Continue reading »]]> I’m finally fully recovered from my HFMD and would like to thank everyone for all your well wishes.

I would like to resume normal posting activities today by highlighting this recent article warning about perpetual bonds.

The spate of sale of perpeture bonds to the public in this year has MAS raising some concerns about them.

Companies like Singapore Post, Mapletree Logistic Trust and Olam had sold perpetuals earlier this year, with some being sold to individuals via private banks. It was mentioned that some of the private banks had even offered leverage facilities to their clients in order to enhance the yield on the perpetuals.

Genting, on the other hand, had sold perpetuals directly to retail investors via a public offering.

One point of contention that some people have raised up was that perpetual bonds are not really normal bonds, and the use of the word “bond” can be misleading.

If you look at the offering document of Genting, the terms “perpetual bonds” do not even appear at all. Instead, they are referred to as “perpetual securities”. The loose use of the word “perpetual bonds” might have led many to believe that they function as normal bonds. But one key difference is that unlike a normal bond, a perpetual security (as it should be rightfully called), has no maturity date. For some of them, the yearly payout can even be deferred.

This reminds me of the debacle back in 2008 when the so-called Minibonds (which is anything close to a bond) exploded.

Of course, perpetuals are very different from Minibonds. One of their major risk would be the interest rate risk. Having no maturity date, their prices in the secondary market could be very adversely affected if there is an increase in the interest rate.

And then I read (with horror) that some of the REITs are considering issuing perpetuals to raise capital. This would surely be financial engineering at its best as perpetuals are not considered as debt on the balance sheet and it would allow REITs to circumvient rules regarding their gearing limits.

Continue reading »]]> Under the Central Provident Fund Investment Scheme (CPFIS), we can use the money in our CPF account to invest into certain instruments.

One of these includes shares listed on the Singapore Stock Exchange (SGX).

In considering the inclusion of shares under CPFIS, the CPF board uses the following criteria:

1. The shares are offered by a company that is incorporated in Singapore;
2. The shares are listed on the SGX MainBoard; (Previous SESDAQ companies transferred to Catalist will continue to be included under CPFIS while new companies listing on Catalist will not be included until further assessment by CPF Board.)
3. The shares are traded in Singapore Dollars; and
4. The company allows CPF investors, who have pre-registered with CPF Agent Banks, to attend their shareholders’ meetings (if any) as observers.

So many S-Chips, including the dodgy ones, would actually fall under this approved list. And we know what happened to many of them.

Ironically, investors will not be allowed to invest into top overseas blue chips like Microsoft, Google and Walmart.

CPF should either make their current criteria more stringent so that the more risky Singapore listed companies are not allowed onto the scheme, or allow big overseas companies onto the scheme. Or both.

Otherwise, the current arrangement just does not make complete sense.

There is of course another hurdle and inconsistency. Under the recently introduced regulation whereby retail investors have to pass certain requirements before they can investing in Specified Investment Products (SIPs), overseas listed stocks fall under the SIP.

Therefore, we are again faced with the irony that everyone can invest into dodgy S-Chip companies, but not overseas blue chips.

Continue reading »]]> Are you ready to finance your child’s local tertiary education?

If your child is enrolling into a local polytechnic or university soon, you may be wondering about your financing options and whether to take an education loan.

CPF is organising a talk to cover on this topic. You may wish to come with your child who is intending to pursue tertiary education.

Register early (click here) to avoid disappointment. Seats go fast and are available on a first come, first served basis.

Date : 23 May 2012
Time : 07:30PM to 9:00PM (Registration starts from 06:45PM)
Venue : 6 Shenton Way, DBS Building Tower 1, DBS Auditorium, Level 3, Singapore 068809

Parking facilities will be available at DBS Building Tower 1 and CPF Building.

Continue reading »]]> There have been more and more kinds of alternative investments like trees and animals being sold to the public in Singapore.

Some of these investments promise investment returns of 10-20+% p.a, and a few of them even come with “capital guaranteed” tags.

It’s always a mystery to me how growing plants and rearing animals can give such high guaranteed returns after you factor in all the marketing costs to promote such investments to the public. I don’t even see real farms making such returns on their capital.

Those who are old enough might remember the ostrich scams that hit us many years ago.

The Financial Services Authority (FSA) in UK is way ahead of the curve for such schemes and have already issued a warning to the public about investing into trees and crops.

FSA’s approach is that if there is an investment that involves pooling of investor’s money, it is considered a collective investment scheme and has to be regulated and authorised.

