I had a engaging discussion on Unit Trusts with MoneyOwl CEO, Chuin Ting Weber, a week back so I was pretty thrilled to see the team appear in news recently... For a pretty short-lived while.
In a Straits Times article, the team quoted,
We will integrate CPF to provide a comprehensive financial planning service and impartial advice to help Singaporeans to plan well. This is something uncommon in the current financial planning services as CPF does not pay commission or trailer fee to advisers.
Additionally,
Most financial advisers tend to omit the CPF component in their planning because it does not attract any commission or trailer fee.
Wow.
Ultimately, MoneyOwl's repeated emphasis on this kind of statement exacerbates the public stigma that Financial Advisors are:
1) too unethical to do planning for minimal returns, or
2) not well-prepared to offer comprehensive advice.
I like to call this the 'The Greedy Financial Advisor' point-of-view.
Kind of disappointed, MoneyOwl. More importantly, it’s also inaccurate.
Financial Advisors have for a long time, been providing CPF knowledge and incorporating CPF investments as part of a client's portfolio.
Please do not imply that we are unprofessional just so you can market your services.
With MoneyOwl highlighting CPF and Financial Advisors pushing back against such a statement, I’d like to provide some honest views about how Advisors treat CPF, how our advice can benefit you as well as dangers you as clients should look out for.
These are the three parts I will be discussing:
1) CPFIS
2) Medisave
3) CPF OA/SA
1) CPFIS:
The Need:
From my experience, the people who I've helped most for CPF investments are taxi drivers in their late 30s-40s - people who've stopped receiving employer contributions. When addressing retirement, they always talk about their lack of cash and fear that they would be unable to meet their retirement sums by 55.
With a financial advisor's help, they would be able to turn CPF's 2.5% p.a. growth into 7.5%, while smoothening volatility by investing long-term (15, 20 years).
In addition, they would not need to put up any new money in order to reach their Full Retirement Sum (FRS) or Basic Retirement Sum (BRS) at 55.
The Greed:
There are commissions and trailer fees for investing using your CPF. Some cases of clear greed that aren't in the client's favour are:
a) 'Churning' - Where a client is encouraged to port over money to another company or plan instead of doing a fund switch within the first company for free.
b) 'Poor timing' - A financial advisor should consider your needs first. If you need a lot of OA money within a short time like 2 years, it is be unreasonable for an advisor to say investing will definitely let you overcome both fees and volatility just in time for you to sell your fund at a profit / better return than the OA's 2.5%.
CPF investments should strictly be for long-term prospects.
Maverick Advice:
Personally, I'm all for investing your CPF, especially your OA. However, it has to meet three criteria:
a) Risk Profile
Are you prepared to accept both volatility over long years and potentially poor fund choices?
b) Necessity
Is CPFIS the best option for you, or will your situation be better without CPF investments?
c) Cost
Is the cost of CPFIS justifiable (i.e. it doesn't add additional risk to you)?
Case in point: I usually advise my 50+ year-old clients against investing in a unit trust. They would need a few months to break even just from the upfront costs. Since they can start withdrawing from CPF at 55, there’s a higher investment cost and a degree of non-necessity.
Regardless of whether you need the flexibility of the OA, you should always aim to outperform 4% net of fees when investing. Otherwise, you might as well transfer the funds into your SA (4% returns risk-free).
CPFIS costs have been dropping recently and honestly, this Financial Advisor doesn't make a lot of commission through it.
It would really be very much geared towards meeting objective needs. Through balance and justification, your financial advisor and yourself both mutually and reasonably profit.
I keep a list of 15 CPFIS funds on hand which have historically performed at 6% and above net of fees for my clients, which you can always talk to me about here.
2) Medisave
The Need:
Aside from upgrading your Shield plan, which is uncontestably the most important insurance you need, some FAs have access to plans that allow you to upgrade your ElderShield using your Medisave alone.
Less well-known than your hospital plan, ElderShield is a total and permanent disability (TPD) plan that pays out a monthly income upon claim.
By upgrading your ElderShield with a FA, you will be able to:
a) claim under easier conditions
b) claim higher payouts for longer periods, up till death
c) utilise MediSave alone for TPD needs and save cash.
MediSave spending caps are a good way to ensure that your Medisave will spend most of its time accumulated at a 4% compounded, risk-free rate.
The Greed:
ElderShield upgrades have perpetual commission and are readily sold and purchased by both advisor and consumer since MediSave is often untapped.
