Sunday, December 30, 2018

A health financial services industry

Many people work hard. They spend wisely and are able to set aside some savings each month.

They need advice on how to invest their savings to get a modest return. They do not want to take risk and are not greedy for a high return.

Sadly, most of them end up with a bad investment. The people that approached them to give investment advice gave bad advise to them, and give them either a risky investment or a very poor return.

This happens in many countries, including Singapore. It is sad to see ordinary people being taken from a ride by the "financial industry". The financial industry produces many super rich people, and many, many more poor customers.

In many cases, the poor return is due to the high charges that are taken away by the financial industry to pay high commission to the seller and produce high profits to the financial institutions.

A word to describe this situation is that the customers are being "ripped off".

Who do most govts allow their ordinary citizens to be ripped off from their hard earned savings. Here are the reasons:

a) The govt officials are brainwashed by the concept that a free market in financial services help the consumers in the long run.

b) The politicians are funded by the financial industry and they allow their benefactors to have freedom to run their business to generate profits.

c) Some govt officials or politicians look forward for cushy jobs in the finance industry a few years down the road.

Suppose there is a govt that truly look after the interest of ordinary people. What can the govt do? Here are some possible ways.

a) Offer a well diversified fund of safe bonds, including government securities. The investor can get a modest return that is safe.

b) Offer a well diversified fund of blue chip equities. These equities offer a good long term return, but may be risky in the short term. They are suitable for investors who understand that they have to invest for the long term and should not worry about short term investments.

Both funds should be large funds, well diversified and have a low management fee, less than 0.3% per annum.

This approach will still provide room for the financial services industry to offer alternative funds. But there is a benchmark of the fund that is provided by the govt. These funds should operate transparently, and be managed on a cost recovery basis. It should not have the goal of making a profit.

When govts recognize their duty to offer the suitable investment instruments on a non-profit basis to its citizens, the citizens will have an option to avoid being "ripped off" by the greedy operators in the financial industry. It will set the benchmark for a healthy industry to flourish.

Tan Kin Lian

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