Saturday, October 03, 2009

Crashgate - it ain't over

Read this article in Today Online.

Conrad Raj wrote about the incident where a Renault driver crashed his car deliberately at the inaugural SingTel Singapore Grand Prix. A minister said that the Government will not be pursuing this matter, as it is a tactic used by the team. Conrad Raj asked:

* What about the crime of endangering life and limb?
* What about corruption of the highest order?
* What makes this crime so different from soccer fixing?

He said that the Corrupt Practices Investigation Bureau ought to investigate this matter. I agree with his views.


View this amazing photo.

However, this is reported to be created by computer graphics and is not a real photo:

An honest agent

I asked my travel agent to recommend me a ticket to Paris or London. He obtained detailed quotes from three airlines. Two airlines quoted an economy fare of around $1,600. The third airline (which is of similar standing) quoted a fare of $1,000.

Although the agent earned a lower commission from the third airline, he brought the quote to my attention, so that I could consider it for my decision. He has to consider the interest of his client to build a long term relationship of trust.

RED Portal (15) Property Report

You can buy a property report on a specific project for $25. You have a choice of buying the RED property report or a more detailed report from Street Sine (also for $25). The information provided are slightly different in presentation.

Here is a sample webpage.

Go to the RED portal, Search for specific project, click on the Report tab, and you will get this page.

Free market (11) - Customer satisfaction

In the past, businesses put in great efforts to guard their reputation. They address customer complaints actively and maintain their reputation for fair treatment of customers.

In recent years, the standard of customer service has declined. This comes during an era of relentless search for higher profits and a drop in business ethics. Businesses do not care as much for their reputation, as it is now quite common for their competitors to have similar low standards.

The regulators have also dropped their standard of enforcements. They consider that these matters could be left to the market. If the consumers are not happy, they can go to another supplier. Even the mainstream media is driven by advertising dollars and are not vigorous in reporting bad practices of businesses.

Many businesses now take the view that if a group of customers are dissatisfied, they can market their products to other groups of customers.

The decline in business ethics will be bad for society. We need a refocus on good business ethics and practices. This requires the action of the regulators, mainstream media, and the examples of good corporate leaders.

Consumers should also come forward to be more active in expressing their dissatisfaction and views. They can use the new media to voice their views.

Tan Kin Lian

Tough time ahead for US and global economy

In September, employers in the US cut 263,000 jobs. The unemployment rate increased to 9.8%. Stocks and the US dollar slumped. Reality is beginning to set in that this recovery is going to be very slow in developing and erratic as it goes on. The prospects for the global economy is also bleak.

Friday, October 02, 2009

Digital Health Records in USA

The hard road ahead.

Electronic Medical Record - Singapore

MOH Budget Speech (Part 2) - Transforming Healthcare

06 Mar 2007
By Mr Khaw Boon Wan, Minister for Health
Venue: Parliament

Electronic Medical Record

7. First: an important infrastructure is the Electronic Medical Record (EMR). I have coined the slogan, "One Singaporean, One EMR" to catalyse this initiative. Right now, it is one Singaporean, multiple medical records, stored away in different clinics and hospitals in different formats, and not connected or consolidated. As a result, when patients visit different doctors, they have to have tests repeated and scans redone. This adds to unnecessary cost.

8. We are moving towards this target of "One Singaporean, One EMR". Because of legacy systems, we cannot achieve it in one step. But we have made progress. As pointed out by Dr Lam Pin Min, public hospitals now have the EMR eXchange (EMRX). We achieved a first but important psychological step in 2004 when public hospitals began to electronically exchange their Hospital Inpatient Discharge Summaries. Since then, we have made the EMRX more comprehensive, by adding other patient records such as laboratory tests, radiology reports and medication information. The electronic volume of laboratory results exchanged has grown 7 times in 2 years. Thousands of patients benefit from EMRX every month.

9. Our doctors' feedback is that EMRX has made their work easier. In particular, our Emergency Department doctors have said that the EMRX gives them greater reliability and confidence in treating patients, especially those with long and complicated medical histories. Extending EMRX to private doctors will be a natural step and is the objective. As Dr Lam pointed out, a National EMRX will minimise unnecessary medical investigations. More importantly, I see EMRX playing a critical role in the integrated delivery of care to patients.

