This table shows the accumulated amount of savings at various rates of interest, and the reduction caused by the charges taken away from your savings by the financial product.
For example, if you save $500 a month and earned 5% per annum for 35 years, you will get an accumulated amount of $569.018. If the financial product takes away 2% per annum (which is quite common) to give a net return of 3%, you will get an accumulated amount of $373,656, or a reduction of 34%.
A good financial product will take away a reduction of 0.5% leaving you a net yield of 4.5% and an accumulated sum of $510,894 or 37% higher than $373,656. An example is an exchange traded fund (ETF) or a low cost unit trust.
Choose a financial product that takes away not more than 1% of your yield. Avoid financial products, including most life insurance policies, that takes away more than 2% of your yield, leaving you with a poor return.
When you buy a life insurance policy, you get a benefit illustration. Look at the figure shown as "reduction in yield". You will find the reduction to be more than 2%. If you do not know where to find it, ask the insurance agent to tell you (it is the duty of the agent to explain this infromation to you).
If you have already bought a whole life, endowment or investment-linked policy, or a variation of these plans, you can ask the insurance company to send you the benefit illustration again and tell you about the reduction in yield.
A survey carried out in my blog indicated that 80% of people who bought a life insurance policy were not told about the distribution cost (which causes a large portion of the reduction in yield) and, after learning about it, almost all of them felt that the distribution cost is too high. They felt that the agent should have told them about it.
The remaining 20% who were told about the distribution cost could have bought a single premium policy where the distribution cost is quite small and is likely to be explained by the agent.
Tan Kin Lian
Note: This new chapter will be added to my book on Financial Planning: Practical Steps
Showing posts with label Investments. Show all posts
Showing posts with label Investments. Show all posts
Tuesday, September 29, 2009
Tuesday, September 22, 2009
Never buy on the spot
Comment posted in my blog
Creative property consultants work hand in hand with developers to create false impressions. You can see them under different creative names in different forums generating waves to enrich themselves.
Some years back when I was looking for a property this agent with a big Mercedes Benz brought me to see a condo in the east. The way he conducted the sale he has a 95% chance of closing the deal at a high price. He was able to use tactics like high pressure sales to lure the potential buyer capitalising on the average human greed and fear.
Later when I was sitting in his Mercedes, he asked me what I do for a living. I told him I teach advance negotiation techniques to fortune 500 companies executives and he then muttered: "No wonder".
The simple advice to follow is simply this. Do not buy anything on the spot, there is no such thing as no more supply, only no more money. Determine your own price based on value, which you can determine after some basic research.
Do not go beyond your calculated price as agents will use your emotions to jack up the price. Always use the technique of having to consult your spouse to buy time.
Some agents know this and insist that both you and your spouse be present, ever wonder why time shares promotions always want you and your spouse to be present so you have to make a decision on the spot?
Just do not make a decision on the spot. Say you need to consult your father, mother or God, if necessary. Make it a philosophy never to make a spot decision.
Whenever I buy something, the sales agent will always ask for a deposit. I will tell them my philosophy is no deposit. They will then say what if someone comes along and buy the last piece. My answer is always: "Congratulations, I will look for another piece"
Remember, there will never be no supply, this impression is created by agents so they can pressurise you. There is only no money!
Creative property consultants work hand in hand with developers to create false impressions. You can see them under different creative names in different forums generating waves to enrich themselves.
Some years back when I was looking for a property this agent with a big Mercedes Benz brought me to see a condo in the east. The way he conducted the sale he has a 95% chance of closing the deal at a high price. He was able to use tactics like high pressure sales to lure the potential buyer capitalising on the average human greed and fear.
Later when I was sitting in his Mercedes, he asked me what I do for a living. I told him I teach advance negotiation techniques to fortune 500 companies executives and he then muttered: "No wonder".
The simple advice to follow is simply this. Do not buy anything on the spot, there is no such thing as no more supply, only no more money. Determine your own price based on value, which you can determine after some basic research.
Do not go beyond your calculated price as agents will use your emotions to jack up the price. Always use the technique of having to consult your spouse to buy time.
Some agents know this and insist that both you and your spouse be present, ever wonder why time shares promotions always want you and your spouse to be present so you have to make a decision on the spot?
Just do not make a decision on the spot. Say you need to consult your father, mother or God, if necessary. Make it a philosophy never to make a spot decision.
Whenever I buy something, the sales agent will always ask for a deposit. I will tell them my philosophy is no deposit. They will then say what if someone comes along and buy the last piece. My answer is always: "Congratulations, I will look for another piece"
Remember, there will never be no supply, this impression is created by agents so they can pressurise you. There is only no money!
Monday, September 21, 2009
Views on Financial Planning book
Mr Tan
Thank you for all the efforts you have put in. As a layman,we sure to learn more about financial planning and investment through your books. All contents should be put in simple form to make a layman like me to keep on reading your books. I looking forward for your oter incompleted chapters. After reading your view in CPF Life, I now more confident to help my parents to take up this plan.
