Professional Documents
Culture Documents
Disclaimer
This documents aim is not a criticism of financial advisors per se, but rather the structure of Singapores
financial advisory industry, which is mainly commission based. This leads to advice being meted out to
clients, which more often than not, is not to their benefit. I do not blame them.
If you are a financial advisor, kindly highlight to me any errors, if any, in this document so I can correct
them. You are also more then welcome to present your point of view to me.
If you are an investor in Unit Trusts or insured with and Insurance-Linked-Plan (ILP), I hope the info
presented here will be of use to you. This group of people after reading (either briefly or thoroughly), usually
will have the following 2 outcomes:
a) Let things remain status quo because:
a. They have no time to go through these things (even after 6 months later).
b. These are too complicated to understand (yet one is willing to buy/invest in these
instruments in the first place).
b) Take action and contact his/her financial advisor for clarifications, and probably have to make
some tough decisions.
Regrettably from my experience, the majority will fall into the former group, thinking the consequences have
little impact on them.
Lastly, comments and suggestions can be emailed to UnitTrusts.ILPs@gmail.com.
Introduction
At some point in our lives, we are bound to come across Financial Planners, Bankers etc., who preach to us
the importance of investing. Their advice on the importance of investing is sound, but more often than not,
their processes arent.
I shall cite 2 investment vehicles that are often recommended by those in the industry:
1) Unit Trust (a.k.a. Mutual Fund in the US)
2) Investment-Linked (Insurance) Policy
Unit Trust is a structure where funds are pooled together by retail investors, and the fund manager has
discretion on how to invest those funds. Some examples of well-known companies that offer this type of Unit
Trust products are Aberdeen, Schroders, Fidelity and so on. A retail investor like you and me can buy these
funds easily from the funds distributors like Fundsupermart.com or from our local banks (DBS, UOB etc.).
There are probably hundreds of such Unit Trusts available and every fund usually has specific regions or
asset classes they invest in. So for example if an investor wants to invest in the US stock market, he or she
can buy Unit Trusts that invests solely in US Stocks.
Moving on to Investment-Linked Policies (ILPs), they are life insurance policies where a portion of the
premiums paid (monthly or annually) goes into buying Unit Trusts managed by the insurance companies
own Fund Management Arm. So the companies, which manage these funds will be Prudential, Manulife etc.
2) Pick which sector will do well in the near/far future. For example many years ago, I often hear
Planners buying into China and India funds as they are poised to outperform.
3) Advice clients on what to do during financial crises, which asset classes to switch to, etc.
In summary, there is a team of analysts who work five days a week to help you decide which are the funds
can buy one.
In case you are wondering what the annotation for the 1.5% p.a. is, here it is:
The maximum sales charge chargeable is up to 5% as shown in Figure 3. For this ILP Fund, the maximum
chargeable Annual Management Fee can go up to 2%! They charge this annual management fee just by
helping you buy the Aberdeen Global Opportunities Fund!
Lastly I shall clarify other jargons found in a typical Fund Factsheet.
NAV (Net Asset Value)
To the layman, one can think of the NAV of a fund as the price which the investors buy/sell the units at. It is
just like the Stock Price of a stock. However, unlike a conventional stock, the price can only be determined
only at the end of the day. It reflects the underlying value of the assets of the fund. So when costs are
incurred, say to pay the Fund Managers salary, the NAV of the fund will drop accordingly to reflect this
expense. Hence, the expenses of the fund (Funds management fees and other related costs which makes up
the 1st layer of fees) are already reflected in the funds NAV.