10. However, this is a complex national project - very few if any countries have successfully implemented a system that links up public, private and the charity sector. This is because there are many issues such as data protection, regulation and audit to be addressed. We need to take a measured approach, to pilot and put together a comprehensive framework that takes care of these issues. This will begin with common data standards. We will do this within the public sector, and extend this to the step-down institutions. We have started to build the linkages to the private sector GP clinics by helping them to set up their IT systems under the Chronic Disease management effort. I am confident that we will get there.

Marketing technique of property consultant

My friend visited a new property launch. The price of the property had increased by more than 30% during the past six months. At the current price, the property was very expensive.

The property consultant recommended a specific unit at a good facing and with the price still not adjusted by as much as the other units. There is only one unit left with "good value". It was so enticing, that my friend almost presented a cheque to book that unit. She did not consider the heavy commitment, the monthly repayment, affordabilty and other factors.

Fortunately, a family member stopped her from making this "on the spot" purchase. After returning home, she realised that it was really beyond her reach.

Privacy of patient data

According to this report from the consultant McKinsey, it is better for the patient records to be available for analysis and hold doctors accountable to deliver the expected level of care. Campaigners for privacy may be playing into the hands of people who does not wish to be accountable for their mistakes or bad practice. This is an interesting conclusion.

Central Medical Records

A few months ago, I carried out a survey about the value of a central medical record system. Many respondents replied that they are interested to join this system, as it allow any doctor that is treating them to access the medical records. It also avoids having duplicate medical tests to be taken. Here are the survey results.

This system is designed primarily to handle the outpatient records (i.e the medical records that are kept in GP clinics). It is not intended to capture the detailed specialised records that are kept in hospitals.

You can read more about this system in this document. You can test the Demonstration system directly here.

If you like the system, please help me to pass the word around to doctors, employers, insurance companies and the health authority. It can help to improve the delivery of medical services in Singapore.

NOTE: The records in this demonstration database are fabricated. In the real system, there will be controls to ensure that only the patient and the doctors authorised by the patient can see the records.

Benefit Illustration for a Life Insurance Policy

When the agent gave you a benefit illustration, did the agent explain the following?

1. That you have a 14 day free look period to cancel the policy for a full refund?
2. That the amount shown as "distribution cost" s taken away from your premium?
3. That the "effect of deduction" is taken away from your investments to pay the various charges under the policy?

If the agent has explained these points to you clearly. the agent is being transparent and can be trusted. If some of the information is hidden from you or the explanation is not clear, you have to read the benefit illustration again. If you need help, you can approach FISCA,

Tan Kin Lian

Special treatment for Minibonds

There is a difference between Minibonds and the other credit-linked notes (i.e. Pinnacle Notes, High Notes).

For Minibonds, the credit default swaps did not fail. Only the swap counter-party (i.e. Lehman subsidiary) failed due to the liquidation of Lehman Brothers. PriceWaterhouseCoopers was appointed to arrange for the underlying assets to be released from the swap counter party and tranferred to another investment bank to handle the settlement.

For some notes, such as High Notes 5, Lehman Brothers was named as a reference entity for the credit default swap. The failure of Lehman Brothers caused the entire investment to be worthless.

For the Pinnacle Notes, the failure of a certain number of the underlying assets will cause a substantial or total loss of the investments. The investors have to wait and hope that these underlying assets do not fail. If they do, the investments will also be worthless.

It is not possible for any action to be taken to save the investments in the Pinnacle Notes, except to sell the notes to another party who is willing to take the gamble that it will not fail.

Different series of each credit linked notes are invested in different underlying assets and have different structures. It is difficult to make a general statement regarding these notes.

The Minibond class actions, led by Conrad Campos, are mainly to sue the distributors for failing in their duty to give proper advice to the investors. This is a separate matter from realising the value of the underlying assets.

For the same reason, the Hong Kong settlement only covered the Minibonds and not the other credit linked notes.

Tan Kin Lian

Free market (10) - Consumer protection

The governments in most countries consider it their duty to protect consumers from the bad practices of businesses.

In the financial services sector, it is possible for the financial institution to design products that take advantage of the ignorance of consumers and entice them with misleading promises that are not kept.

In the medical field, it is possible for drug companies to introduce products that may are unsafe for consumption or make benefit claims that are not verified by scientific evidence.

There used to be strong regulations on the sale of financial products, but the regulations have been weakened in recent years, during an era of deregulation. It was thought that, to promote financial innovation, financial products can be sold on the basis of product disclosure, and that should be left to make their own judgement about the suitability of the product, with the advice of financial advisers.

