Just as Promoter A did not ask us what we really need, many financial practitioners do not ask their clients what they really need. The result is hard-selling of products which may not be suitable for the client. Since their remuneration is based on commissions, clients are often pressured into purchasing a product. Some salaried financial practitioners have high quota to meet and so they may be hard pressed to close a sale.
2. Some financial practitioners are restrictive in their product range. Frequently they are only able to represent one product manufacturer and thus cannot give accurate information – just as Promoter B gave us incorrect information.
3. There are also many financial practitioners that desire to do a good job by seeking to understand the client’s needs. This is good. However, if they are restricted in their product range like Promoter C, clients may still have their doubts.
Before anyone thinks that the solution is to seek a financial practitioner who can carry products from many manufacturers, I like to highlight one more problem. Just as Promoters A, B and C are compensated through commissions only, the commission-only financial practitioner may not serve the interest of the client. The client may feel obligated and the practitioner may be tempted to recommend expensive products.
A fee-based approach
The work of a financial practitioner can potentially be as short as half an hour to as long as 20 hours. This depends on the nature of the work involved. The process of setting objectives, fact finding, analysis, recommendations and product comparisons can at times involve hours of preparation and answering queries from the client. With this in mind, financial practitioners should charge their client a fee for this work. However, this is easier said than done.
Recently, I met up with a client who had asked for a financial planning service. I told him that I prefer a fee-based approach. There is no obligation to buy anything from me. He hesitated. I asked him this question, “Would you pay your contractor for providing a renovation service? Would you pay a consultation fee to your doctor when you are ill?” He did not say “yes” but answered, “I know where you are coming from.” I continued, “Since you desire a financial planning service, would you then pay for that service?” His answer was: “I am not ready for it; I want a commission-based service.”
Although most clients will not be that explicit, the truth is that most people expect financial practitioners to work for free. Is it any surprise that some financial practitioners make clients feel obligated to buy something? Therefore, I suggest a fee-based approach when engaging a financial service.
By the way, did anyone wonder why I allowed Promoter A to come to my house to do so much work in demonstrating her vacuum cleaner? The reason was because the telemarketer prospected my wife stating that they are offering a cleaning service and have ceased the business of selling vacuum cleaners. My wife was keen to know more about the cleaning service. Unfortunately, it turned out to be a product sale. Despite being willing to engage a cleaning service for a fee, we were disappointed that it turned out to be a commission-based product sale. We are already accustomed to hourly-charge cleaning services.
About the author:
Wilfred Ling is the Associate Director of Promiseland Independent Pte Ltd. He is licensed by Monetary Authority of Singapore to provide financial advice to individuals. In his professional capacity, he manages investment portfolios for high net-worth individuals. In addition, he is also a regular columnist for various financial magazines.