Thank you for all the efforts you have put in. As a layman,we sure to learn more about financial planning and investment through your books. All contents should be put in simple form to make a layman like me to keep on reading your books. I looking forward for your oter incompleted chapters. After reading your view in CPF Life, I now more confident to help my parents to take up this plan.
NOTE
About half the people like the simple format of the book. The other half likes it to be more substantial and in depth. I will be changing the content to be "more in depth". The next version will be quite different from draft 4.
Sunday, September 20, 2009
RED Portal (8) - Search by sector
Which are the housing projects in sector 59 (Bukit Timah, King Albert Park) with the highest benchmark price (BMP) and the highest amenity index (AMX)?
Go to the RED portal and select sector 59. It displays a table of housing projects in that sector. Click twice on BMP to sort by benchmark price in descending order. You will see the following:
Click twice on AMX and you will see the following:
Click on View to see more details about the housing project. Click on * to see a Price Chart.
Tan Kin Lian
Go to the RED portal and select sector 59. It displays a table of housing projects in that sector. Click twice on BMP to sort by benchmark price in descending order. You will see the following:
Year Units BMP AMX
59 STERLING, THE Condo 232 1025 22
59 1 KING ALBERT Condo 1997 101 816 38
59 CHUN TIN COURT Condo 763 42
59 CAVENDISH PARK Condo 1996 254 745 10
59 PALM RESIDENCE Condo 2005 32 729 15
59 PANDAN VALLEY Condo 1979 623 714 4
Click twice on AMX and you will see the following:
Year Units BMP AMX
9 CHUN TIN COURT Condo 0 0 763 42
59 RAINBOW GARDENS Condo 1985 64 501 39
59 MEADOWLODGE Condo 2005 64 708 39
59 1 KING ALBERT Condo 1997 101 816 38
59 SUN COURT Condo 1985 0 377 38
Click on View to see more details about the housing project. Click on * to see a Price Chart.
Tan Kin Lian
Saturday, September 19, 2009
RED Portal (7) - Graph of Price Trends
The RED portal allows you to displace a graph showing the price trend for the last 24 months where there are transactions. Those months without transactions will be skipped, so that actual period could be more than 24 months. It gives you a good idea about the movement in prices.
The information provided in the RED Portal is valuable and is now given FREE. At a later date, there will be some charge to access certain valuable information. Meanwhile, enjoy the FREE information. I hope that you find them useful.
www.easysearch.sg (Real Estate Data).
The information provided in the RED Portal is valuable and is now given FREE. At a later date, there will be some charge to access certain valuable information. Meanwhile, enjoy the FREE information. I hope that you find them useful.
www.easysearch.sg (Real Estate Data).
Launch of a new property project
I attended a launch of a new property project recently. There were a few hundred potential buyers. They were given a queue number and allowed into the show flat in batches.
Although the project had a few hundred units, the marketing consultants released only one floor at a time. The prices were not disclosed. They will only be given to interested buyers, on private negotiation. The buyers were told that of the units released earlier, more than 90% had been booked, of which a high percentage had already presented their checks for the booking fee. This arrangement created the impression of overwhelming demand for a limited supply.
When the price was finally told to me "as a privilege", it was 70% more costly (per square feet) than a similar 5 years condominium located 100 meters away. A buyer who is not aware about the market price might be easily misled into booking an over-priced property and acting under a stressed condition. Later, I learned that many of the buyers were allowed to give an unsigned blank check for their booking.
The above pracitces are deceptive. This is how a property bubble is created and buyers were misled into booking for an over-priced property.
Before you consider any property investment, do your research. Go to this website, www.easysearch.sg (Real Estate Data) and find out the recently transacted prices for similar properties in the vicinity. You can pay more for a new property but the difference should not be more than 20%.
Tan Kin Lian
Although the project had a few hundred units, the marketing consultants released only one floor at a time. The prices were not disclosed. They will only be given to interested buyers, on private negotiation. The buyers were told that of the units released earlier, more than 90% had been booked, of which a high percentage had already presented their checks for the booking fee. This arrangement created the impression of overwhelming demand for a limited supply.
When the price was finally told to me "as a privilege", it was 70% more costly (per square feet) than a similar 5 years condominium located 100 meters away. A buyer who is not aware about the market price might be easily misled into booking an over-priced property and acting under a stressed condition. Later, I learned that many of the buyers were allowed to give an unsigned blank check for their booking.
The above pracitces are deceptive. This is how a property bubble is created and buyers were misled into booking for an over-priced property.
Before you consider any property investment, do your research. Go to this website, www.easysearch.sg (Real Estate Data) and find out the recently transacted prices for similar properties in the vicinity. You can pay more for a new property but the difference should not be more than 20%.
Tan Kin Lian
Financial Planning (7) - What are good products?
The good investment and insurance products fit into the following criteria:
a) are transparent
b) have fair charges
Most products traded on an exchange are transparent and fair. The price is determined by the supply and demand. Information is made transparent and available to all market participants. You have the choice to be a buyer or seller.
You can buy stocks and bonds on the exchange and get fair pricing. However, you should avoid the illiquid stocks that may be subject to manipulation by the majority shareholders or certain funds.
