Since modern day banking was introduced, the financial sector has constantly been littered with conflict of interest situations. It is prominent in many areas such as insurance, property and stockbroking.
Conflict of interest situation, if left unchecked, can hinder or even cause the collapse of the banking sector. It happened in 2008, when the global financial markets collapsed under the massive weight of the numerous low quality collateralised debt obligations (CDOs) that were issued.
One of the main reasons for this collapse was due to insufficient monitoring of a clear conflict of interest situation, where banking executives were remunerated generously based on how much CDOs they created, without any regards to the actual quality of these CDOs. The financial institutions that created these CDOs subsequently offload them from their balance sheet to retail investors, including many pension funds and retirees. People in Singapore were not spared.
We studied it. We talked about it. We even debated extensively about it. Yet, these conflict of interest situations that we can clearly observe around us today still exist in the market. And this is detrimental.
Conflict Of Interest In The Insurance Industry
When it comes to the insurance industry in Singapore, conflict of interest is as obvious as it gets. Most insurance agents today in Singapore make money only when they manage to sell a policy to a client. The insurance companies they represent do not remunerate them if they are providing good financial advice to their clients, but only when they close a sale.
The hard truth is that while we would love for our insurance agents to be on our side, thinking for us and helping us make sure that we spend the right amount on insurance from our perspective, their alignment ultimately lies with the insurance companies they represent.
And it is hard for us to be angry about it when we are not paying them for the time they spend meeting and advising us. Yet at the same time, it is hard for them to argue that we should be paying for their advice when we constantly see them loitering around MRT stations daily trying to offer us free financial advice or some gifts if we only just stop to listen to them. There is something really wrong here which has to change.
As long as we continue allowing insurance companies to get away with paying their agents only through commission, this problem will continue to persist. It will never be easy to obtain genuine independent financial advice whenever an advisor is ultimately still a salesperson from the company without a basic salary.
Conflict Of Interest In The Property Sector
Similar problems exist in the property sector. Agents made their earnings only when they help their clients buy, sell or rent properties. What this means is that a property agent will always have an incentive to encourage you to transact in properties, even when it does not really do you any good.
By itself, there is nothing really wrong with that. Buying, selling or renting a house is not easy and having a good agent would make the entire process a lot easier. The problem arises when people trust their agents for real estate advice such as whether this is a good time to buy or sell a home, and to subsequently treat the advice as an independent opinion from an expert.
Let’s be realistic, a property agent is a broker, not a financial or investment advisor. The primary purpose of the agent is to help you broker a deal. The agent does not get paid for giving sound real estate advice. They only get paid when they help you transact a deal.
We are not trying to be rude here. But an agent would say to you, “this is a great time to sell your property” and go on to a potential buyer and say “this is a great time to buy a property”, all within the same day.
Conflict Of Interest In The Brokerage Industry
Brokerage houses make money whenever we use their platform to buy or sell shares on the stock exchange. That much is certain. One of the main reasons why brokerage houses have in-house research team is to constantly find ways to remind their valuable clientele about what is happening in the financial markets, and to potentially prompt them to take some actions, hopefully by using their platform.
A buy-and-hold strategy from an investor will not be profitable for a brokerage house. An intraday trading strategy would be. So we got to be cautious whenever a research house shares with us their report, without overreacting to the analysis made.
What Does This Mean To Us?
Asking an insurance agent if you need more insurance policies or a property agent if you should buy another home is a sure way to get yourself a huge dose of non-independent advice.
Even if these agents have the necessary knowledge and experience, we still have to bear in mind that the main role that they serve is to sell us the products or services offered by the companies they represent. And unless things change, these people, regardless of how professional they would want to be, will continue to be caught in conflict of interest situations.
We empathise with the current situation that a lot of these professionals are in. However, this is the status quo. We think it is worth understanding the situation before you completely trust in the recommendations of your agents.