Martin Lee @ Sg
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Economic Bias in Financial Planning

And so, another top honcho from an insurance company has voiced his concerns about moving to a fee-based financial planning model.

He thinks that the need for fees may lead to people being even more under-insured.

Ever since FAIR was announced, there have been many views exchanged about what is best for the industry (and for oneself). Before we start debating about the merits of whether paying commissions or fees is better, it is good to get an understanding of the different models. They are:

  • Commission only model
  • Fee only model
  • Fee based model

Actually, they each have their own economic bias. A financial planner who is out to exploit the customer will be able to do so on all models. Here are three very short clips that explains the three models and their economic bias:

What is Economic Bias?

Commission Only

Fee Only

Fee based

I hope you found the videos useful. In my opinion, whichever model we use, a lower commission for the same product with all else being equal can only be beneficial for the consumer.

Leave a Comment:

Charles says 11 years ago

Same as funds, the fee could be evaluated as a performance against a benchmark…
Nothing really complicated, does not need to be linear, or symmetric.

Yvette says 11 years ago

How about a compensation model where the financial advisor gets paid a percentage of the profit earned for the client. This will create a win-win for both advisor and client.

    Martin Lee says 11 years ago

    Dear Yvette,

    That’s called the performance fee model. It’s already in existence.

    But it does has its economic bias too as the adviser might be inclined to take on higher risks (in order to generate higher performance fees).

      Yvette says 11 years ago

      How about including a twist to this model ie the advisor pays the client for capital lost so that the original capital is preserved.

        Martin Lee says 11 years ago

        Dear Yvette,

        Unfortunately, that doesn’t really work as essentially what you are asking for is an investment where you can get unlimited upside and zero downside.

        A product with almost zero downside can be structured, but that also means the upside will be limited.

        You can’t have the best of both worlds.

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