Bid-to-Bid / Bid-Bid / NAV-NAV
The above is used to reflect the change in the NAV of the fund. For example a fund initial NAV of $1 rises
100% to $2. The Bid-Bid performance would be 100%
Offer to Bid/ Offer-Bid
This takes into account the sales charge incurred if one invests in the fund. Using the earlier example, the
Offer-Bid performance would be approximately 95% for a 5% sales charge levied, even though the NAV
increases 100% from $1 to $2. This sales charge is one of the 2nd layer of fees, levied by the funds distributor,
Financial Advisor or Insurance companies which you buy the fund from. The offer-bid performance does not
take into account the Annual Management Fee, which the fund distributor/insurance companies/financial
advisory firms may charge.
Transaction Description
Transaction Amount
Investment Outlay
$1,000
Transacted Units
Portfolio Value
-$32.10
$967.90
967.90
$967.90
-$2.42
-2.42
$965.48
-$2.41
-2.41
$963.07
-$2.41
-2.41
$960.66
-$2.40
-2.40
$958.26
$958.26
958.26
$958.26
Total
To briefly explain the example shown in the table 1 above, the sales charge is levied first before the
remaining amount is used to actually invest in the fund. 3.21% (3% + 7% GST) is a typically amount charged
by Financial Advisors. According to most Funds Prospectus, the distributors can charge up to 5%.
The Annual Management Fee is slightly more complex. Every quarter, the amount payable is calculated as a
percentage (0.25% in the example) of the average daily valuation of the portfolio. The amount is then settled
by automated selling of your existing units held, at whatever NAV of the fund is at, at the day the selling is
done. If you hold a portfolio of several funds, the system will sell the units of the best performing fund in
your portfolio.
To sum up this example, an investor would have incurred a loss of around 4% in the first year,
and continuing bleeding around 1% annually for the subsequent years even if the funds NAV
remains unchanged.
However, what is not known to most people, the actual allocation actually looks like this:
Year%%
%%allocation%to%
investment%
according%to%BI%
Actual%
allocation%to%
investment%
1%
20%%%
10.3%%%
2%
50%%%
38.8%%%
3%
78%%%
65.2%%%
4@9%
100%%
85.9%%
Table 2 Comparison of actual investment allocation compared to those illustrated in Prudential Prulink
Protection Plus ILP
Why the discrepancy? Lets use an annual premium of $3000 for a 26-year-old male as an example. 20% of
$3000, which is $600 is supposed to be used for investment.
However, $90 out of this $600 is used to pay the sales and annual charges. Then, a further $201 is used to
pay for insurance cost. The remaining amount of around $308 left is then used to invest.
In case you are wondering where the rest of the 80% ($2400) goes to, I cant think of any other areas other
than commission to the insurance firm (or advisor). This example is illustrated more in detail in the
following table:
(1)%
(1a)%
(1b)%
(1c)%
Fees%
Age%
Premium%
Paid%
Allocation%to%
"buy"%units%
Sales%charge%
(5%)%
Annual%
charge%
Total%
Fees%
Insurance%
Costs%
Actual%amt%
invested%
(2)%
Actual%%%
allocation%
to%buy%
units%
Commission%
26%
$3,000%%
$600%%
$30%%
$60%%
$90%%
$201.16%%
$308.84%%
10.3%%
$2,400.0%%
27%
$3,000%%
$1,500%%
$75%%
$60%%
$135%%
$201.16%%
$1,163.84%%
38.8%%
$1,500.0%%
28%
$3,000%%
$2,340%%
$117%%
$60%%
$177%%
$205.66%%
$1,957.34%%
65.2%%
$660.0%%
29%
$3,000%%
$3,000%%
$150%%
$60%% $210%%
$211.67%% $2,578.33%%
85.9%%
Table 3 Prudential Prulink Protection ILP detailed premium allocation
$0.0%%
Figure 5 Sales and Annual charge as illustrated in Prudential ILP Product summary
I salute those Financial Advisors selling ILPs if they explained the above details to their clients. But I highly
doubt they do.
10
Insurance Portion
Two 30-year-old males, Alan and Bernard wishes to have insurance coverage of $200,000 for Death, Total
Permanent Disability (TPD) and Critical Illness (CI). Alan wants the coverage to last until age 65, whereas
Bernard might or might not want to continue beyond age 65.