You can also invest in unit trust and funds that offer diversification and display daily prices based on the market prices of the underlying assets. Choose the large unit trusts that have a high volume of daily transactions. Avoid the small unit trust with less than $100 million of assets.
Avoid structured products, as they tend to be non-transparent and are designed to have a large profit margin for the product issuers. These structured products also have high marketing costs that are passed to the investors. After paying for the high charges, which are usually not disclosed, the investors are likely to get a poor return.
Life insurance products of the investment type generally give a poor return, for the same reasons as the structured investment products. They are not transparent and impose high charges (to cover marketing and profit margins) on the investor.
To recap: choose transparent products with fair charges. Avoid structured investment products, including life insurance. Invest in financial products that are traded on the exchange.
a) are transparent
b) have fair charges
Most products traded on an exchange are transparent and fair. The price is determined by the supply and demand. Information is made transparent and available to all market participants. You have the choice to be a buyer or seller.
You can buy stocks and bonds on the exchange and get fair pricing. However, you should avoid the illiquid stocks that may be subject to manipulation by the majority shareholders or certain funds.
You can also invest in unit trust and funds that offer diversification and display daily prices based on the market prices of the underlying assets. Choose the large unit trusts that have a high volume of daily transactions. Avoid the small unit trust with less than $100 million of assets.
Avoid structured products, as they tend to be non-transparent and are designed to have a large profit margin for the product issuers. These structured products also have high marketing costs that are passed to the investors. After paying for the high charges, which are usually not disclosed, the investors are likely to get a poor return.
Life insurance products of the investment type generally give a poor return, for the same reasons as the structured investment products. They are not transparent and impose high charges (to cover marketing and profit margins) on the investor.
To recap: choose transparent products with fair charges. Avoid structured investment products, including life insurance. Invest in financial products that are traded on the exchange.
Tan Kin Lian
Friday, September 18, 2009
Red Portal (6) - Highest Amenity Index
The amenity index measures the amenities within 1 km of a housing project. Points are given for the type of amenity (e.g highest is for MRT) weighted by the distance to the amenity. The highest score for the amenity index (AMX) is 100.
Here are the housing projects (i.e. condominiums) with the highest AMX. Most of them are not expensive, i.e. benchmark price less than $1000 psf. They are located in the central area.
Why does Thye San Mansion, located in Tanjong Pagar, have a high AMX? It is close to 3 MRT stations, 1 bus interchange, 2 community centers, 3 medical centers, 1 secondary school and 9 shopping malls. And it has a benchmark price of only $572 psf.
Find out more at www.easysearch.sg (Real Estate Data)
Here are the housing projects (i.e. condominiums) with the highest AMX. Most of them are not expensive, i.e. benchmark price less than $1000 psf. They are located in the central area.
Project name AMX BMP
Thye Shan Mansion 99 $572
Craig Place 93 $957
Pearl Bank Apt 91 $590
Abacus Plaza 85
Compass Heights 85 $531
Min Yuan Apt 84 $800
People's Park Complex 82 $688
Novena Suites 82 $1172
Grand Tower 81 $679
Burlington Square 80
Why does Thye San Mansion, located in Tanjong Pagar, have a high AMX? It is close to 3 MRT stations, 1 bus interchange, 2 community centers, 3 medical centers, 1 secondary school and 9 shopping malls. And it has a benchmark price of only $572 psf.
Find out more at www.easysearch.sg (Real Estate Data)
Financial Planning (6) - How to find a good adviser?
If you need assistance to find the right type of investment or insurance product, you can use the services of a financial adviser.
It is better to find an adviser who will work for a fee. It is better for you to pay a fee of say $50 per hour for financial advice, rather than to use an adviser who earns a commission from the product that is sold to you.
If the adviser earns a commission, there is a conflict of interest. The adviser will recommend the product that pays him or her the highest commission. This cost is ultimately borne by your as the consumer, but you are not aware about it.
If you pay a fee to the adviser, you can ask for the commission that is paid on the recommended product to be refunded to you. This refund can be much more than than the fee that you have to pay. The adviser may be able to recommend financial or insurance products that are free of commission - so the cost will be lower anyway.
If you have to pay a fee of $50 per hour, you can reduce the total fee by spending some time to learn about your options, so that the financial adviser needs to spend less time to help you make the appropriate decision. The adviser may be able to give you some information from a website or booklet that you can read in advance.
To recap: Choose a financial adviser who is willing to work on a time-based fee, is willing to any commission paid on the products, and to refer you to educational materials that you can read in advance.
It is better to find an adviser who will work for a fee. It is better for you to pay a fee of say $50 per hour for financial advice, rather than to use an adviser who earns a commission from the product that is sold to you.
If the adviser earns a commission, there is a conflict of interest. The adviser will recommend the product that pays him or her the highest commission. This cost is ultimately borne by your as the consumer, but you are not aware about it.
If you pay a fee to the adviser, you can ask for the commission that is paid on the recommended product to be refunded to you. This refund can be much more than than the fee that you have to pay. The adviser may be able to recommend financial or insurance products that are free of commission - so the cost will be lower anyway.
