FAQ #37: Is a Financial Advisor’s income halal?

Original Question:

Is income earned as a financial advisor compliant with Islamic principles?

A financial advisor (FA) is an expert who offers advice on various personal finance, investment, and financial planning matters. They specialise in areas such as investment portfolios, insurance, tax strategies, retirement planning, and estate planning. The primary aim of a financial advisor is to help clients achieve their financial goals, encompassing insurance protection, retirement savings, investment decisions, debt management, home purchases, budgeting, and education funding.

When recommending investment products, a financial advisor is responsible for:

  • Disclosing the terms and conditions of the investment product.
  • Highlighting the associated risks and benefits.
  • Informing clients of any premiums, costs, expenses, or fees related to the investment product.

In Singapore, FAs operate under three main compensation structures:

  • Commission-based: Earnings stem from commissions on products sold. The more products they sell, the more they earn. Such advisors often work with both individual clients and firms.
  • Fee-only: These advisors charge either a flat consultation fee or a percentage of the asset value, without commissions from product sales.
  • Fee-based: These advisors blend both methods, charging consultation fees and earning commissions on the products they recommend, ensuring the client’s best interest remains at the forefront.

 

Type of income How it is earned Income structure
Consultation fees When the customer engages the FA
  • Fee-based
  • Fee-only
Sale charge Every time the customer invests their money
  • Fee-based
  • Commission-based
  • Fee-only
  • Performance fee
  • Asset under management
  • Asset under advisory
 Every month, quarter, biannual, or year, depending on the FA
  • Fee-based
  • Commission-based
  • Fee only
Commissions When the customer purchases anything recommended by the FA
  • Fee-based
  • Commission-based

 

From an Islamic perspective, the role of a financial advisor is generally permissible. The income earned is lawful provided the central duties involve assisting individuals and businesses in making informed financial decisions free of prohibited (shariah non-compliant) elements.

Issues arise if an advisor’s recommendations skew towards or actively promote shariah non-compliant avenues. For instance, it is frowned upon for a Muslim financial advisor to predominantly recommend conventional interest-bearing securities or investments in non-compliant sectors such as gambling, alcohol, non-halal food, and specific entertainment industries. Challenges also occur when the available Shariah-compliant solutions are limited and don’t align with the client’s immediate requirements.

Regardless of the client’s faith, Muslim FAs are urged to avoid endorsing or recommending non-compliant activities, as such endorsement is seen as supporting forbidden actions. Islam emphasises inviting others to righteousness and discouraging evil, as stated in the Quran: “Let there be a group among you who call others to goodness, encourage what is good, and forbid what is evil—it is they who will be successful.” (Surah ‘Ali-Imran: verse 104).

Furthermore, promoting or encouraging forbidden actions can accumulate sins for the individual, as expressed in the hadith: “Every caller who invites people to misguidance and is followed will bear a burden of sin equivalent to that of those who follow him, without it reducing their burden at all. And every caller who invites people to true guidance and is followed will earn a reward equivalent to that of those who follow him, without it reducing their reward at all.” (Sunnah Ibn Majah, 205).

Thus, to uphold both Islamic values and the Singapore Financial Advisers Act (FAA), advisors can introduce both conventional and Islamic financial solutions, allowing clients to make the ultimate informed decisions. It is also advisable for Muslim FAs to avoid commission-based earnings if sourced from shariah-non-compliant transactions.

Let us fortify our faith in the All Provider and Sustainer, drawing from the hadith narrated by Ibn Abbas (RA): the Prophet (ﷺ) said, “Be mindful of Allah’s commands, and He will take care of you. Be mindful of Allah’s commands, and you shall find Him beside you.” (Jami’ at-Tirmidhi, 2516).

May Allah guide us towards making righteous choices.

References:

  • https://muftiwp.gov.my/artikel/al-kafi-li-al-fatawi/4747-al-kafi-1782-hukum-berlakon-dalam-mempromosikan-judi
  • https://muftiwp.gov.my/artikel/irsyad-fatwa/irsyad-fatwa-umum/5071-irsyad-al-fatwa-siri-ke-650-hukum-mengambil-upah-mempromosikan-perkara-yang-haram-atau-difatwakan-haram
  • https://sunnah.com/ibnmajah:205
  • https://sunnah.com/mishkat:2781

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