Tan Kin Lian's Blog: Low cost investment funds

Monday, October 13, 2008

Low cost investment funds

Many retirees lost their life time savings through bad investment products sold by the trusted financial institutions. These institutions sold products that earned a high profit margin, but were highly risky to the retirees.

There is a need for a new institution, similar to the Central Provident Fund, to serve our retirees. This institution should operate as follows:

1. Be non-profit driven
2. Offer a few large, well diversified funds of Government bonds, corporate bonds, equities and property REITS.
3. The funds should have low fees, just sufficient to cover the operating expenses
4. The operating expenses should be kept low through streamlined, efficient systems
5. No commission should be paid for the marketing of these funds.

This is similar to the concept of the "private pension plans" that was considered by the Central Provident Fund a few years ago, but was shelved. It is time to revive this plan and offer it to both existing CPF members and also to retirees.

It is also desirable for the fund to enjoy some tax benefits, so as to encourage people to invest their savings in these funds.

6 comments:

Anonymous said...: Mr. Tan,
Many of the investors here bought the the Mini Bonds before the sub-prime crisis surfaced in the 2H of 2007. At that time, the bonds didn't look high risk, did it?

Given its rating at that time, people knew there was a small chance the issuer would default. Even banks and other companies could fail at any time--there is a small chance. But in good times, people were willing to take the risk.

There are many banks and insurance companies currently having the same rating as Lehman had before it failed. Would you call them "high risk" too?; October 13, 2008 8:20 AM
Tan Kin Lian said...: Reply to Observer:

You appear to be speaking for the financial institution that sold the products.

Look at my other posting. The credit linked securities are high risk. It is not just the risk of Lehman Brothers. The risk is muliplied at least 10 times due to the way that the product is structured.

Even in good times, this product should never be approved and should never be sold.

I have written about it more one year ago, when times are good, to ask investors to avoid this type of product. (At that time, I was not aware about the extent of the risk - due to its complicated structure and lack of tranparency. I am now horrified to learn about the extent of the risk.; October 13, 2008 8:29 AM
Anonymous said...: CPF should bring back the private pension fund scheme to help many to accumulate for retiremnt. The current arrangement that allows the financial advisers to invest for them is bad and dangerous. It has been proven time and again that insurance agents and advisers are not qualified to do for the members.
The scheme of allowing the agents to invest for members has lost for many their retirement fund. It is time CPF reviews this and sets up a private pension fund instead of shrieking from its responsibility.; October 13, 2008 8:43 AM
Anonymous said...: Hi,Mr Tan
I am 20 years old this year i would like to invest in funds in maulife company.Wats stock of Maulife company you can advise me investment on the funds wat fund to buy.
http://www.manulife.com.sg/

Heard from you soon.; October 13, 2008 12:53 PM
Anonymous said...: Thank God I invested my CPF money into NTUC Prime Fund, Balanced fund and Tech fund.

I started investing during the 2001 and 2003 recession and by 2007, the return was amazing 13% per year !

I didn't liquidate as I wanted see what happened if I wait another 20 years.

Now the fund has lost 30% of its value but overall, I m not perturbed and intend to invest more if timing is right.

I m confident by 2010, the lost will be recouped.; October 18, 2008 9:18 PM
Anonymous said...: I have 2 FAs, limited knowledge in the so-called "Financial Analysis/Planning" cos I'm always in a shortfall no matter when I seek opinion... Wonder why(This is rhetorical btw)...

This whole commissioned based FA opinion is not helping clients do Financial Planning at all, it's helping FAs do Financial Planning. What they call building passive income, for themselves. I really hate to condemn this practice as I'm many friends in this line fully convinced that they are doing the right thing but in actual fact ask any FA to explain the full exposure of any product that they are selling you. I bet you they can't unless they knew before hand and asked for some other expert help.

High profit margin funds are not only bad for retirees. I'm in my 20s and just simple logic tells me if my fund manager/FA drive nice cars and tell me that they have to do less work. It only means that a part of my investment is going into their nice car. They sure look like retiring/semi-retired in the next 5 years, while planning for me to work for the next 20. Whenever I say my money is going into a business venture so that I can build passive income, they will have that whole talk about investing into steady products, i.e. mutual funds.

This whole financial saga has proven only 1 thing. FAs are either:

1) just working hard towards making their own retirement plan using your money.

2) not well-informed enough about what they sell. Many I know can't even tell the risk factor of a fund except by that distribution pie graph and a rating that is written on the brochure.

Coming back, I love Mr.Tan's idea. of having a low cost, non-profit driven organisation for investment. I've been jumping from one iFA to another in search of someone who can train me. While I cannot help the whole world I think I can help at least my own friends and relatives. I'm not too sure if they'll be keen to have me anymore if they found out that all I wanna do is take the commission and return it(maybe in the form of re-investment) to the clients. I think I can find a profit model somewhere else in this whole service. Just not in the form of taking from their life insurance/investments. It's just wrong. The clients trust FAs to invest their money. I'm sure if you told them that 40% of the 1st year life insurance premium goes to your pocket no one will buy it from you. All these should go into reducing premiums and not distribution cost.

I'm sure people in the industry will not agree. With respect to Mr. Tan, I won't post any urls where I'm seeking help to make this possible. Let my investments be my investments and not someone else's passive income.; October 23, 2008 10:22 AM