This approach turned out to be disastrous, as financial institutions introduced complex products that are designed to take advantage of the ignorance of consumers to reap big profit for the issuers. These products are sold with attractive commissions paid to the financial advisers, who pushed the products to consumers regardless of their suitability.

In America, the regulators took action to hold the financial institutions and advisers accountable for any misdeed. New legislation is now being introduced to set up an agency to protect consumers from predatory practices of financial institutions.

Singapore should consider similar measures as the problems faced by consumers here are of more serious than in America.

Fortunately, the control of the sale of drugs continues to be strongly regulated and consumers are well protected.

Tan Kin Lian

Difference of 20% in Term Insurance premium

Hi Mr. Tan,
I got 2 different quotations for 30-year level term insurance covering death, terminal illness, and total permanent disability, sum assured S$400k.

Company X: S$752/year
Company Y: S$628/year

I asked the agent why Company Y is 20% more expensive. She said that it is easier to make claims under Company X. Is this true? Is it worthwhile paying the higher premium to make easier claims?

Do not believe the agent from Company X. Do not pay 20% more. The claim process should be the same.

RED Portal (16) - Nearby Projects

If you wish to choose a project near a certain school, you can go to the RED portal, click on Search >> Popular places, enter the name of the school and you will get a listing and a map showing all housing projects within 1 km. You can see the benchmark price of these projects to see if any fit within your budget. You can then drill down to look at the recent detailed transactions.

You can also buy a detailed RED property report for $25 only. You also have the option to buy a more detailed report from the Street Sine website, also for $25 only.

The RED portal is designed to provide information that is easy for you to access. Get the information, before you talk to any property agent. Make sure that you get a good price if you wish to buy or sell any condo or apartment.

RED portal.

Bad advice by agents on Term Insurance

Some consumers approached an agent to buy Term insurance. The agent quoted a Term insurance premium that is more than twice what it available in the market. The agent pointed out that it is too much money to pay for the Term insurance, and sell a Whole Life, Critical Illness or Investment Linked policy instead.

This is misleading and bad advice. But it is used by the agent to get customers to buy a high cost product.

If you wish to buy Term insurance, you have to approach several insurance companies directly and get a quotation from them. Look for a Term insurance policy to cover 25 years or to cease at age 60. Do not go beyond this age, as the premium rate will be too high and the insurance is not necessary (after your children have grown up and you have sufficient savings).

Tan Kin Lian

US economy is still struggling

Oct. 1 (Bloomberg) -- U.S. stocks fell the most in three months as Treasuries and the dollar rallied after a decline in a gauge of manufacturing and an increase in jobless claims spurred concern over the strength of a recovery from the recession.

Several economists have expressed the worry that the current recovery is due to the government stimulus. After the stimulus is spent, the economy will face the same difficulty as before - reduced consumer spending and confidence.

The underlying problems of the free market economic system has not been solved - high unemployment, extreme disparity of income, high dependence on mis-priced leverage, bubble in asset prices.

Interest rate is now too low, due to the infusion of public money. When the infusion stops, interest rate will have to increase to a higher level, and that will also affect the stock and property markets.

My view: Do not rely on low interest rate for too long. Do not invest and lock up your money on low interest rate for a few years. Do not invest in property or stocks at inflated prices.

Tan Kin Lian

Thursday, October 01, 2009

Minibond holders may get back some money

Read this report in CNA.

There was no mention about how much the investors would get back and what is the estimated legal cost to unravel the structure. With the economic recovery, I hope that the value of the underlying assets would have improved and gave a high rate of return to the investors. We will have to wait and see.

Waste in health care

In health care, doctors and hospitals make more profit by being less efficient, according to this report.

Swiss health care system

This report describes the Swiss health care system, which is highly rated for delivering good outcomes.

Book: Bad experience on financial products

Someone suggested that I compile a book to show the bad experience on financial products. This has to be contributed by many individuals in Singapore.

If you wish to share your story, please write it below. I need you name, telephone and e-mail to contact you for verification, but your personal identity will not be disclosed in the book.

I will also edit your story - so you do not need to worry about your writing. If there is sufficient stories of interest to others, I will publish it in soft copy.

Click here to share your personal story.

