"you have the power to protect
yourself from biased advice."
Commission-Based Advisory Model is here to stay
When it comes to financial advice, the commission-based model has long been a source of heated debate. Critics argue it incentivizes bad behavior, but here’s the reality: the commission-based model isn’t going anywhere anytime soon. In fact, it plays an important role in making financial advice accessible to many people, especially those who are just starting their financial journey.
For many young adults or individuals early in their careers, seeking advice from a fee-based advisor may feel out of reach. That’s where commission-based advisors step in, often providing free or low-cost financial guidance. This model helps to bridge the gap for those who wouldn’t otherwise prioritize financial planning—people who need it most. However, while the system provides much-needed access, it comes with its own set of challenges, and it’s important to understand how those challenges could impact the advice you receive.
The incentive misalignment: Selling, not advising
At the heart of the commission-based model lies a fundamental misalignment: advisors aren’t compensated for the quality of their advice—they’re rewarded for selling products. This means their income depends on whether or not you buy something, not necessarily on how well their recommendations align with your financial goals.
While many advisors genuinely aim to serve their clients’ best interests, the reality is that the system incentivizes sales, not service. This creates a potential conflict of interest, where advice may be skewed to favor solutions that are more profitable for the advisor rather than what’s most beneficial for the client.
For example, an advisor might present a product as “essential” or “ideal” without fully explaining alternatives that could be simpler, cheaper, or more aligned with your needs. It’s not always about dishonesty—it’s about the subtle narrative that arises when one’s livelihood is tied to the sale of a product.
Understanding this dynamic is crucial. By knowing that an advisor’s recommendations might be influenced by the commissions they stand to earn, you can take a more proactive role in evaluating their advice.
The Problem: Not All Solutions Pay the Same Commissions
Here’s where the commission-based model can get tricky. Not all financial products offer the same commissions to advisors, and that can influence the advice you receive.
Often, the Financial planning process is a zero-sum game: when you save more, the advisor and their company typically earn less. Take insurance as an example. Advisors often recommend complex insurance solutions, which come with higher premiums for added benefits, over term insurance which is usually cheaper and more straightforward. Insurance solutions with added benefits pay out higher commissions, so while it might benefit the advisor, it’s not always the best deal for you.
The same issue arises with investment products. Combining insurance with investments may sound attractive on the surface, but they come with multiple layers of complex charges. These charges include premiums for insurance coverage, fund management fees, administrative charges, and surrender fees if the client wishes to exit the policy early. These can significantly eat into your returns over time. Advisors often push investments with insurance benefits because they offer higher commissions compared to simpler investment products.
In comparison, mutual funds/ETFs are purely investment products, without the added insurance costs. They usually have lower fees and are easier to understand, making them a better choice for many investors. However, because unit trusts pay less commission, they’re not always top of the list when an advisor recommends products.
The incentive structures in commission-based models can easily lead to bias. The problem isn’t that advisors are inherently unethical; it’s that the system sets them up to be motivated by short-term gains, which can skew the advice they give.
The Bigger Problem: Industry Awards Based Purely on Commissions
Now, let’s go one step further. The financial advisory industry often celebrates success in a way that can reinforce this bias. Industry awards and recognition are frequently based purely on how much commission an advisor has brought in, not necessarily on how well they’ve served their clients.
Think about it like this: imagine if your health choices were evaluated solely based on calorie count, regardless of the nutrients or overall health benefits a food offers. By this logic, chocolate chip ice cream would be viewed as just as healthy as a bowl of nutrient-dense salad—simply because they both contain the same amount of calories. This is essentially how commission-based awards work.
A financial advisor who has closed a few high-commission sales may be awarded the same level of recognition as another advisor who has provided valuable, long-term financial guidance to thousands of clients. In other words, the system rewards high-commission sales, not necessarily the delivery of good, comprehensive financial advice. This can drive even well-meaning advisors to focus on the wrong priorities.
The Solution: Transparency is Key, So You Can Identify Good Advice
Here’s the good news: transparency is your best tool in navigating commission-based advice. Did you know that under Singapore’s Financial Advisers Act (FAA) and Securities and Futures Act (SFA), investment advisors and financial advisors are legally required to disclose their commissions to clients?
That’s right—you have the right to know how much your advisor is earning from the products they recommend.
But here’s the catch: while disclosure is mandatory, the way it’s presented is often far from clear. Many clients don’t know to ask about these commissions, and even when they do, the details can be hidden in the fine print or framed in a way that makes it hard to assess the real impact on your financial plan.
Transparency should be more than a legal requirement—it should be a best practice for advisors who genuinely care about their clients’ interests. A good financial advisor should be open about the commissions they receive and provide alternatives that might better fit your goals, even if those alternatives offer them a lower payout.
Educate Yourself
Ultimately, you have the power to protect yourself from biased advice. The more informed you are about financial products and how advisors are compensated, the better equipped you’ll be to make decisions that align with your financial goals—not just your advisor’s paycheck. Ask the tough questions: “How are you compensated?” and “Are there lower-cost alternatives?”
By understanding how commissions work and how they might influence the advice you receive, you can better navigate your financial future. Stay tuned for more helpful advice and insights on how to take control of your wealth journey with confidence.
Written By:
Jonathan Wong
Edited by:
Yee Shen Hao
If you enjoyed this article, don’t miss TWSG’s quarterly investment seminar on Tuesday, 14 January 2025, where we’ll dive into President Trump’s upcoming policies and discuss portfolio positioning for 2025. We’ll also cover important insights on legacy planning.
The session will be hosted by TWSG’s Director & Portfolio Manager, William Lim, and Wealth Manager, Fion Ho.
Dinner will be provided!
