Tan Kin Lian's Blog: Fair value for investors

Thursday, October 29, 2009

Fair value for investors

Dear Mr. Tan,
What return is considered as fair value for investors? Is it 3%, 4% or 5%?

REPLY
It depends on the following:
a) What are the underlying assets? How risky?
b) What are the charges taken away by the fund manager and distributor?
c) Do you get the residual gain?

The best type of investment is a low cost unit trust or exchange traded fund (ETF). You enjoy low charges (usually less than 0.5% p.a.) and the benefit of diversification. This is likely to give you a return, over 20 years or longer, of 5% per annum or more, but is not guaranteed.

A poor investment is a participating life insurance policy, due to the following:
a) High charges taken away for distribution, mortality and expenses, usually 3% per annum
b) You may not get the full residual gain as some part of it may be kept from you due to "smoothing of bonus".

Another poor investment is a structured product, where most of the charges are not transparent and the yield to the investor depends on chance (i.e. gambling) and is likely to be low, especially for a guaranteed product.

Tan Kin Lian

19 comments:

zhummmeng said...: A wholelife MUST give you 4% after 20 years otherwise it is not worth investing in it and endwoment must give 4.5%.
These products could give such return in the past but not now becuase of COST.Cost is escalating but not return and interest rate.
A CEO in the past was paid less than $10K a month and now they want to be paid a 10 times more, ie a million a year. A senior manager was paid $4K now he is paid $20K and so are other staff. Insurance agents now want higher commission and more incentives to motivate them, more money to kick them in the ass.
Lying and suppression of information and half truth redefine the selling process.
Costs in all these areas have gone up, the return on investment has gone down, interest rate miserable, the salesmen are still salesmen ,no value add, still peddling koyok, anything can cure par products like wholelife and endwoment.
You don't need to be an accountant to see that the return is adversely and drastically reduced. If it is projected 3.5% ,give it a discount of 30%.
If it is a single premium endowment projected at 4.1% , at best it can return 3.0% after 10 years.
In order for the par products to give decent return like in the past the interest rate environment must be like the past or remove the commission and reduce all the senior managers salaries by 50% and cut down operation cost, especially marketing which is very wasteful, by 50% , then the consumers can get value for money return.
However, the greed and dishonesty seems to be the culture today cutting the cost is like asking these people to be saints and monks.Even monks have desire and can go berserk on money.
So that won't work... What is left now is ALL CONSUMERS STOP BUYING PAR PRODUCTS , this will drive the insurers and agents to think harder and re-examine their ethics.
And MAS must stop sleeping and take the Obama courage to nip and amputate the cancerous arms of the industry. Glaringly, the cost , the commission, must be nipped and ethics , competence, integrity must be the underpinnings of this business.; October 29, 2009 9:24 AM
Anonymous said...: Another factor to consider is the environment - whether it's inflationary or deflationary, and their associated rate

eg In inflationary environment of 10%, a return of 3% or 4% or 5% is NOT necessarily fair.; October 29, 2009 11:32 AM
Eng said...: Insurance is not needed. It is offered on the consumers' fear of the unknown.

Can someone please give examples of successful insurance outcomes? There is so much complaining and negative thoughts.

There must be people who has GAINED in buying insurance.. regardless of product. I understand that there are investment linked products where the units can be sold to to recoup the cost of paying the premiums, and even for a small profit ( after 12 years )
Is this possible?

Thanks; October 29, 2009 11:35 AM
Anonymous said...: Insurance was a noble idea until greed and dishonesty into the picture.
Who screwed it up?
The insurance agents and their benefactors, they work hand in glove.
What do you mean by gain? Is $39K enough to take care of a family if you should leave behind? (this is LIA figure)
Problem is wrong products sold to wrong people. This is the reason why people are under insured and unable to retire.
How come? greed and dishonesty over-rides the clients' interest.; October 29, 2009 2:58 PM
thefisherman said...: I find the articles and responses written by Tan Kin Lian are truly worth reading and benefitial to general public with regard to insurance and finance matters.; October 29, 2009 5:50 PM
Anonymous said...: None of the par products provides fair value. They look more scam products than investment.Despite poor and disgraceful return the insurance agents still dare to demand high commission. They are disgraceful too.; October 30, 2009 10:07 AM
Anonymous said...: I digress. Besides distribution expenses, yields on insurance products depend on circumstances and environment too.

