Financial Planning Central

Victim of OilPods Win Suit, But Could End Up With Nothing

Tiang Chuan — Tue, 03 Apr 2012 15:37:10 +0000

A retiree won the suit against OilPods Singapore, its sole director and sales consultant for fraud and conspiracy over his losses in 2008, reported The Straits Times (Victim of ponzi scheme to get refund).

It was reported in 2008 that there were more than 2,000 investors, mostly Singaporeans, and had invested about US$46m worth of working interest in Colorado-based Powder River Petroleum, which was supposed to have oil and gas interests, over 4 years.

The plaintiff was awarded US$39,375. Ironically, he may end up with nothing due to legal costs.

Victims of unregulated investments often have to resort to civil suits to try to recover their losses. However, many end up suffering in silence as they may end up paying astronomical legal fees without getting anything back.

Directors of Profitable Plots Officially Charged Over Boron CLS Bond

Tiang Chuan — Wed, 28 Mar 2012 05:54:41 +0000

The 3 directors of landbanking firm Profitable Plots were charged in court yesterday over investments related to an industrial lubricant called Boron. Each director was charged with 86 counts of cheating US$2.4m (The Straits Times - Profitable Plots directors charged with cheating). Only US$3,625 have been recovered.

There was however, no charges related to the landbanking investments Profitable Plots were originally involved in.

The director were remanded at Singapore Changi Remand Prison as they were unable to post bail of $400,000 each. The Deputy Public Prosecutor said that they were flight risks and wanted a $600,000 bail each originally.

The directors will remain at the remand prison pending a criminal case disclosure conference on April 20th.

Are Advisers Who Sold Whole Life Plans Profit Driven?

Tiang Chuan — Wed, 28 Mar 2012 02:17:24 +0000

As expected, in the aftermath of the news of MAS’s Financial Advisory Industry Review (FAIR), the media followed-up with more reports , particularly on the commission part. The 28th March 2012 issue of The Straits Times came with an article (Beware profit-driven insurance agents) on the sensitive issue.

Disclaimer: I have sold whole life plans and am still selling them.

A junior insurance agent was quoted “Term policies don’t make the company money, so we have to sell other policies like investment-linked plans or whole life policies. I only talk about term policy if the client asks me specifically about it“. Is this phenomenon common? From my own experience, yes! Not only junior advisers do that, even senior ones do that! Sure, some are driven to do it due to the commissions. However, there could be ones who do it due to pressure and sales quotas.

The article also showed how a firm can help ‘save’ client’s money using a fee-based approach which I find misleading. The example given was that a client could pay $5,000 for an policy and the commission earn on that, which could be a further $5,000 stays with the client. So is the client paying $10,000 for a $5,000 policy? From my understanding of the fee-only model (which the firm claims to be in the past), the commission is returned to the client, the client pays only the advisory fee, which in the example, amounts to $3,000. For fee-based model, commission may not be returned. So a client gets to keep the commission derived from the $5,000 premium (which could amount to $5,000) and pay the advisory fee of $3,000 in the example. The client does not save on both the premium and get another extra $5,000 in commission.

Now, there are a couple of things to take note here. As stated in the example, the fee-based approach “can in some cases save the customer money and can in some cases save the money compared to commission-based model“. So the client must take note of the fact that with a fee-based/only approach, is the adviser only recommending certain approaches (eg, Buy Term Invest The Rest) and forgoing others? Is that the best approach and is suitable for everyone? What about the commissions for the rest of the policy years? Are they returned as well?

The calculations given for another example is quite an extreme. . The annual premium for the 10 year term is $325 while for the whole life, it is $20,400. The numbers are for a 26 year old male for a 10-year term and a whole-life policy. Surely the numbers are going to be very different. The term covers for 10 years while the whole life covers, well whole life with cash value. I quoted a popular whole life plan for a 26 year old male for $500,000 coverage for Death/TPD/CI 10 year premium term and it cost $15,600/year. I am however, unable to comment on the commission based on the percentage of the premium because I don’t track that.