Alan bought a term insurance, AXA Life Term Protector + TPD +CI Riders, with annual premiums of $872.
He will pay this amount annually until the policy terminates at age 65.
Bernard bought a Prudential ILP, Prulink Assurance Account. The insurance portion of his premiums is
illustrated in the following table, together with Alans premium:
Age%
30%
31%
32%
33%
34%
35%
36%
37%
38%
39%
40%
41%
42%
43%
44%
45%
46%
47%
48%
49%
50%
51%
52%
53%
54%
55%
56%
57%
58%
59%
Bernards%Insurance%Cost% Alans%Premium%
$290.23%%
$877%%
$298.24%%
$877%%
$304.24%%
$877%%
$316.25%%
$877%%
$320.26%%
$877%%
$334.27%%
$877%%
$358.29%%
$877%%
$396.32%%
$877%%
$442.35%%
$877%%
$500.40%%
$877%%
$564.45%%
$877%%
$630.50%%
$877%%
$704.56%%
$877%%
$780.62%%
$877%%
$868.69%%
$877%%
$952.76%%
$877%%
$1,044.84%%
$877%%
$1,146.92%%
$877%%
$1,259.01%%
$877%%
$1,399.12%%
$877%%
$1,589.27%%
$877%%
$1,807.44%%
$877%%
$2,059.65%%
$877%%
$2,339.87%%
$877%%
$2,652.12%%
$877%%
$2,978.38%%
$877%%
$3,338.67%%
$877%%
$3,724.98%%
$877%%
$4,145.31%%
$877%%
$4,697.76%%
$877%%
60%
61%
62%
63%
64%
65%
Total&
$5,264.21%%
$5,862.69%%
$6,491.19%%
$7,165.73%%
$7,878.30%%
$8,692.95%%
$83,600.83&
11
$877%%
$877%%
$877%%
$877%%
$877%%
$877%%
$31,572&
Note that the insurance cost Bernard pays is just part of the total premiums (say $3000 annually) he has to
pay. Towards the end, as the insurance cost balloons, he has to start selling his investments to pay for it.
That is how ILP works. Even if Bernard wants to continue coverage beyond age 65, I dont think he can
afford it (unless he is willing to wipe out his entire investment to pay for it).
On the other hand, Alan is quite happy paying $877 annually for coverage until age 65.
Why buy ILPs then when it is much more expensive to cover beyond age 65? Is it because of the attractive
investment returns? The last section of this document aims to debunk this fact.
12
The BI assumes a cash value at the start of policy year 9 to be $14,712. Annual premiums need to be paid for
another 36 times, from the start of policy year 9 to the start of year 44. Thereafter, at the end of policy year
44, the cash value would range from $199,000 to $610,000, for returns of 4% and 8% respectively.
Now if we can attempt a finance calculation (easily achieved using Excel PMT formula) to find out what is
the required annual investment outlay to obtain future cash values of $199,000 and $610,000 at 4% and 8%
returns respectively:
$199,000: Invest $1717.71 annually at 4% rate of return
$610,000: Invest $1856.16 annually at 8% rate of return
So what the above values mean is that, on average every year, around $3000 (or ~60% of total premiums)
goes to insurance costs, fees and charges, while only approximately $1800 is being invested at the indicated
growth rate!
For those who are already covered by ILPs at the moment, but plan to terminate it before the insurance
costs balloons. Think about this: What if between now and the day you terminate you ILP, you are diagnose
with some medical condition (e.g. high blood pressure)? You will be left with the following options:
1. Be stuck with your current ILP and pay the exorbitant insurance cost in later years.
2. Terminate and take up a cheaper insurance, but with pre-existing conditions (e.g. Stroke) excluded.
3. Terminate the ILP cover when costs start to balloon and be left with no cover.
So to those Financial Advisors who preached the low cost of ILPs in early years, saying one can terminate
the ILP in later years, they are asking you to take a gamble, and what is the reward for this gamble? Highly
likely to be mediocre returns on your investment returns, as the last section will show.