When banks and financial institutions earn so much (and charge people for having less than $3,000 in their account), but yet giving 0.1% p.a. interest to consumers, it is a challenge for insurance companies to give more, because part of the life fund are placed in money market instruments.

Also not forgetting that insurers are also paying the death benefit which also affects the life fund and hence the yield.

It is one thing to be agent-bashing but another to be
objective in your analysis.

Regards

An Insurance agent.; October 30, 2009 6:04 PM
zhummmeng said...: Rubbish, if you are that analytical and know that these scam products are not good and yet you recommend to your clients, don't you think that you have ignored the interest of your clients and have committed professional misconduct?
It is like a patient demanding the doctor to operate on him and in the opinion of the doctor is dangerous or not necessary but neveretheless operates on the patient becuase of the high fee he stands to recieve. The doctor's defence is "the patient want it , wat, i can't help it"
In legal profession a lawyer can discharge himself if he finds that his action goes against ethics and same for doctor. They cannot defend themselves in court by this argument that " my client wants it wat, he die die wants me to do it , waht and I cannot help it or decline the case"
The judge asks them, 'how much did you earn from the case?
"eh erh only one $1 million", says the lawyer or doctor.
The judge's sentence, "you are to be hanged Until you are death and die die you must die".; October 30, 2009 8:59 PM
Vincent Sear said...: Zhummmeng, read the KYC/FNA form. A agent is required to offer advice. A client is entitled to reject advice too. A good agent will always reflect this on the form, e.g. "XXX product was recommended but client insisted on chosing YYY product." Or, "client declined advice and self-chose product." The client would then sign. Without that form, the sale can't go through.

On the other hand, there're of course cases, that client signed to "XXX product recommended and agreed." In such a case, the agent's professional competency and reputation would be at stake if something goes wrong.

In any case, I know I and nobody else can convince you. Don't buy insurance and go on crusading against insurance. It's part and parcel of the business since it was invented. Serious professional and competent agents should be able to handle that in stride.; October 30, 2009 9:27 PM
zhummmeng said...: Sorry , I beg to defer.
If a client rejects a recommendation the agent or rather the adviser MUST highlight or bring to the attention of the client that it is to his or her peril if the recommendation IS not accepted and that their needs will not be met based on the financial circumstances analysed..
In the new regulatory requirement, if a client insists on product advice the adviser must verbally and in writing tell the clients that their choosing the option the cleints have waived or forfeited their rights to any recourse in the fact find form.
This does not absolve the adviser if it is found later that adviser had wilfully and falsely advised the client to choose the option and thereby circumvented and breached section 27.
An adviser need not worry if the recommnendation is of reasonable basis as this complies with section 27.It is about appropriateness relative to the fact find and financial circumstances of the cleints and not about whether the cleint loses or makes money.
It is well known to MAS that most agents dodged the fact finding option and therefore is considering removing option 3 and 4.The new consultation paper , in all likelihood, will remove these troublesome options as they have been abused by agents who push products and to shift the blame to the cleints.
In this situation the right thing to do is for the adviser to discharge himself or herself lest he or she be implicated for collaboration with the clients.
Of course I won't buy from any insurance agents for I find them unqualified and incompetent and worse, dishonest. I am crusading against malpractice and incompetence which has resulted in many consumers having been aggrieved by agents without even their knowing it. Insurance may appear simple but many consumers are clueless about it and these are the consumers who been exploited and cheated by agents. This fact has been corroborated by many case studies posted in this blog by people who are professionals.What more many out there, the man in the street, who not only don't know but gullible also? This has to be stopped and MAS will, I hope .
MAS must have the moral duty to nip this cancer in the bud to create a level playing field.
Malpractice and incompetence were NEVER intended to be part and parcel of the business when insurance was created
until they decided to add the saving element and that was when hell broke loose and that was when agents had a field day fleecing the ignorant and gullible man in the street with this ink and paper crap. Yes it started out nobly but now it an industry worse than the casino which has a following of all kind of shady people. MAS should professionalise the industry
by raising the entry standard and not the kind of tikam tikam exams which Ah meng can pass with distinction.Australia and UK will raise to tertiary level in financial planning and same time remove commission as this too has been a sore thumb in their markets.
Singapore has to follow and this is to attract people with the right passion to help the man in the street and not people attracted by the get rich quick promise by recruiters. I hope MAS will see and take the cue from their counterparts in other jurisdictions.; October 31, 2009 1:05 AM
Vincent Sear said...: Zhummmeng, I meant that having crusaders against insurance is part and parcel of the business, not malpractice and incompetence. Malpractice and incompetence should be weeded out of the business, I fully agree.

