Tuesday, November 13, 2012

Losses due to spread and churning

A friend, who used to work for a multinational life insurance company operating around the Asean countries told me that the company made a lot of profit on their investment linked products.

There is a 5% spread between the bid and offer price of the units, They agents sell large volume of the product when the stock market was doing well. The customers were not aware about the spread.

When the unit prices went above the spread, the agent advised the customers to sell their units to take profit. When the market came down, the agents advised them to re-invest and they earned the commission again. The insurance company and the agent shared the 5% spread.

If the market does not come down, the agent will convince the customers to reinvest anyway, and incur the spread again. The agent and the insurance company made their commission and profits on the "churning".

If the market does not recover and goes down, the policyholder will be taking a big loss on the invested amount. They have to suffer the loss on the spread, on the churning and on the market.

Many investors had approached me about the losses of 20% to 50% on their unit trust that is being held over 5 to 10 years. I wonder if the losses were due to the factors described above? It is sad that many consumers are so naive, and were taken for a ride by the so called "financial advisers".


zhummmeng said...

Before MAS limited ILPs or CPFIS products to 3% sales charge there was a company that paid its agents 3.75% commission for the sale of ILPs. It has increased its sales charge to 4% now for cash ILPs.
This foreign insurance company agents are 'very good' at selling regular ILPs with high coverage and they don't disclose that the initial premium will not last long and has to be topped up to meet the insurance cost. They do roaring business at roadshows.
Each agent can easily con passers bye into buying this regular ILPs because of the 1st year high commission of 50%. Imagine closing 20 cases a month that is $14,400 commission (premium charged to credit card)
The conseguence for the customers is not their business. Blame it on the poor market, lor.

Xianlong said...

Is how the financial industry make $$. Is an unfortunate fact that they need plenty of igorant sheep to satisfy the wolves appetite.

Many people pay thousand even tens of thousand of dollars to get a piece of toilet paper which doesn't make them secure financially in this fast changing world.

If they invested the time to self-educate themselves instead of wasting their time on facebook, they will reap better returns & be more informed financially.

Look at the no. of sheep playing with their smartphones on mrt instead of reading a personal finance book.

zhummmeng said...

Usually churning is done by active 'financial experts' aka active ILP salesmen to generate commission. They will 'advise' you to take profit when you make some money and to buy in when the MAS approved minimum holding period is over.
They appear and sound investment expert when they talk about the market outlook with some economic fundamentals thrown in.
Their predictive tool is the 'risk profiling questionaire and the rest is gibberish investment jargons only they understand.They would tell you about asset allocation and diversification as if the 2 words are interchangeable and guarantee either 4% or 8% return (previously 5% and 9%)but the resultant portfolio is anything but diversified.
The single premium ILP maybe a paltry sum but they can generate commission as big as a big single lump sum.
For the regular ILPs they will talk expertly on dollar cost averaging or DCA as if it is a magic money making machine without risk.
They have only tikam tikam qualifications in ILPs and some may have CMFAS 9A which they passed by regurgitation , by luck or after many attempts and yet clueless about how they would apply the derivatives to help their clients hedge or modify the risk return profile of their portfolio.
In short , please don't be taken for a ride by the insurance salesmen who masquerade as financial or investment consultants.

yujuan said...

Have armed ourselves with 3 survival skills in Singapore regarding Insurance or any other investments.
1. To separate Insurance and investments, these two will never meet, as different as chalk and cheese. Have to thank TKL here.
2. When approached by friends and relatives to buy insurance, would firmly say we are already over insured, no need to buy anymore.
3. When approached by strangers selling insurance products at shopping retail areas, always remind ourselves these are con people, and walk away quickly.
3. Always remember an Admin Executive in NTUC Income, advising us to invest ourselves, dun depend on other people to manage our money. If his CEO Boss knows him, this Executive will get the sack.
There you are folks, no worry about being skinned like a cat.

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