If it is not authorised, then it is considered an unregulated collective investment scheme (UCIS). Such investments cannot be sold to the general public and can only be sold to high net-worth individuals or sophisticated investors.

Any company found to be doing otherwise will be forced to close down. For example, many land banking companies in the UK were forced to stop their operations.

Singapore’s approach is slightly different. It specifics a list of financial instruments that are regulated. This includes the usual investments like shares, unit trusts and life insurance. These regulated products can only be sold by licensed representatives who meet the prescribed requirements. Anyone who is not licensed but tries to give individual advice on them will be contravening the regulations (The irony is that you do not violate anything if you conduct a seminar to few hundred people on the same topic).

If a product falls outside this list, it is considered not regulated by MAS. The current position is that any product that does not fall under the scope of MAS is not up to them to regulate and hence they will not stop companies from selling sell such products. For example, land is considered a real asset so any sale is like a property purchase on a willing buyer and seller basis.

So, any consumer who purchases an unregulated investment might have very minimal protection from our laws. If something goes wrong, an investor will need to resort to his or her own legal actions.

So please think twice before you decide to invest into any unregulated investment sold in Singapore.

Continue reading »]]> Ever since MAS announced that they would be doing a major revamp of the financial advisory services sector, the industry has responded with many views.

Most of the current incumbents are against moving towards a fee-only model, while some consumers supported the move. I have added the links to some of these views at the end of this post.

And below is the feedback that I sent to MAS for FAIR.

It’s not as lengthy (and entertaining) as the one wrote by my colleague Wilfred Ling, but it carries some of my thoughts on the current remuneration scheme and transparency.

If you like to send your own feedback, you can still do so by the end of today via email to fairfeedback@mas.gov.sg.

Raise the competence of FA representatives

If the move is towards a fee-based regime, the current qualifications is far from adequate. Lawyers and doctors who charge fees all have to go through years of training before being able to practice.

FA representatives being involved in non-FA work

I think it is fine as long as there is no conflict of interest and they can maintain their standards. You have other professionals who take on many secondary roles too, eg, board of directors, etc.

FA activities in insurance brokers

It is a complementary service and should be allowed.

The commission-based remuneration and distribution structure

To have a fee-based model in Singapore, we will need to have qualified professionals. People in other country are willing to pay a fee for advice because some of the issues might be complex (eg tax laws in US, half a dozen pension schemes in UK) and you really need a professional to resolve them.

In Singapore, while we have increasingly complex CPF and HDB rules, most people prefer contacting the organisations directly to get “free” advice.

It will take years before we can evolve to a fully fee-only model. In the meantime, the following changes should be made to the present commission scheme:

1) Impose a heavy cap on the commissions paid out in the first year and spread the commissions over many years as evenly as possible. If an agent is paid the same commission (yearly) whether a consumer stays on a current plan or buy a new plan, he will not have a financial incentive to advice the client to switch. This will eliminate problems like twisting and churning.

2) If a new adviser takes over the servicing of an existing policy, he should be entitled to the commissions that was paid to the previous agent. This gives him an incentive to provide service and also eliminates the need to “push” a new product to get paid.

3) Reduce the multi-tier commission system.

The transparency of distribution and other related costs

The effects of deductions table in its current form is not very useful. The tables provided should show the internal rate of return (IRR) instead to make it easy for consumers to compare one plan versus another.

For ILP, there should be 3 more columns in the benefit illustration, one showing a projection at 0% return, one at -5% and another at -9%. After all, returns from the underlying unit trusts are non-guaranteed and can be negative as well as positive. Current projections showing just the upside can be misleading and many people might not be aware they could be investing into high risk funds.

Fee-based advisory service the way to go Business Times

Mystery shopping survey: One-third of proposals ‘unsuitable’ Business Times

Veteran insurance agents reeling from proposed changes Straits Times

Financial advisers seek gradual changes Straits Times

Advisers worry customers will resist fee-only model Business Times

Merits of a fee-only advisory practice Christopher Tan, CEO Providend

Fee-based insurance system ’has risks’ Straits Times

Fee-based insurance model has no pitfalls Straits Times Forum

The lesson about putting a car on the moon Straits Times

Why ex-Million Dollar Round Table agent backs MAS move Straits Times Forum

Continue reading »]]> City Gas said yesterday that the gas tariff for households would be increased by 3.3% from 1st May 2012. This translates to an increase from 21.45 cents to 22.16 cents per kilowatt hour (kWh).