Anyway, most of your points elaborated what I've said in summarised form.

I've worked with a company that had inhouse client fact-finding forms and training for agents some 10 years before MAS made it compulsory. However, in those years as it wasn't compulsory, some agents used it successfully and beneficially for their clients whilst some didn't and continued to prefer their product peddling ways, until MAS made it compulsory in 2001 and they had a hard time trying to get used to it.

When I become supervisor, I also came to be aware that some agents simply tell their clients that this is just another piece of bureaucratic red-tape, just tick Option 3 or 4 or sign.; October 31, 2009 10:52 AM
Anonymous said...: The people who join the insurance industry are people who cannot find a job and who join to try and to earn a living without any seriousness.. It is not because they know about the industry which allows them to help others meet their needs. This is never their aim.Helping clients is never their reason but commission is.
Similarly there are the retrenched secretaries, office , factory workers, clerks , bus and taxi drivers who join to try also.
Then there is group who join because there is big money to be made. Another group who are enticed by inusrance company recruiters who promise big money that they can earn. Of course there is this group who think it is a get rich quick industry or hit and run industry.
What have they all had in common?
Money, money big money and get rich quick , fast money , hit and run , again money and money they can squeeze out from the buyers.
It is doomed from the start.
All of them join with one thing in mind, how to make a lot of money from the consumers.
How to make a lot of money? There are alot of targets like mdrt , cot or tot? The trainers will use them as bench marks and the training will focus on making the customers open their wallets.
There are many ways to squeeze the consumers.Some more creative ones say, how to open the wallets of the consumers. So they use strategies like, convincing by persuasion, confusing the consumers, complicate the presentation to confuse and if all these don't work use bigger dosage , use conning and then cheating etc etc, offer rebates, offer their bodies in some cases, promise, some threaten of ill health some manipulate the fear and greed of consumers. They learn everything there is to be learned
about making the consumers 'to open their wallets" so that the agents can rob.
Nothing about helping consumers to meet their financial needs, goals, to achieve their retirement funds.
Some agents may argue that they do, they are caring, they are sincere, they are caring. The problem is they are incompetent. This contradicts the FAA fit and proper requirement. This provision never says that agents must be sincere and caring, hard working but stipulates clearly , loud and clear that agents must be HONEST AND COMPETENT.
Are they sincere about helping their clients? If they are they must upgrade their knowledge to be competent but have they? So the bullshit, the hippocrates, the lie and so forth.
How can they help their clients without the skills?
So?

The Watchman; October 31, 2009 1:07 PM
Everlearning said...: Buying various insurance policies is supposedly to give us a peace of mind but instead, it is giving us a piece of headache.

The ever-changing terms (the reducing of maturity sums) and the ever-increasing premiums on upgrading the health insurance policy because of increasing costs in healthcare, etc., is really causing complexity and perplexity in lives.