The argument of Term vs Whole Life is never ending. Term gives you pure coverage for a limited time, thus the premiums are low. Whole life gives you whole life coverage with cash value, thus it cost more. Which one is more suitable depends on the client. Personally I find complimentary. However, there are people who are dead against whole life and only want term and vice visa. The product is just a tool. Different tool is use to solve different issues. There is no universal tool that can solve all issues. So at the end of the day, its different folks different strokes.

The main argument of Term vs Whole Life is actually on using Buy Term Invest The Rest (BTITR) vs Whole Life. Again, this is never ending. I find BTITR is very good theory. It is extremely hard to implement. This does not mean that it cannot be implemented. It just mean that only the minority can do it.

As newspapers need to attract readership, it has to be controversial. Readers need to have their own mind and may need to take things with a pinch of salt sometimes.

Dark Clouds Loom Over The Financial Advisory Sector

Tiang Chuan — Tue, 27 Mar 2012 02:11:42 +0000

In a move that is not totally unexpected, the Monetary Authority of Singapore (MAS) announced that it will launch a Financial Advisory Industry Review (Fair) yesterday at the 50th anniversary dinner of Life Insurance Association.

Among the many areas that the Fair will look at, the ones that will generate the most shockwave in the industry will probably be the review on the entry requirements of FA representatives and the Commission-based remuneration and distribution structure.

Current entry requirements for FA representatives is 4 GCE ‘O’ Level passes. Not much impact here if only new representatives are required to have higher qualifications as the current generation do posses higher qualifications. However, if current representatives are also required to undertake additional papers or to meet new requirements, significant blood-letting may occur. Already, some Chinese-educated and/or older representatives are sweating over the new CMFAS M8A and M9A papers introduced recently to equip representatives with the knowledge on complex products that contain derivatives. There are news of representatives calling it a day in the industry due to the new exams.

Perhaps the most impact-ful of the review is the one on the commission structure. The current remuneration structure is a deep-rooted one. It will not be easy to adopt new structures, especially for the veterans of the industry. Countries that have or in the process of banning commissions and adopting fee-based structures includes New Zealand, Australia and UK. Notice that they are western countries (I do not know if you can call New Zealand and Australia ‘western’, but you get the drift..) and have a different attitude to fees. The culture in Asia is very different. Consumers are ever so willing to pay for expensive fees that are embedded in the product and transparent to them than to pay for reasonable charges. Changing the mentality of consumers is key.

Distribution channels that rely on transactions and products with high commissions may find it a challenge if the new rules are effectively enforced. Yes, the key is to have effective enforcement. Many businesses are exploiting loop-holes and grey areas. If there is no clear rules and effective enforcement, then this will just be a futile exercise.

While it is generally a step-forward in this Fair review, it is also mystifying to find that there are no regulations in unregulated investments (well, its an oxymoron) and no intentions to introduce even basic rules to safeguard non-discerning consumers.

Landbanking firm Edgeworth Properties May Be In Trouble

Tiang Chuan — Tue, 21 Feb 2012 08:42:55 +0000

The Commercial Affairs Department (CAD) have started investigations on another landbanking firm – Edgeworth Properties, reports the 21st Feb 2012 edition of The Business Times (CAD on trail of Edgeworth Properties?). This comes one-and-a-half-years after the probe on landbanking firm Profitable Plots.

According to the report, instead of transferring the land titles to the investors, Edgeworth allegedly mortgaged away or some of the Canadian properties and used some of them as collateral for loans. Edgeworth closed their Asian offices after the parent company obtained protection in Canada in November last year. The Canadian court also placed 16 properties under receiverships. Some mortgage companies are applying to sell the properties. If the sale goes through, the landbanking investors could end up with nothing.

It is believed that Singapore investors make up more than half of the C$70m investments in Edgeworth’s projects. They were allegedly promised returns of 60% to 100%.

Has The Wine Bubble Popped?

Tiang Chuan — Mon, 30 Jan 2012 03:18:01 +0000

Another investment bubble may have popped. This time, it is something you can drink.

As with some other forms of investments, sellers have been touting the China demand and limited supply as the sure-win formula to great profits. However, wine prices have slumped recently. The Live-ex 100 index, which represents the price movement of 100 of the most sought after fine wines which have a strong secondary market, have fallen 22% from the peak in June 2011. Prices of Chateau Lafite 2008 have even been reported to have fallen by 45%.