If you have to pay a fee of $50 per hour, you can reduce the total fee by spending some time to learn about your options, so that the financial adviser needs to spend less time to help you make the appropriate decision. The adviser may be able to give you some information from a website or booklet that you can read in advance.
To recap: Choose a financial adviser who is willing to work on a time-based fee, is willing to any commission paid on the products, and to refer you to educational materials that you can read in advance.
Tan Kin Lian
Thursday, September 17, 2009
Land banking - call on CAD to investigate
Many investors bought a land banking product with an option (guarantee) that they can withdraw their investment after 12 months with a certain rate of return. They exercised their option, but the land banking company refused to honor the promise.
The investors lodged a complaint with the CAD (Commercial Affairs Department) but the CAD officer told them to see a lawyer and take a legal case. One investor went to see the Member of Parliament and was advised to lodge a complaint with CAD.
Why are our public officers not doing their job? They seem to be passing the buck around. One point to the other. The poor citizens, having "lost" their money, have to go on a merry go round. It seems that they have to carry out their own investigation.
It is the duty of the CAD, on receiving several similar complaints about this land banking company, to carry out an investigation. At the least, they should ask the land banking company to give an explanation, so that the CAD can decide if there is a potential case of cheating. If so, they should carry out more detailed investigation to gather evidence and charge the wrong doers in court.
If the investigation shows that there is no cheating, it will then be appropriate for the CAD to advice the investors to take up a legal case for specific performance.
The investors lodged a complaint with the CAD (Commercial Affairs Department) but the CAD officer told them to see a lawyer and take a legal case. One investor went to see the Member of Parliament and was advised to lodge a complaint with CAD.
Why are our public officers not doing their job? They seem to be passing the buck around. One point to the other. The poor citizens, having "lost" their money, have to go on a merry go round. It seems that they have to carry out their own investigation.
It is the duty of the CAD, on receiving several similar complaints about this land banking company, to carry out an investigation. At the least, they should ask the land banking company to give an explanation, so that the CAD can decide if there is a potential case of cheating. If so, they should carry out more detailed investigation to gather evidence and charge the wrong doers in court.
If the investigation shows that there is no cheating, it will then be appropriate for the CAD to advice the investors to take up a legal case for specific performance.
I suggest that all the affected investors should get together and collectively go to see a Member of Parliament. If you go togther, you will be able to bring your point across more clearly to the MP. Ask the MP to write to CAD to carry out an investigation.
After refusing the honor the promise to repay the earlier investors, the land banking company continue to sell the product to new investors. Will this become a ponzi scheme?
I am worried about the future of Singapore. If our public servants and elected leaders do not carry out their duty, things will get worse. There will be more cases of cheating.
Is it due to lack of manpower in CAD that they cannot carry out any investigation? Or do we now have officials that do not like the ground work and prefer to sit behind a desk and write reports?
Tan Kin Lian
I am worried about the future of Singapore. If our public servants and elected leaders do not carry out their duty, things will get worse. There will be more cases of cheating.
Is it due to lack of manpower in CAD that they cannot carry out any investigation? Or do we now have officials that do not like the ground work and prefer to sit behind a desk and write reports?
Tan Kin Lian
RED Portal (5) - Highest Benchmark Price
The RED portal provides an important indicator called BMP (Benchmark Price). It is the average PSF (price per square foot) computed for the latest 20 sales transactions, adjusted by the price index.
Do you know the condos with the highest BMP in Singapore. Here are the top 10 condos. 8 of them are still under construction (to be ready in 2010 and 2011). Two are already occupied. Are you familiar with them?
Go to www.easysearch.sg (Real Estate Data) to see the map of the condo and also the actual transactions.
These properties cost several million dollars and are beyond the reach of ordinary people. Anyway, it is nice to know how expensive they are, and where they are located.
You can find more reasonably priced properties at other sectors. Go to the portal and select the condo by its name, or choose the condos in your preferred sector (or district).
www.easysearch.sg (Real Estate Data)
Do you know the condos with the highest BMP in Singapore. Here are the top 10 condos. 8 of them are still under construction (to be ready in 2010 and 2011). Two are already occupied. Are you familiar with them?
Go to www.easysearch.sg (Real Estate Data) to see the map of the condo and also the actual transactions.
TOP 10 BMP
Condo Year Comp Tenure Location Nr Units BMP
Marq on Patterson Hill 2011 FH Orchard 66 $4,305
Cliveden at Grange 2011 FH Tanglin 100 $3,315
Orchard Residences 2010 99 Tanglin 175 $3,282
Parkview Eclat 2010 FH Tanglin 35 $3,220
Lumos 2011 FH Orchard 53 $3,133
Beaufort on Nassim 2008 FH Bukit Timah 30 $3,087
Leonie Parc View FH Orchard 44 $2,910
Helios Residences 2011 FH Newton 140 $2,840
Boulevard Residences 2005 FH Tanglin 46 $2,807
Nassim Park 2011 FH Bukit Timah 100 $2,751
These properties cost several million dollars and are beyond the reach of ordinary people. Anyway, it is nice to know how expensive they are, and where they are located.