Talk on solving puzzles

I gave a talk on solving puzzles to 40 people at the Thomson Community Club. It covered Shape Quiz, Sudoku and Intelligence Quiz. The participants enjoyed the talk and bought 60 books of different titles. Many bought the shape quiz pieces to organise competition among their grand children. The books can be bought here.

High upfront charge

A consumer asked my views about a product introduced by an insurance company.

He showed me a benefit illustration:
a) A large single premium is paid into the account.
b) The sum insured is about 7 times of the single premium
c) The cash value on the first year is 73% of the single premium. The upfront charge is 27% of the single premium.
d) At the end of 20 years, there is a guaranteed cash value based on the guaranteed crediting rate of 3% and maximum charges) amounting to 79% of the single premium.
e) There are two other illustrations, which are not guaranteed, that shows a cash value that is higher than the single premium invested.

a) The charges are TOO HIGH. If the single premium is $100,000, a sum of $27,000 is taken away from your investment to allow for commission and profit.
b) It is unlikely, in my view, for the payout to meet the non-guaranteed illustration, as they are based on optimistic assumptions on future earnings
c) The consumer can invest the single premium separately and pay the on a term insurance out of the interest earned.

Lower return expected in the future

Sept. 30 (Bloomberg) -- Pacific Investment Management Co.’s Bill Gross says investors should expect total returns on equities of about 5 percent annually as consumers curb spending and increase savings.

“Returns mimic nominal” gross domestic product, Gross, manager of the world’s biggest bond fund, said in an interview yesterday with Bloomberg Radio. “Nominal GDP is the growth rate of wealth on an annual basis. The new normal is 2 to 3 percent GDP and real growth of 1 to 2 percent.”

If total return on equity is 5% p.a., the return on a diversified fund will be lower, say 3% p.a. If the financial product gives a reduction in yield of 2%, the net return will only be 1%.

With low return, it is important for the financial product to have lower reduction in yield, i.e. lower the marketing and other charges.

Slot in cash card to enter and leave car park

Do you know why you still have to suffer the inconvenience and have to slot in your cash card to enter and leave some car parks in Singapore? Here is the likely reason.

Scam involving Australian property

A lawyer told me about this scam involving Australian property. A developer marketed the property in Singapore through a Singapore property agent. The property carried a rental guarantee which was provided by another company, having a similar name to the developer, but with no funds to back the guarantee.

On completion, the invetors did not get the guaranteed rental. The company that provided the guarantee declared insolvency.

The Australian banks that provided the 70% loan to the Singapore investors took over the property at a discount of 30%. The Singapore investors lost the 30% that they invested.

The Singapore investors went to see the property agent, who said they were only marketing the property to earn a commission, and was not responsible for the loss.

Lesson: Never invest in overseas properties, even with rental guarantee. The risk is too high.

Free market (9) - Corporate social responsibility

There is a focus on corporate social responsibility. This focus is to encourage corporates to recognize that they have to go beyond making profits for their shareholders and to take care of other stakeholders, such as their workers, customer, community and the environment.

Many corporates proudly embrace this concept, but pay only lip service to it. To be truly a responsible corporate citizen, they have to create a proper balance in the sharing of the profit among the various stakeholders.

The most important task is to provide goods and services at fair prices to their customers. They should not make excessive profits at the expense of their customers, by offering goods of inferior quality or provide misleading information about the value of the goods. They have to be honest.

The corporations have to provide fair wages to their workers. It is possible to use the market forces to suppress the wages and increase profits for their shareholders, but that would be against the concept of social responsibility. It is understandable for a corporation to reduce its wages, if this is necessary for the corporation to survive in a competitive market or where there is a drop in demand. However, if the corporation is able to make big profit, it should give a fair share to the workers.

A part of the profits should be set aside for the community and the environment.

The shareholders are entitled to the residual profits but there must be benchmarks on what is a reasonable rate of return. The corporation should not go beyond this reasonable rate, if it is done at the expense of the other stakeholders.

The concept of corporate social responsibility requires these benchmarks to be established. It will lead to a fairer society and ensure its long term sustainability.

Tan Kin Lian

Wednesday, September 30, 2009

Financial innovation that are useful to consumers

Here are some financial innovations that are useful to consumers, as stated by Robert Shiller.

Free market (8) - Access to credit

Banks provide credit to businesses. They charge an interest rate comprising of the cost of funds (i.e. the interest that they pay to deposits) and the credit spread (i.e. the additional fee to cover the risk of default by the borrowers, expenses and profit).