“Some of the Chinese super-rich are getting tired of Lafite“, said George Tong, vice-president of his family’s toy company and a prominent Hong Kong wine collector, quoted The Sunday Times.

When someone is trying to sell you something, it is normal to find him or her emphasising only the good stuff and none of the bad stuff. Do not get greedy and ignore the risks.

Stocks v Property… Again

Tiang Chuan — Sun, 22 Jan 2012 03:04:50 +0000

As the Rabbit prepares to dive into its burrows and the Dragon primes itself to emerge from the water, the journalists were busy writing on what might be the hits and misses for the new year. The main article on the last day of the Year of the Rabbit is on Stocks v Property. Well, I had written an article on it some time back. Thus, there is special interest from me on this article. There are some issues I would like highlight.

Data-mining

The article produced some numbers from an SGX study which showed that from 2001 to 2010, the STI returned 4.9% annualised (without dividends) compared to 3.9% from property (excluding rental, maintenance fees and taxes). There were comments that this is an unfair comparison as 2001 was low point in equities due to the burst of the dotcom bubble and 911 terrorist attacks. Well, there is true. However, there was also data over 5 years (2006 to 2010), 3 years (2008 to 2010) and 1 year (2010) which shows that property outperformed stocks. Historical performance would be affected by the time frame selected.

Volatility

The owner of a real estate consultancy was quoted as saying ” There is one big difference between stocks and property: No matter what, a piece of property will also have value“. I simply disagree.

It is true that there is a chance that a single stock could drop to nothing. However, that does not happen to a well diversified basket of stocks eg, an index. That’s what diversification is all about. It is also easy to diversify in stocks compared to property.

A piece of property will not always have value. In Singapore’s context, I have not heard of any property dropping to zero. However, most properties here are lease-hold. What happens when the lease runs out?

How property prices are reported gives an illusion of low volatility. Property prices are reported monthly. This creates the same issue with monthly priced funds.

Leverage

The article gave an example of how an investor who invested $100,000 and borrows $400,000 can make $25,000 if the price moves up by 5%. That’s a 25% return (not taking into account other costs like interest and lawyer fees). That good. But what if the price move down 5%? The opposite happens, the investor loses 25% ($25,000). Leverage cuts both ways. I’m disappointed that the downside was not mentioned. However, giving the benefit of the doubt, the consultancy owner may have mentioned but it was not mentioned in the article.

It is more than meets the eye when it comes to comparing equities to properties. There are other issues like concentration risk, regulatory risk, ease of management etc. Readers can access my previous article here.

Wishing all readers a blessed and prosperous Year of the Dragon!

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Letter To The Straits Times – Singaporeans Benefit From Property Measures

Tiang Chuan — Sat, 07 Jan 2012 15:15:07 +0000

I wrote a letter to The Straits Times Forum in response to the letter from Mr Tan Cheng Hock who felt that successful Singaporeans have been victimised by the latest property measures (Multi-property owner speaks up).

My letter (Singaporeans benefit from property measures) was published on the 07th Jan 2012. The editor removed my point that property investors who invested right before the Asian Financial Crisis would have to wait for up to 14 years for property prices to recover.

CDP Revamp In The News

Tiang Chuan — Fri, 30 Dec 2011 07:56:32 +0000

The proposed revamp of the Central Depository (CDP) system to allow stockbrokers’ access is in the news again. The Straits Times carried a report on the subject on its 30th December 2011 edition (CDP revamp reignites debate on potential fraud). The article can be accessed here.

Basically, they have summarised the forum letters written by me and Mr Tan Kin Lian.

Letter To The Straits Times – Guard against rogue brokers

Tiang Chuan — Thu, 22 Dec 2011 13:46:12 +0000

I wrote to The Straits Times forum on the possibility of increased churning from SGX’s decision to open up CDP data to stockbrokers. The letter was published on the 22nd December 2011. The letter – Guard against rogue brokers – can be assessed here.

Letter To The Straits Times – Singaporeans Benefit From Property Measures

CDP Revamp In The News