You can find more reasonably priced properties at other sectors. Go to the portal and select the condo by its name, or choose the condos in your preferred sector (or district).
www.easysearch.sg (Real Estate Data)
RED Portal (4)
Which are the most expensive condos in Singapore (based on the benchmark price)?
Which condos have the best amenities within 1 km (based on the AMX)?
Which condos have the highest increase in price PSF over the past 12 months)?
This information will be posted in the Real Estate Data (RED) website soon. Go to www.easysearch.sg (Real Estate Data). Read the Guide on how to use this website.
Which condos have the best amenities within 1 km (based on the AMX)?
Which condos have the highest increase in price PSF over the past 12 months)?
This information will be posted in the Real Estate Data (RED) website soon. Go to www.easysearch.sg (Real Estate Data). Read the Guide on how to use this website.
RED Portal (3)
Dear Mr. Tan,
Your website has the additional information of stating the floor of the unit which all other websites do not offer. Of course we can try to make a guess but not quite accurate as knowing the actual floor number.
Another advantage is the comparison you provide with other condos. I wish I had done this before selling my unit. I was a first time seller and naively thought that my agent (who is a family member's good friend!) would have done all that is necessary to get me a good price.
Unfortunately she based her pricing on an earlier sale in my condo and told me that an offer of $X was good. I was quite shocked to have that offer and asked her if the market was picking up. She told me it could a temporary thing and made me commit just after 2 viewings and 1 offer!
I must say that it was my fault in trusting that my agent would get me a good price. I bought the property for $X and sold for the same price. It is a high floor. Later I got to know that the ground floor unit was sold for a higher price.
If I had waited just one month, I would have made 80K. At the current price, I would make 100K. The painful thing is that I was not even in a hurry to sell. I had a wonderful tenant who was keen to extend for another year. Guess this is a painful and expensive lesson that I have to learn.
I suggest that you add a listing of units sold more than 2 years ago or a history page
www.easysearch.sg (Real Estate Data)
Your website has the additional information of stating the floor of the unit which all other websites do not offer. Of course we can try to make a guess but not quite accurate as knowing the actual floor number.
Another advantage is the comparison you provide with other condos. I wish I had done this before selling my unit. I was a first time seller and naively thought that my agent (who is a family member's good friend!) would have done all that is necessary to get me a good price.
Unfortunately she based her pricing on an earlier sale in my condo and told me that an offer of $X was good. I was quite shocked to have that offer and asked her if the market was picking up. She told me it could a temporary thing and made me commit just after 2 viewings and 1 offer!
I must say that it was my fault in trusting that my agent would get me a good price. I bought the property for $X and sold for the same price. It is a high floor. Later I got to know that the ground floor unit was sold for a higher price.
If I had waited just one month, I would have made 80K. At the current price, I would make 100K. The painful thing is that I was not even in a hurry to sell. I had a wonderful tenant who was keen to extend for another year. Guess this is a painful and expensive lesson that I have to learn.
I suggest that you add a listing of units sold more than 2 years ago or a history page
www.easysearch.sg (Real Estate Data)
Financial Planning (5) - How to invest your savings?
You should invest 80% of your savings for for the long term. Here are the tips for this type of investment:
a) Invest in a large, professionally managed fund as it offers diversification. You will not be badly affected if some investments go bad, as the impact is small and is compensated by other good investments.
b) Choose a low cost fund, where the fund manager takes only a small fee. If you choose an indexed fund, you enjoy diversification and pay a fee of only 0.3% per annum.
c) Invest for the long term, i.e. 10 years or longer. The fund will do badly in some year but will do well in other year. Over the long term, you can get an average rate of return.
d) Choose a fund that invest largely or fully in equity, as equity gives a higher return over the long term. You have already reduced your risk through diversification and averaging out the good and bad years.
You can keep 20% of your savings in a money market fund or in short term assets. The return may be lower, but you can withdraw the savings at any time to meet emergency needs, without having to pay a penalty or suffer a capital loss.
Over the long term, an equity fund should be able to earn you a net return of at least 5%. This is attractive, compared to safe, short term return of less than 1%.
To recap: Invest at least 80% of your savings in a diversified, low cost equity fund that can give a return of at least 5% for the long term. You can reduce the risk through diversification and long term averaging.
a) Invest in a large, professionally managed fund as it offers diversification. You will not be badly affected if some investments go bad, as the impact is small and is compensated by other good investments.
b) Choose a low cost fund, where the fund manager takes only a small fee. If you choose an indexed fund, you enjoy diversification and pay a fee of only 0.3% per annum.
c) Invest for the long term, i.e. 10 years or longer. The fund will do badly in some year but will do well in other year. Over the long term, you can get an average rate of return.
d) Choose a fund that invest largely or fully in equity, as equity gives a higher return over the long term. You have already reduced your risk through diversification and averaging out the good and bad years.
You can keep 20% of your savings in a money market fund or in short term assets. The return may be lower, but you can withdraw the savings at any time to meet emergency needs, without having to pay a penalty or suffer a capital loss.