Sales Charge
3.21%
1%
instead of quarterly)
Monthly investment outlay
Investment Period
$600
14 years 7 months
8.45%
13
Also, I assume the funds NAV increases linearly from $1 to $3.39 over the 175-month period, or a
compounded annual growth rate (CAGR) of 8.45%.
Figure 7 Effect of Annual Management Fees and Sales Charge on portfolio value over a 175-month period
Fees description
Portfolio Value
Difference
14
Annual average of
total fees paid
$205,716
$199,112
$6,603
$453
$182,610
$16,432
$1,126
From this example, it is evident the Annual Management Fees levied on the total portfolios value is the
scary one, despite it being only 1% (can go up to 2% from the Prulink fund example).
As mentioned in the previous section, the Financial Advisory Firms justify these fees by proclaiming,
through their extensive research, they know which funds can outperform over time, when is a good time to
buy/sell these funds, etc.
The next section will illustrate CPF-IS Unit Trusts and ILP Funds as a whole, which is not that fantastic
either, even without the 2nd layer of fees being levied.
15
Dec$05$$
Dec$07$
Dec&07
Dec&08&
Dec&08&&
Dec&09&
Dec&09&$&
DecE10&
Dec&10&
Dec&11&
Dec&11&&
Dec&12&
Dec&12&
DecE13&
Dec&13&
DecE14&
MSCI%World%TR%USD%
Singapore%Straits%Times%
CR%
14.43%%
@40.28%%
27.45%%
2.50%%
@3.86%%
9.78%%
31.65%%
10.73%%
51.96%%
@49.17%%
64.49%%
10.09%%
@17.04%%
19.68%%
0.01%%
6.24%%
CPF%IS%Unit%Trust%(Equity)%
37.00%%
@47.21%%
48.50%%
6.83%%
@13.10%%
12.60%%
14.00%%
9.28%%
CPF%IS%ILP%(Equity)%
39.03%%
@47.78%%
47.95%%
4.96%%
@15.39%%
11.95%%
14.82%%
7.68%%
Table 7 Performance figures of Indices and CPF-IS Unit Trust (Equity) and ILP (Equity).
Source: www.imas.org.sg/index.php/resources/report
16
Figure 8 9-year Cummulative Performance of Indices and CPF-IS Unit Trust (Equity) and ILP (Equity).
%
Singapore%Straits%Times%CR%
50%%STI,%50%%MSCI%World%
CPF%IS%Unit%Trust%(Equity)%
MSCI%World%TR%USD%
CPF%IS%ILP%(Equity)%
9*year$cumulative$returns$
147.55%$
142.46%%
139.86%%
137.36%%
132.03%%
The figure and table above illustrate the cumulative 9-year performance of Equity Unit Trusts and ILP Funds. I also included
the performance of a portfolio with initial 50% invested in STI and 50% in the MSCI World TR.
The following conclusions can be drawn from the 9-year cumulative performance data:
1) The returns of the universe of Unit Trust and ILP Funds trail those of the STI and a portfolio of 50% of STI and
50% of MSCI World TR, before taking into account Front-end Sales Charge and Annual Management Fees (2nd
layer of fees).
2) If either Front-end Sales Charge or the Annual Fees (or both) are taken into account, these Unit Trusts and ILP funds
definitely lose out to both indices stated above.
3) ILP funds performance is worse than that of the Unit Trust funds. This might be due to either their higher expense
ratios or plain lousy fund managers (who still get paid by the way), or both.
One of AXA ILPs product summaries (AXA GoldenSaver) lists their ILP Funds and their relative performance to their
benchmarks (which I included my own annotations):
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18
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From the AXA ILP Funds List, only 7 out of 18 funds outperformed their respective benchmarks, and 2 out of those 7 are
loss-making. And this is before fees and charges by the insurer.
