Monday, July 24, 2006

Do not allow the adviser to churn your CPF investment

Recently, there is some articles in the newspaper about "churning" of investments using CPF savings. Let me explain what the issue is.

Churning takes place when there is unnecessary buying and selling of investment in order to generate income for the insurance adviser.

A customer has to incur a front-end spread (ie the difference between the bid and offer price), when investing in this product. Most companies charge a spread of 5%. NTUC Incomes charges a lower spread of 3.5%.

If the investment is sold within a short time, there is insufficient time to realise a good return to recover the front end cost. We advise CPF funds to be invested for the long term and not for short term speculation.

NTUC Income is against churning, as it is at the expense of policyholders. We pay a lower rate of commission to our insurance advisers. They do not have the incentive to churn. Our supervisor call the policyholder at the time of purchase to ensure that they properly understand their investment and the features of the product.

We have the lowest rate of early surrenders in the industry. If a customer wishes to surrender his investment, we explain the disadvantages of early surrender. We also provide them with other options such as switching from one fund to another so that they avoid high front end cost.


Justin Lim said...

Investment-Linked Policies ("ILPs") are offered by Insurance Companies and their Unit Trusts are priced with a bid-offer spread of typically 5% (except for NTUC).

There is usually a Insurance attached to such Investments.

My personal opinion:

If you are looking for "pure" investments w/o the Insurance factor, invest in "pure" Unit Trust. Fundsupermart charges only 2.25%, which is even lower than NTUC's 3.5%. There is no Bid Price or Offer Price but only Net Asset Value ("NAV").

BT said...

Just realised that Tan Kin Lian will not reply comments posted here.

He wrote "If you have any comment, send to me at Website:"

Justin Lim said...

Thanks Bet,
However, I'm not looking forward to Kin Lian's reply. Posted was my personal views for other readers so they know about other avenues to do their investment. I find Kin Lian's view too obviously 1 sided. It is always, "NTUC Income is the Best". He is always on the shoot-down at Insurance Companies and Banks, saying that they are not good and NTUC Income is not like that...

My Personal Views:
1) Cheap does not necessary means Good. Be a SMART shopper. Is the product meant for you????
2) ALL companies gives quotation based on their earning projection. So how to say that NTUC Income is the Best. The only way to know... Buy both policies and hold till maturity, then compare. Only then will you know which GAVE better return. However, this will probably not hold true for the next policy that you purchase.
3) Annual Charges (eg 1%, 1.5% etc...) is dependent on the type of funds. Funds that need more management (eg equity funds, funds that are more volatile) need fund managers to be trading more actively, as such, the fund charges a higher rate per annum. Managed Funds are more stable, as such, do not need managers to be so active.
4) Return is the premium given to you for the Risk you undertake. As such, for less Risk, you probably get lesser returns. Higher risk is equal to Higher POSSIBLE returns. Show me a fund that offer low risk and highest return, I'll channel all my investment money there.
5) Never invest in 1 single class of asset (eg investing only in equity). You should always diversify.

The Best Policy in the World: It's the Policy that gives YOU the MOST when YOU need it the MOST.

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