Over the long term, an equity fund should be able to earn you a net return of at least 5%. This is attractive, compared to safe, short term return of less than 1%.
To recap: Invest at least 80% of your savings in a diversified, low cost equity fund that can give a return of at least 5% for the long term. You can reduce the risk through diversification and long term averaging.
Tan Kin Lian
Appeal to MAS - regulate investment products
So far, all the measures that MAS has focused on are 1) training of sales staff, 2) labelling of products, 3) sales process, proper documentation etc.
However, the MAS has failed to address the root cause of all the mis-selling in the financial industry. They have failed to address the conflict of interest between the way the sales force is remunerated and the interests of clients.
Clients want good investment performance, within their proper risk profile. They want a diversified portfolio.
The sales force and the banks that set the score cards want to sell products with the highest sales revenues. The higher the sales revenue, often the poorer the investment performance for clients.
By allowing banks to sell products with upfront sales charges, the sales force have no incentive to conduct due diligence of the products. In fact, the sales force is incentivised to go for the products with the highest sales margins, often embedded in flow products, structured products and treasury products. These products often provide very limited upside but unlimited downside.
Flow products like equity linked notes and dual currency investments involve the clients selling put options for a fee. Often the spreads taken by the banks are 80%, while the client earns only 20%. Yet the spreads are not transparent. The client only knows what he has been quoted. Worse, the little fees that client earns from selling these options involve unlimited downside if the underlying equity or the currency being paired drops in value.
Sales people love such flow products because 1) they earn very high margins at expense of clients, 2) these investments are short-termed, often 1 month for an ELN and 2 weeks for a DCI, and they keep rolling the clients every time a contract expires until they customer gets converted. if the stock rises or the currency such as teh AUD rises, customer merely gets a small yield like 1% per month. But if the stock or currency falls, customer receives the underlying stock and currency. Hence, the return is asymmetric.
When the investment climate is favourable for equities, often the sales force would steer clients doing such flow products, which earn very little yields, when the clients are better off investing in mutual funds, ETFs, products that constitute a core portfolio.
There are also no controls on the spreads that a bank can take for bonds, convertible bonds, preference shares. They are quoted as bid ask with the spreads embedded. However, bonds, convertible bonds and preference shares provide much better returns to risk ratios than flow products and hence such spreads are often quite justified.
The banks cannot be relied on to treat customers fairly because they are under tremendous shareholder pressure to produce ever increasing revenues. Any one from senior management in a consumer bank will admit that their sales target rises 20 - 30% per annum, regardless of market climate. Hence, banks tend to veer towards selling products that generate the highest revenue at the expense of clients.
There are also no controls on the spreads that a bank can take for bonds, convertible bonds, preference shares. They are quoted as bid ask with the spreads embedded. However, bonds, convertible bonds and preference shares provide much better returns to risk ratios than flow products and hence such spreads are often quite justified.
The banks cannot be relied on to treat customers fairly because they are under tremendous shareholder pressure to produce ever increasing revenues. Any one from senior management in a consumer bank will admit that their sales target rises 20 - 30% per annum, regardless of market climate. Hence, banks tend to veer towards selling products that generate the highest revenue at the expense of clients.
The only way is for MAS to legislate or control the spreads earned from flow products, unit trusts and all investment products. The banks will likely find other ways to make up for the lost revenue by implementing performance fees or wrap fees, which will align the interests of teh bank with the customers.
The MAS must take this financial crisis as an opportunity to take bold steps towards reforming the way investment products are sold by banks. Otherwise, I suspect more social harm will fall on the public. If the government is willing to take steps to control the rise in property prices recently, why not take equally bold steps to reform the financial industry?
Greg Wang
The MAS must take this financial crisis as an opportunity to take bold steps towards reforming the way investment products are sold by banks. Otherwise, I suspect more social harm will fall on the public. If the government is willing to take steps to control the rise in property prices recently, why not take equally bold steps to reform the financial industry?
Greg Wang
Wednesday, September 16, 2009
Real Estate Data - RED Portal (2)
Dear Mr Kin Lian
This is indeed a very useful website. Thank you for putting this together. I am one of those who was fooled into thinking that my agent would do her homework and get me good deal. I've lost close to 100k due to failure in practising due diligence in marketing my property.
With your website, I think sellers need not be at the mercy of some agents who only want to close a deal as soon as possible and collect their commission! All buyer and sellers can do their own homework.
www.easysearch.sg (Real Estate Data)
This is indeed a very useful website. Thank you for putting this together. I am one of those who was fooled into thinking that my agent would do her homework and get me good deal. I've lost close to 100k due to failure in practising due diligence in marketing my property.
With your website, I think sellers need not be at the mercy of some agents who only want to close a deal as soon as possible and collect their commission! All buyer and sellers can do their own homework.
www.easysearch.sg (Real Estate Data)
Real Estate Data (RED) Portal
There is interest in private property in recent months. Before you make a big $1 million commitment, it is better for you to do some research. What is the price paid for recent transactions in the same condominium? What are the prices in similar condominiums in the same sector?