To conclude this section, for those advisors who are selling these investment products (ILPs or Unit Trusts), this is what they
are actually telling you, in my view:
The universe of equity funds/unit trusts in Singapore underperformed the MSCI World Index Long Term and Straits Times
Index for the past 9 years, but if you pay me fees, Ill try to pick the good ones that can beat the index in the next 10-20 years.
Ill try, no guarantee, you just have to trust that I can do it. Ill still collect the fees from you during this 10-20 years
nonetheless...
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Security Name
Fund Size
Stock Exchange
Currency
Expense Ratio
Singapore
SGD
0.30%
London
USD
0.25%
SGD
1.75%
SG Unit Trust
The table above shows 2 ETFs that an investor could possibly use to make up a portfolio of 50% Singapore
stocks and 50% International Stocks. Shown for comparison purpose, the Unit Trust used in the earlier
example is presented as well. Note the Unit Trust incurs approximately SGD 5 million annually (~1.75% of
SGD 302 million) in operating expense, compared to about SGD 1 million for the SPDR STI ETF. No doubt a
majority of the Unit Trusts expense goes into funding the fund managers salaries.
To give an idea how easy it is to invest in the index, it takes just 17 mouse clicks upon logging into POSB
iBanking to setup an automated monthly investment plan to invest in Nikko AM STI ETF. Time required:
less than 2 minutes.
Conclusion
Unit Trust and ILP Funds by themselves do not outperform a simple All-World index in the long run, when
the relevant fund fees are taken into account.
Enter the Helpers who are the Financial Advisors who proclaim they can solve this problem by picking the
crme de la crme of these funds, and they do so by charging an additional layer of recurring fees. Investors
pay these fees when they invest in these Unit Trusts or ILP Funds, solely on this promise. Most will never
know how their investments will turn out until 10 20 years later (provided they track their own returns,
which 99% of investors probably dont).
Alternatively, one can just pay no one and invests in low cost ETFs, and the result will more than likely turn
out satisfactory in the long run.
21
If there were no bid-offer spread is 0%, you would have bought $200 worth of units at a price of $0.95, or 210
units.
Other Fees
a) $5 per month is levied by selling the required number of units at the lower bid price. Using the above
example, of the 200 units bought, 5.2 units would be sold at $0.95 to fulfill this $5 policy fee.
b) To pay for the insurance charge, units are similarly sold at bid price to pay for it.
Summary
%%
Investment%
Outlay%
Policy%Fee%
Total%
Units%valuation%
Amount%
Price%
($200.00)%
$5.00%%
%%
Units%
$1.00%%
$0.95%%
200.000%%
(5.263)%
%%
194.737%%
$185.00$$ (194.737%units%@%$0.95)%
From the summary table above, before any price fluctuations of the fund, one would have already incur a
total charge of $15, which makes up of 5% sales charge and $5 policy charge, every month.
22
23
The reason for the segregation into Initial Units (IU) and Accumulation Units (AU) is to levy to ongoing
quarterly wrap fees of 1.5% (1.12%+0.38%) on the IU, and 0.38% on the AU. This level of creativity in their
fee structure required me to do up an elaborate spreadsheet to find out the impact of these fees.
24
Using the illustration in the product summary of $450 monthly premiums over 8 years, with no fluctuation
in fund price, I obtained the following figures:
Total%Investment%Outlay%
Total%Valuation%
Total%fees%paid%
$43,200%
$37,874%%
$5,326%or%$55.48%monthly%
Even with no fluctuation of the fund price, one would already suffer a 12% drawdown in the portfolio over
the course of 8 years.
The spreadsheet of this calculation can be found in the following pages, and one has to see to believe how
complex it is. I am quite certain no advisor would have worked it out like that to show his/her client when
selling this product.
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