In a competitive environment, the credit spread narrows and banks make a modest profit. Under volatile market conditions, the credit spread can increase sharply as the banks take advantage to increase their profit margins.

Some banks take advantage of the market volatility to recall loans and increase the interest sharply. The borrower has no recourse, but to pay the high interest rate, as this is a commercial term.

The banking industry is able to make huge profit at the expense of the business and consumer sectors. Some lawmakers have described the practice as predatory or usurious.

During an economic crisis, the Government has to step in and guarantee the credit for small businesses, as the banks are not prepared to take the risk. Some people refer to this practice as "lend you an umbrella during the sunny days and take it back when it rains".

Is there a better way to provide credit for businesses, rather than rely on the banking industry, especially if the banks do not have a social conscience and exploit the situation to make huge profits?

In my view, there should be a state owned development bank that is willing to offer financing on fair terms to the essential sectors of the economy, i.e. those that meet the needs of the population for their day to day living. These loans are for small businesses to buy the tools, equipments and stocks to run small businesses to provide goods and services for the population.

It is also possible to have large numbers of community or cooperative banks to provide the lending to the small businesses. These banks can draw their funds from the state owned development banks on fixed terms.

This type of structure ensures that there is healthy competition among the large number of banks. The lending should be restricted to the cost of running a business, and not for speculation in properties, including commercial properties.

If businesses have access to credit on fair terms and are not subject to exploitation by the banks or by speculative forces, they can provide their goods and services at fair prices, stablilise the cost of living and increase their economic efficiency.

A large source of economic instability and crisis in past years is due to speculation in property and cost of credit, and in exploitation by the owners of these resources. It is better for these two key sectors to be controlled (and still reflect the market) but to remove the exploitation of the market.

Tan Kin Lian

Tan Kin Lian

Protect the interest of first time home buyers

Read this letter in the Straits Times Forum. I agree with the views expressed by many young people, that HDB flats should be sold at controlled, affordable prices, and not be subject to speculation in the market. Here is another example of the bad "free market".

Old ezLink cards cannot be used from 1 Oct 2009

The old ezLink cards cannot be used from 1 October 2009. This affects over 3 million cards. There was so little publicity about the deadline to convert to the new card that many people were caught unaware. What will happen to the balance in these cards? Read my views here.

Law professors lobby for consumer protection agency

There is a need for consumers to be protected against bad business practices and complex products that are designed to take unfair advantage of consumers. Even the law professors agree with this view. Read this report.

Financial innovation

Hi KL,
Robert Shiller wrote a column in the Financial Times (27 Sep 2009) with the above title.

The main thrust is that the source of this crisis lies in imperfect financial architecture, rather than over-complexity of products. We should recognise that increased complexity offers potential rewards as well as risks. Complexity is only problematic when used to obfuscate and deceive. Regulators beginning to actively discourage complexity are headed in wrong direction. Innovation in financial sector has to be upheld to improve our lives, the same as innovation in any other sectors. Thus regulators need to be given a stronger mandate and more qualified manpower to encourage innovation.

The conclusion is to use this crisis to promote innovation-enhancing financial regulation, not to let this be eclipsed by superficially popular issues.

Shiller's arguments appear sound to me. Innovation is the lifeblood of capitalism, driving productivity growth, and should be actively encouraged under proper regulation.

I am thinking perhaps it would help if you state your stand on this, so that people will not read you wrongly, or to quote you out of context. Are you in principle opposed to financial innovation (leading to increased complexity)? Or fundamentally it is the crooked salesforce to blame who exploited the complex products? Or we should point at the regulators? If regulation is perfect, there is no way a seller can cheat, and buyers are informed of all associated risks & rewards, do you think complex products are alright?

In your writings, you have recommended easy-to-understand products to men on the street - low cost with fair distribution of rewards. Your well-meaning intention is very clear, no doubt about this. Less clear is the driving principle: because you think financial innovation is bad, or you think the ethics of banks is very questionable, or you think the regulators will never catch up with the industry players' tricks etc. This is important because the proposed remedy will be different. If innovation is bad, we will ask regulators to ban/minimise creativity; if innovation is helpful but consumers are often poorly informed, we should push for better communication by sellers while retaining innovative drive; if regulators are themselves behind the curve and not equipped with necessary skills, we need to incentivise more talents to join them.

Hope to see a response. Thanks for your time!