However, while ElderShield is a guaranteed issuance offer (you can buy it despite any pre-existing conditions), its upgrades are not necessarily so. This increases the probability of the ElderShield plan being misrepresented by the FA.
If you're encouraged to upgrade it on the promise of easy payouts, or port the ElderShield upgrade to a different company e.g. GE to NTUC with the promise of no potential repercussion, do get a second opinion first.
Maverick Advice:
Upgrading your ElderShield can bring a wealth of benefits so don't ignore it just because you fear that your Financial Advisor is greedy.
Aside from the potential misrepresentation of ElderShield, just take note of these two things:
a) Your FA must advise you on the future. MediSave costs will stack up when you reach your 70s, possibly past the MediSave usage limit.
b) Make sure that you are aware of the difference in coverage between your ElderShield upgrade and a life plan that covers TPD. There is a world of difference between a one-time lump sum of $500k and $2k a month for life.
3) CPF OA/SA
The Need:
Financial Advisors must know CPF inside and out. While CPF interest rates look attractive, there have been dark periods in their history.
Since the beginning...
1) CPF interest rates have fallen from 6.5% to 2.5%, and there's been a lot of fluctuation over the last 40 years. Taking current interest rates as a given is poor financial planning. Contrary to popular belief, CPF rates are not guaranteed for life.
2) CPF withdrawal age has gone up 10 years (from 55 to 65) and is poised to go up even further.
3) Failure to meet the FRS brings about other criteria to withdraw your CPF money, even after 65.
Hundreds of articles have tried to simplify CPF for the average Singaporean but its complexity and constant changes make it a complicated topic.
It is imperative that a Financial Advisor understands the CPF, and is able to provide answers and show how it can be used in portfolios
The Greed:
Quite fairly put, simply providing information doesn't give a FA commission.
Maverick Advice:
One person's CPF experience can be very different from someone else's.
I've seen self-employed people who top up their CPF excessively.
I've seen people who've worked 30 years for a company and assumed CPF would handle their retirement needs. However, they end up burnt because they failed to account for the sizeable OA chunk used for their house.
Its one thing for an FA to incorporate CPF as part of your portfolio as a rule of thumb, which is more often the case than not. However, it is difficult for a Financial Advisor to insist on using CPF as part of your portfolio because not everyone needs, wants or trusts CPF as part of said portfolio.
That being said, the very least a FA can do is answer CPF-related questions and show you how to use CPF in your portfolio. Any advice (s)he provides can likely be proven using the handy-dandy CPF calculator, which they should refer to.
While FAs should not make specific tax-advise/promises, a strong financial advisor will include those benefits in their calculation of your goals as well.
CPF is the one thing that all local clients and PRs know and ask about. Even the bulk of foreigners have questions or some kind of expectation about it. Perhaps they are in anticipation of getting it, or they want an advisor to explain it and even offer a substitute.
No matter how un-financially savvy you are, even if you live under a rock and you've never been approached by any financial advisors, the universal knowledge (at least in Singapore) is that CPF exists.
It's really naïve to suggest that the majority of financial planners do not consider it.
Both the knowledge and application of said knowledge by a Financial Advisor should have some extrinsic reward. When it comes to CPF, readily available information isn't readily understandable. Even teachers get paid for imparting knowledge readily available in textbooks, don't they?
Oh well.
When the article came out, bigger names than myself such as Andy Ng lambasted the hell out of that article with a good two hours of passive aggressive exchange.
Andy Ng suggested that there was no statistical data for the statements made - and frankly speaking, even if there were statistical data - based on the points I listed, Andy would still be correct.
Obviously though - whether he's correct because Financial Advisors are ethical or unethical... Well, I'll leave that for you to decide. In any case, you can always nudge me instead if you're not sure. ;)
To be fair, I thought both Weber and Christopher Tan handled themselves quite well in stride and were willing to concede points such as carelessly made statements.
Disclaimer: These conversations have since been deleted or filtered from MoneyOwl's FB page. In hindsight, I really should have made screenshots...
To MoneyOwl - first of all, congrats - honestly. Much like how I don't necessarily agree with every Seedly article, launching and running a business has led me to appreciate the milestones every entrepreneur hits.
It's pretty unsporting to hope someone fails just because they don't agree with you and I am sincerely thrilled for MoneyOwl.
I look forward to the potential headache they'll bring to my future, and see how I can turn it around (much like I had did for DIYInsurance).
Money Maverick
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