The Real Estate Data (RED) portal gives you the information. You will find the following information to be useful and easy to use:
BMP - benchmark price
AMX - amenity index
Transactions - actual transactions in this condominium.
Guide - read the instructions on how to use this portal.
Take note of the disclaimer. If you find any mistake or missing information, please reply to the Feedback tab. We need you to help make this portal useful for consumers.
Go to www.easysearch.sg (Real Estate Data).
The Real Estate Data (RED) portal gives you the information. You will find the following information to be useful and easy to use:
BMP - benchmark price
AMX - amenity index
Transactions - actual transactions in this condominium.
Guide - read the instructions on how to use this portal.
Take note of the disclaimer. If you find any mistake or missing information, please reply to the Feedback tab. We need you to help make this portal useful for consumers.
Go to www.easysearch.sg (Real Estate Data).
Financial Planning (4) - How much can you afford to save?
The amount that you can save depends on your income (combined with the income of your spouse) and the amount that you spend.
Some of your spendings are fixed. You have to make monthly repayments on the loans that you have taken to buy your home, car or furniture. If you do not make the payment, you are charged a high rate of interest, which can be a burden.
You also have to spend money on transport, food, clothings, utilities, telephone, medical expenses and other essentials. You can spend a smaller amount by being frugal, but there is a minimum sum to be spent. If you have more members in the family, the spending increases proportionately.
Tuition for the children and employing a maid are expensive items. Are they really necessary? Can they be avoided?
Spending on credit should be avoided. The interest charged on credit card can be 2% per month or 24% a year. This is too high and can be a heavy burden.
After setting aside the fixed commitments and the essential items, you have a remaining sum. You can decide on how much to set aside as savings for the future and how much should go into discretionary spending.
Some people make the mistake of setting aside too much of their monthly income in life insurance savings. This forced savings take a large part of their earnings. When they are unable to meet the premium payments, their policies lapse and they forfeit a large part of the premiums that have been paid. This should be avoided.
To recap: Have a budget to allocate your savings into fixed commitments, essential expenses and voluntary expenses. Avoid having fixed commitments (e.g. loans installments and life insurance savings) that may be difficult to service.
Some of your spendings are fixed. You have to make monthly repayments on the loans that you have taken to buy your home, car or furniture. If you do not make the payment, you are charged a high rate of interest, which can be a burden.
You also have to spend money on transport, food, clothings, utilities, telephone, medical expenses and other essentials. You can spend a smaller amount by being frugal, but there is a minimum sum to be spent. If you have more members in the family, the spending increases proportionately.
Tuition for the children and employing a maid are expensive items. Are they really necessary? Can they be avoided?
Spending on credit should be avoided. The interest charged on credit card can be 2% per month or 24% a year. This is too high and can be a heavy burden.
After setting aside the fixed commitments and the essential items, you have a remaining sum. You can decide on how much to set aside as savings for the future and how much should go into discretionary spending.
Some people make the mistake of setting aside too much of their monthly income in life insurance savings. This forced savings take a large part of their earnings. When they are unable to meet the premium payments, their policies lapse and they forfeit a large part of the premiums that have been paid. This should be avoided.
To recap: Have a budget to allocate your savings into fixed commitments, essential expenses and voluntary expenses. Avoid having fixed commitments (e.g. loans installments and life insurance savings) that may be difficult to service.
Tan Kin Lian
Monday, September 14, 2009
Financial Planning (3) - What risks to insure against?
Insurance is available to cover the following risk:
a) risk of premature death
b) medical expenses
c) disability
You need to insure against premature death during the time when your children are still young. This insurance will provide a regular income to your family until all your children have grown up and have started to work.
You should buy term insurance, as just provide pure coverage (not combined with savings), and the cost is quite low.
You should have insurance to cover you up to age 60, or for a period of 25 years (if shorter). The cost of insurance increases according to the period of insurance, i.e. you pay more if you want to insure for a longer period. You should avoid paying a higher premium than is necessary.
You should insure for an adequate sum. It can be 10 years of your earnings or to provide 50% of your earnings each month for the remainder of the period of insurance.
For example, if you earn $40,000 a year, you can buy insurance to pay $400,0000 on premature death or to pay $2,000 a month for the remainder of the period of insurance. If you insure for 25 years and death occurs after 15 years, the monthly income is payable for the remaining 10 years.
You can buy an insurance policy to cover your medical expenses. In choosing the suitable policy, you should consider the coverage and the cost. The insurance that offers the best value for money is the basic Medishield offered by the Central Provident Fund.
If you buy a private Shield plan, you may get 50% more coverage, but you have to pay a premium that is 100% more costly. If you are well off, you may not mind paying a higher premium. But, if you do not have adequate savings for your future needs, you should avoid wasting the money on expensive, unnecessary insurance.
If you are covered under basic Medishield and you wish to be treated in a private ward, you can pay the uninsured expenses out of your savings. The risk of this happening is likely to be quite low.