I am against complex products that are designed to "cheat" the consumers and marketed under the name of "financial innovation". The main culprits are the financial engineers who design these products, although the people who sell these products have to share the blame for being greedy to earn the attractive commission. The regulators also failed in the duty by allowing these products to be sold.

There is a proper place for financial innovation, to keep up with the times and changing needs of society. For example, we have to innovate to provide a better system of financing health care. We need a better system to allow people to pay their mortgage installments in an environment of irregular employment.

It is better for the innovation has to be carried out as a joint effort by the industry, consumers and the regulators.

We will need a consumer protection agency that has the power to safeguard the interest of consumers. This function used to be performed by regulators, but they have neglected this function in recent years under the misguided strategy of "leave it to the market". This role has to be reinstated. America is addressing this issue now.

Tan Kin Lian

Health care system in Germany

Here is an excellent health care system, that is much better than America or Singapore. Look to Europe for good examples, e.g. Germany or Switzerland.

RED Portal (15) - Rental Rates

If you are a owner of a condominium, how much should you offer your unit for rental? The RED portal has a tab called Info. It shows the range of rental rates for various condominium projects.

If your condominium is not listed, you can look at the benchmark price (BMP) for sale. Most condominiums are rented at between 0.25% to 0.4% of the BMP price. For example, if the BMP price is $1000, the rental rate should be between $2.50 to $4.

As a guide, you can take 0.33% (4% pa) of the value of the property. If the sale value is $1 million, you can rent it for $3,300 per month.

If you wish to list you unit for rental, click on the Offer tab (for your housing project and give your details. Our staff will contact you. (Real Estate Data)

Tuesday, September 29, 2009

ProTrader - Financial Trading Game

You can practice and develop your skill in trading of futures with Pro-Trader. It is fun and does not involve real money. Read this document.

You can play the game here (Pro-Trader). Enjoy. Have fun.

Impact of a reduction in yield

If you save $500 a month over 35 years, your total savings is $210,000. If you earn 5% per annum during this period, you should get $569,000. Unfortunately, you will not get this full sum, as the financial institution will take away a portion of your gain to pay for their various charges, such as marketing, fund management, administration and profits.

Most high cost products can reduce you yield by as much as 2%, giving you a net yield of 3%. This 2% yield may appear small, but over a 35 year period, it could take away 34% of the accumulated amount, giving you a net amount of $373,000. You are left with a net gain of only $163,000. The amount taken away from you, representing the reduction of 34% is $196,000. In other words, you are left with less than half of the total gain.

It is important that you find a product where the reduction in yield is as little as possible.

If you invest directly in shares, you will not suffer any reduction in yield, but you will need to monitor the shares and make sure that you collect the dividends and rights issues. You may also suffer a big loss, if the particular business performed badly.

To avoid this risk, it is better to invest in a unit trust where the investments are professionally managed and and you enjoy diversification. However, the charges for most unit trust is 1% per annum, which is rather high. The fund manager will tell you that he can add value by picking the good stocks that will perform better than the market, but studies have shown that most fund managers are not able to generate this value.

You can invest in an exchange traded fund, which is benchmark against the stocks comprised in the market index. An example is the Statestreet Trakker fund, commonly known as the STI ETF. The management fee is 0.3% per annum. This is a low charge, compared to unit trust.

Read this table to see the impact of a reduction in yield on a monthly savings plan over a number of years.

Tan Kin Lian

Taking a housing loan

Here are some tips on taking a housing loan. Do not borrow to the limit. Have some margin to allow for future increase in interest rate. Have some spare savings in case you lose your current job. Ask your bank to give you a special term to defer repayment for up to 12 months in the event of loss of employment.

Using bicycle for the last mile

Here are my suggestions for a bicycle service to bring people from their homes to the MRT station and back.

Accumulation of Savings

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

Free market (7) - Lower fixed cost

Many small business find it difficult to survive. They have to pay high rental and credit to run their business. These high cost have to be passed to their customers in the form of higher prices.

As business premises and credit are under the control of a few people, they are able to increase the rental and interest rate on loans. They make excessive profit and cause a heavy burden on the small business and the consumers.

These high costs can be controlled by the government through legislative measures, e.g. to set caps on rental rates or the cost of capital, or to provide alternative sources of supply through the public sector.

