The Retiree and the Referral Commission
Madam Tan, aged 63, retires next month. She has RM800,000 in EPF savings, a paid-off house and no other investments. She tells a licensed financial planner that she needs RM3,000 a month to live on and wants to keep six months of expenses in cash. The planner recommends a seven-year structured product linked to a foreign equity index. The product is issued by a licensed bank, is not capital guaranteed, and carries the issuer's credit risk. Madam Tan would invest RM500,000, which is 62.5% of her savings. The product pays the planner's firm a 3% referral commission and a 1% trail. The planner records her risk profile as 'moderately aggressive' after a 10-minute conversation, without asking about her health, emergency fund or existing insurance. The planner is licensed for financial planning only and is not an authorised distributor of the product. The bank will execute the investment after the planner introduces Madam Tan.
1. Assess the suitability of the recommendation.
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The recommendation does not fit Madam Tan's circumstances. She needs regular income of RM3,000 a month and has no other investments, so capital preservation and liquidity are central. A seven-year product with no capital guarantee, foreign equity exposure and issuer credit risk exposes her to losses she cannot easily absorb. Investing RM500,000 would leave only RM300,000, and the planner has not confirmed a six-month emergency fund or considered health and insurance needs. The 'moderately aggressive' profile was reached after a 10-minute conversation and is inconsistent with her income need and limited loss capacity. Suitability requires an assessment of risk tolerance and risk capacity, time horizon, liquidity needs, concentration and the client's ability to understand the product. The planner should consider lower-risk income products and should not proceed unless the client fully understands the risks and the allocation is reduced to a level she can afford to lose.
2. What conflicts and licensing issues arise from the referral commission and the planner's licence scope?
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The 3% referral commission and 1% trail create a clear conflict of interest because the planner benefits from recommending this product over alternatives. The conflict must be disclosed in writing before the recommendation, and the planner must show that the advice was not influenced by the commission. The planner should compare suitable alternatives, including lower-cost or capital-protected options, and document why they were rejected. On licensing, a financial planning licence does not authorise dealing in securities or distributing the product. The planner may introduce Madam Tan to the licensed bank, but must not hold out as an authorised distributor, execute the transaction or receive a fee that is in substance unlicensed dealing. The referral arrangement should be reviewed against the planner's licence conditions and the firm's procedures. The bank should deal directly with the client.
3. What should the planner do before any application is submitted?
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The planner should complete a full fact find covering income needs, cash flow, health, insurance, emergency reserves, tax and estate considerations. The risk assessment should distinguish willingness to take risk from ability to bear loss, and the client should sign off on the basis of the advice. The planner should explain the product's lock-in, capital risk, issuer credit risk and foreign exchange exposure in plain language, and provide a written disclosure of the commission and any conflict. The planner should document why a lower-risk or more liquid alternative was not recommended. If the client still wishes to proceed, the planner should consider a much smaller allocation that preserves her income and emergency fund. The planner should also keep a record of the bank's role as executor and avoid any pressure on an older client to decide quickly.