Disability insurance will pay you a monthly income during the period that you are disabled due to accident or sickness. You have to consider the cost and benefit of this insurance, and the chance of making a claim. If the insurance is too expensive, relative to the chance of making a claim, you can carry this risk on your own. If you are disabled, you can draw down on your savings and replace the drawdown in the future.
to recap: consider the benefit, the chance of making a claim and the cost. Insurance is costly, so you have to choose an insurance coverage that gives you good value for your premiums.
a) risk of premature death
b) medical expenses
c) disability
You need to insure against premature death during the time when your children are still young. This insurance will provide a regular income to your family until all your children have grown up and have started to work.
You should buy term insurance, as just provide pure coverage (not combined with savings), and the cost is quite low.
You should have insurance to cover you up to age 60, or for a period of 25 years (if shorter). The cost of insurance increases according to the period of insurance, i.e. you pay more if you want to insure for a longer period. You should avoid paying a higher premium than is necessary.
You should insure for an adequate sum. It can be 10 years of your earnings or to provide 50% of your earnings each month for the remainder of the period of insurance.
For example, if you earn $40,000 a year, you can buy insurance to pay $400,0000 on premature death or to pay $2,000 a month for the remainder of the period of insurance. If you insure for 25 years and death occurs after 15 years, the monthly income is payable for the remaining 10 years.
You can buy an insurance policy to cover your medical expenses. In choosing the suitable policy, you should consider the coverage and the cost. The insurance that offers the best value for money is the basic Medishield offered by the Central Provident Fund.
If you buy a private Shield plan, you may get 50% more coverage, but you have to pay a premium that is 100% more costly. If you are well off, you may not mind paying a higher premium. But, if you do not have adequate savings for your future needs, you should avoid wasting the money on expensive, unnecessary insurance.
If you are covered under basic Medishield and you wish to be treated in a private ward, you can pay the uninsured expenses out of your savings. The risk of this happening is likely to be quite low.
Disability insurance will pay you a monthly income during the period that you are disabled due to accident or sickness. You have to consider the cost and benefit of this insurance, and the chance of making a claim. If the insurance is too expensive, relative to the chance of making a claim, you can carry this risk on your own. If you are disabled, you can draw down on your savings and replace the drawdown in the future.
to recap: consider the benefit, the chance of making a claim and the cost. Insurance is costly, so you have to choose an insurance coverage that gives you good value for your premiums.
Tan Kin Lian
Sunday, September 13, 2009
Financial Planning (1) - How much to save?
The first step in financial planning is to decide on the proportion of the current income that should be saved for the future. The answer is "as much as possible".
Some people are frugal. They spend only to meet the essential expenses and save the remainder of their earnings for the future. They are willing to forgo their current spending and enjoyment - no vacations, search for cheap offers and bargains, take public transport, find inexpensive eating places.
There are many opportunities to leave frugally and still enjoy the pleasures of life. The parks and public spaces are free. Activities and courses in community and sport centers are affordable. Walking is free and good for the body.
As a rule of thumb, you should save 10% to 15% of your earnings and keep it for future needs. After meeting your essential expenses and savings, you can still have a balance for the discretionary spending, such as vacations, branded goods, tuition, entertainment or the pleasures that do cost money.
It is very important to avoid getting into debt, including borrowing on credit cards, that charges a high interest burden. It is already difficult to earn money and set aside savings, yet some people have to pay interest that takes away 10% or more of their earnings!
Do not invest in a property that requires more than 40% of your earnings to service the monthly repayment. Do not buy a car that needs more than 20% of your earnings to meet the monthly repayment. You have other options that should be explored. If you take these loans, you must make sure that your job is secure, as the monthly repayments can be a heavy burden when you are out of a job.
If your spouse is also working, which is now quite common, the above rules should be applied on the combined income.
To recap: as a rule of thumb, save 10% to 15% of your earnings. When you are clear about your financial goals for the future, you can adjust the amount that you need to save.
Some people are frugal. They spend only to meet the essential expenses and save the remainder of their earnings for the future. They are willing to forgo their current spending and enjoyment - no vacations, search for cheap offers and bargains, take public transport, find inexpensive eating places.
There are many opportunities to leave frugally and still enjoy the pleasures of life. The parks and public spaces are free. Activities and courses in community and sport centers are affordable. Walking is free and good for the body.
As a rule of thumb, you should save 10% to 15% of your earnings and keep it for future needs. After meeting your essential expenses and savings, you can still have a balance for the discretionary spending, such as vacations, branded goods, tuition, entertainment or the pleasures that do cost money.
It is very important to avoid getting into debt, including borrowing on credit cards, that charges a high interest burden. It is already difficult to earn money and set aside savings, yet some people have to pay interest that takes away 10% or more of their earnings!
Do not invest in a property that requires more than 40% of your earnings to service the monthly repayment. Do not buy a car that needs more than 20% of your earnings to meet the monthly repayment. You have other options that should be explored. If you take these loans, you must make sure that your job is secure, as the monthly repayments can be a heavy burden when you are out of a job.
If your spouse is also working, which is now quite common, the above rules should be applied on the combined income.
To recap: as a rule of thumb, save 10% to 15% of your earnings. When you are clear about your financial goals for the future, you can adjust the amount that you need to save.
Tan Kin Lian
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