While 3% might not sound like a lot, gas rates have actually gone up from 17.99 cents per kWh last year to 22.16 cents per kWh now. This is a whopping 20%+ increase.

Every quarter, gas tariffs are reviewed based on guidelines set by the Energy Market Authority (EMA). At the rate things are going, inflation is going to eat all of us alive.

The interesting thing is that the price of natural gas is actually at a 10-year low.

Unfortunately, when the gas contracts for S’pore were negotiated many years ago, the price of the gas that S’pore has to pay was based on the price of oil. So, even though the price of gas has collapsed, we have to pay more as the price of oil has been going up. Sigh.

Continue reading »]]> There was an article in the Straits Times which mentioned that minority shareholders were upset with the bulk sale of Suntec REIT’s units by their manager.

Minority shareholders are upset that this unloading is depressing the share price of Suntec REIT.

How it came about is because the manager is paid 80% of its management fees by the issuance of Suntec REIT units.

Mr Yeo See Kiat, chief executive officer of ARA Trust Management (Suntec), the manager of Suntec REIT, said the units were sold to fund the operations of the REIT manager, such as rent and salaries.

Last year, the manager was paid S$36.1 million, out of which S$28.3 million came in the form of 22.1 million new units in Suntec REIT. This works out to be an average price of S$1.28 per Suntec REIT unit.

I had a chuckle when I read this statement by Mr Yeo, “‘The manager is happy to receive our fees in cash but by receiving 80% of our fees in units, our interests are aligned with our unitholders.”

I would think alignment of the interests only works if the manager had kept all or most of their units. As it is, ARA Trust Management (Suntec) sold almost all of the units that they had received as part of the management fee.

It only held 893 units at the middle of last month, having sold more than 20 million units in the open market. So much for alignment of interests.

However, the parent company, ARA Asset Management, does hold 34 million units in Suntec REIT. This is a long term stake which they mentioned they will not sell.

Continue reading »]]> It was reported that our March inflation figures (measured year on year) was 5.2%. Part of this increase was attributed to a sharper increase in Certificate of Entitlement (COE) prices, which led to higher car prices.

We all know that a declining COE supply had led to a huge increase in the prices of COEs.

Surely there is a better way of improving the current COE system? This is one area that the government can tweak to reduce the cost of living in Singapore.

My friend Chan Tau Chou suggested implementing some kind of balloting system to control the distribution and prices of COEs.

His point that the average family’s expenditure on the COE could be diverted to more useful purposes is something very true.

Mr Chan’s letter drew a flurry of replies, including my own. Some of these ideas are worth considering:

COE Scheme should be fairer

Social cost of high COE prices

Have balloting and bidding for COEs

Create niche category for luxury cars

After reading through the different ideas, I think the most ideal way to tackle this problem is to have separate COE categories for balloting and bidding. A good analogy would be the way HDB units are sold (balloted) while the private condominiums are sold freely.

You can read about some of my other suggestions in my letter to the ST Forum (My letter is in the background story box), which I will not repeat here due to the exclusivity clause.

Continue reading »]]> OCBC recently launched a credit card with an inbuilt interest-free instalment plan for any purchase, anywhere. This is the first card of its kind in Singapore.

A typical credit card only gives you interest-free on your purchases up till your statement due date, after which you will have to settle the outstanding balance in full or incur interest.

The OCBC Cashflo card helps customers manage their cash flow by automatically dividing their credit card purchase amounts into three or six equal interest-free monthly payments, when they charge any amount above S$100 to the card.

As an added feature, customers have the flexibility to set the minimum spend, in multiples of S$100, to activate the instalment plan on their cards.

The OCBC Cashflo card offers a six-month instalment plan for purchases made at major Singapore department stores – Robinsons, Takashimaya, Isetan and CK Tangs, luxury boutiques, insurance companies, travel agencies as well as for any overseas spend. Any other purchase will automatically go onto a three-month instalment plan.

In addition to the interest-free instalment plan, OCBC Cashflo card members will receive cash rebates of up to 1% for any purchase.

Customers can sign up for the card via OCBC Bank branches island-wide, with the annual fee of S$64.20 waived for the first two years. From 19 April to 30 June 2012, members who charge a minimum of S$500 within the first month of card approval will also receive a luggage bag.

While a three or six months interest free installment can seem enticing, we have to be careful not to overextend ourselves and buy something just because we can pay it off over a period of three or six months.