Many years ago, HDB provide shops at affordable prices. It allows the shop keepers to offer their goods and services at lower prices and make a reasonable profit. If they overcharge and make a larger profit, another business will be set up to provide an alternative at a lower price.

This is competition at its best, in bringing the prices down to a reasonable level, based on the cost of doing business plus a fair margin of profit.

In America, the anti-trust law is designed to ensure that there is fair competition and that any business is not allowed to grow so large that they can dominate the market and have unfair pricing power.

We also need controls to ensure that property owners and bankers do not take an excessive share of the value chain, at the expense of the customers, workers and the small business owners. It is desirable for these business costs to be controlled, to promote a healthy competitive market.

Tan Kin Lian

Taxation and social services

Each society needs to provide some social services to its people, such as infrastructure, education, health care, law and order and safety. The cost of these services have to be paid through taxation.

A fair method of taxation is a flat amount to be paid by all residents or households. As each person or household benefits more or less equally from the social services, they should contribute equally.

Unfortunately, in a society where there is a large disparity of earnings, there are many people who do not earn enough to pay for the cost of living. They will not be able to contribute towards the taxation.

A better method is to impose higher taxes on the high income earners. As they earn much more than the median wage, they are able to carry a larger share of the social cost.

Some people argued that a high tax rate will chase away the high income earners to other countries. This may apply to certain businesses that are globally mobile. There are many businesses that depend on the domestic market of a country. The high incomes have to be earned in the country and cannot be moved away.

In my view, a maximum tax rate of 30 percent of earnings is fair, as it would still leave 70 percent in the pockets of the high income earners.

There are debates on what has to be provided by the state and what should be provided by the private sector. In my view, the basic needs that should be provided by the state up to a standard that is necessary and cost effective. Those with higher incomes can opt to pay for a higher standard of service in the private sector, such as private schools or health care.

If the state does not provide for the basic needs, many people will have to buy these basic needs from the private sector and pay a much higher price, due to predatory practices and a high profit margin.

This has already happened in the financial sector which pays a low rate of interest on the savings and sells bad investment products that cause the investors to lose their savings. In the health care sector, some people have to pay higher fees to private doctors, without getting better outcomes.

It is better for the essential social services to be provided by the state on a cost effective basis, and for the cost to be shared fairly among the tax-payers. The higher income earners should be asked to contribute a larger share.

Tan Kin Lian

Monday, September 28, 2009

Australia court allows claims against Lehman

* Australia court opens door to Lehman claims
* Town council to pursue claims for subprime losses
* Ruling is not an international precedent - IMF Ltd

Read this article.

RED Portal (14) - Transacted Prices

I visited a new launch. The prices that are now being marketed are 30% above the transacted prices shown in the RED portal for the same project.

Although the prices in the portal are shown with a transacted date in June, the actual transactions were done about 3 months earlier, when the sale option was signed. So, the prices have moved by 30% or more, within the past 6 months. I decided that the current prices are too high. I will wait for another opportunity.

I will try to look for another source to capture the latest transacted prices, based on the sales options, and put them into the RED portal.

Lesson: do your research before visiting a new project launch. Visit the RED portal: (Real Estate Data)

Elevated covered walkways

I suggest a network of elevated covered walkways to link the MRT station and bus interchange to various parts of the town. This will encourage brisk walking. Read this.

Free market (6) - Opportunity to work

With advances in science and technology, it is possible for the goods and services needed by all the people to be produced with less hours of work and higher productivity.

If the required quantum of work is shared fairly among all those who are willing to work, it will be possible for each person to work lesser hours that they do now.

In a competitive environment, some people will work longer hours to ensure that their jobs are secure. This will cause other people to be unemployed.

The business owners can pay lower wages when there there is a limited supply of work and an over-supply of workers looking for work. With lower wages, they can make a larger profit.

This is a short sighted approach. If people have lower wages or are unemployed, they will have less money to spend on other things. This will further reduce the demand and contract the economy.

A better system is to have the work fairly distributed among the available workers, so that everyone will be employed and can enjoy a fair wage. They will have money to consume other services, such as leisure and entertainment. This will create demand for the production of other goods and services.

A healthy economy depends on the ability of people to get employment at fair wages. It requires legislation on the maximum working hours (so that the work is fairly distributed among the workers) and a minimum wage, so that all workers will earn enough to meet the cost of living and be able to have additional money for savings or to be spent on leisure.