Do you still believe you could receive 3%, 4% or 5% in the future? Think again, with reduced or no guaranteed bonus payouts, it is very, very unlikely!!!; October 31, 2009 2:38 PM
Anonymous said...: Getting 3% is very difficult for a wholelife product after 35 years. By this time the mortality cost is so high that it erodes the cash value.
It is more likely a refund of premium.; October 31, 2009 5:03 PM
zhummmeng said...: We are getting nearer to a remuneration model that is fair and that is based on work and quality of advice and NOT product pushing which doesn't add value and which puts the consumers' interest in the back seat.
I am very encouraged by Lorna Tan"s article in the invest section of Sunday Times today in which she examines the various models that are already in use.She also examines who are the REAL advisers and what is the right qualification.
I am impressed by Provident Advisory which is the fee only financial advisory firm.I hope MAS will adopt this model and force all insurance companies to adopt this model based on salary without the commission.
Unfortunately, this will result in many insurance agents having to be 'reitred' for reasons of qualification in financial planning and financial skills and unsuitability.
These 'retired' agents should look to other industries where unethical selling or mis-selling or incompetent selling will not have much impact or cause much financial devastation if the whole process is not conducted 'properly'.They should be able to apply their super duper selling skills successfully in these industries of their choice, especially those who are life time mdrt qualifiers..
If these agents want to stay they have to comply with FAA practice and be qualified at the tertiary level of CFP or equivalent.It is unlikely that you can advise properly without this qualifications unless you have been pracitising properly all this time.There are the veteran practitioners and not the super duper salesmen and women.
Let's be real. Who will consult and pay fee to a 'doctor' not only just graduated but has only nursing certificates?
I won't consult a so called financial consultant who has only certificates in entry level CMFAS 5&9. It is like consulting a plumber on personal financial matters, right? Worse, if you are unlucky you may be pushed a product that steals from you for life without addressing your needs..
Well, I hope MAS is seriously looking into it as it sounded to the industry a few times and NOT just paying lip service and give false hope.
Meantime we can wait with bated breath.; November 01, 2009 6:34 PM
Anonymous said...: Yes, commission must be removed. MAS must do what is right. What is right is the best, the honest and the competent will command the fee that is justifiable and commission is not.
It has been proven time and again that commission short changes the customers.
I once asked an agent how much was she remunerated for the product she recommended and her answer was a half hearted half truth. I asked for one with lesser commission that could address my needs too she suddenly changed and looked perturbed.I called off after she seemed reluctant and was insisting on the limited payment whole life plan extolling all the 'good' features which she could not specifically identified.She didn't know the return but kept saying it was good.
It is good to know that MAS is doing something about the commission. It must be done for it has caused conflict of interest and the honesty of the insurance agents is affected.Currently there is no objectivity in the recommendations.; November 02, 2009 7:22 PM
Anonymous said...: DBS has tightened up the sales process by checking the customer product suitability and if it is found that the product is not suitable it will be declined and money returned.This is the right thing to do.
The insurance companies must also do this if the supervisor finds that the recommendation after a need analysis is not suitable, and inappropriate or not of reasonable basis the agents must be told to decline the sale and premium returned and NOT sticking to the agents's reasons in the report that the customers die die want it, waht. The supervisor must be made responsible for this.
Well, we all know it is NOT true that the customers die die want it. It is actually the agents who die die want to sell the products with high commission.
I hope MAS will see that this culture is practised and transmitted from the CEO downward.If is not the CEO must answer for it.

The Watchman; November 02, 2009 7:53 PM
Anonymous said...: Often than not it is the agent who made the customer choose the product option to protect himself or herself or to make a quick sale of the product with high commission.. This can't protect the agent anymore if investigation shows otherwise.
The fact find will leave a trail of incriminating evidence against the agent. So, agents, don't try to smoke your way.It is not going to be easy.; November 02, 2009 10:54 PM
Anonymous said...: The good news is commission will be removed. Need based will be made compulsory.; November 05, 2009 10:41 PM

Thursday, October 29, 2009

Fair value for investors

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