Tan Kin Lian

Attracting business into Singapore with lower taxes

Some people argued that low taxes are needed to attract people into Singapore to create wealth and provide employment for the people.

Do not be fooled by this argument. Let us look at the facts.

The two sectors that created the most wealth and employment in Singapore were the banking and property sectors. These sectors generated huge profits and employed large numbers of people in marketing, sales and the back offices.

They created false wealth by generating a huge bubble in asset prices. Many people thought that they were wealthier when the bubble grew and the prices of their assets inflated. Unfortunately, high property price is really a burden that has to be paid over a lifetime and is a major contributor to the high cost of living in Singapore. The burden is higher for the future generations.

The bubble has now burst and caused the global economic crisis. Singapore has its share of the pain.

There is no point in attracting business into Singapore, through lower taxes, if the outcome is to create false wealth and to leave a heavy burden on future generations.

Tan Kin Lian

Sunday, September 27, 2009

Fair distribution of work

In most countries, there is legislation to ensure a fair distribution of work and rate of pay. The legislation can cover the following:

a) Number of hours worked in a week
b) Minimum wage

Take a country with a work week of (say) 40 hours and a real unemployment rate that is close to 10 percent. The official unemployment rate is usually lower, as many unemployed people are not captured in the statistics.

The unemployment rate can be reduced by legislating a work week of 36 hours. This will require employers to employ 10% more workers and give work opportunity to the unemployed workers.

To keep business cost at a competitive level, the wages of employed people working 36 hours a week should be 10% lower than before (when they work 40 hours a week).

It is difficult to cut the monthly salary of workers. But, if they are on an hourly rate, the adjustment is automatic. To create a flexible work environment, we need to change to hourly rate of pay.

Some employers will find it necessary to get their employees to work longer than the legislated work week. This can be allowed, but the employer should be required to pay a tax on the wages paid for the additional hours. This will give the incentive for the employer to employ other people, rather than ask the existing employees to work longer hours.

If the opportunity to work is fairly distributed to more people, we will have a better society. Most people can find work and get a wage that is sufficient to meet their cost of living. They will have more free time, due to the shorter work week. The free time can be converted into leisure activities and hobbies, and create opportunities for other supporting businesses to be developed. Some people can use their leisure time to do part time work and earn a supplementary income. This will create higher economic growth and a better quality of life.

Tan Kin Lian

Rate of pay

We are used to thinking of monthly salary. This is a legacy of the old world, where most people expect to work full time (i.e. 8 hours a day) and for a lifetime career.

In today's environment, we should think about flexible work. It is more appropriate to think about an hourly rate. This allows people to work on certain days (and for varying hours in a day (according to their personal schedule). It is especially suitable for students or adults pursuing further study.

The place of work can also be made flexible. Many people now find it convenient to work from their home. The hourly rate of pay can be converted into a project for a fixed payment. The time taken to complete a project can be estimated, and the hourly rate of pay can be applied to get the project fee.

I am creating a new job portal, and have decided to use the hourly rate as the basis of searching for a job. I use a conversion rate of 160 for hourly rate to monthly salary. For example, an hourly rate of $10 is the same as a monthly salary of $1,600.

FISCA Assistance to consumers

If you need assistance from a FISCA volunteer on a financial product, you can register with The scope of the assistance is set out in this document.

Free market (5) - Cooperation, not competition

We are used to a competitive environment. All suppliers compete hard against each other to get business and expand their market share. Sometimes, the competition is so intense that they try to put their competitors out of business.

It is possible to work in a cooperative environment. Each business serves different groups of customers. They may charge the same price for the service, or it may be differentiated to some extent. Some customers do not mind paying a higher price to get better service or to be served more quickly.

In a market place, there can be several stalls selling similar products. In many places, the stall holders cooperate with each other. If one stall is not able to provide the goods needed by a customer, they will get the goods from a nearby stall and sell it to the customer. Maybe, the two stalls will share the profit margin. This is cooperation.

If we extend the concept of cooperation to neighboring countries, we will get more goodwill and friendship between the people of the countries, as they will benefit together. If one country feels that another country is taking a larger share of the profit, there will be dislike and distrust.

Under a cooperative environment, all parties will survive and progress together. Any opportunity is shared fairly among all the parties. It creates goodwill and friendship. Even if some business fail, they will not blame it on their competitors but on their inability to attract the customers.

We need the educate people on the principles for a cooperative environment.

Tan Kin Lian

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