Investment Moats

How we can Tackle Financial Insecurities

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A sub-conscious fear and confusion about some things related to money.

That is the thing I can clearly defined as I hear people talk about their concerns. Or when my colleagues shared with me what their clients tell them or what they managed to detect.

I have less of this problem currently. I think fear used to plague me more. I didn’t think it was a lot but it was sub-conscious. That is why financial prudent folks decide to rank wealth building rather high in their list of priorities. We either try hard to alleviate our fear or something that makes us feel good.

Early Retirement SG (ERS) has a good post last week. In taking care of mental health, He wants to tell his readers that the solutions to a lot of our problems is not by what we do outside but whether we are able to find the answer on the inside.

The main example he use is financial security. It is a good example because I think it plague almost all of us. Whether you admit it or not.

So this post explored a little more on financial insecurities and how we may be able to better solve it in little ways.

These Insecurities Plagues the Wealthier Folks Too

ERS says that he knows there are people with $1 million that does not feel financially secure. He explains that not feeling secure is an internal thing. You cannot be secure financially unless you look inside.

MoneyOwl’s CEO Chuin Ting informed us of this Bloomberg article that underlines this financial security issue. Advisers share their tale of how difficult it is, to get their rich clients to spend money.

If well-off retirees are more frugal than necessary, they end up denying themselves the fruits of a lifetime of hard work. Their heirs eventually benefit, but the vitality of the American economy suffers. “Wealth is getting more and more concentrated among households that are averse to spending it,” says Matt Fellowes, a former Brookings Institution fellow who’s founder and chief executive officer of United Income, a retirement planning startup. “It’s trillions and trillions of wealth that is not benefiting anyone except asset managers.”

Nervous Retirees Are Too Scared to Spend

I am surprised they managed to make this into a reason for greater wealth divide.

“The reason they don’t spend in retirement is because they worry about running out of money,” says David Lau, founder and CEO of DPL Financial Partners. “You don’t know when someone is going to die, you don’t know when someone is going to get sick.”

Nervous Retirees Are Too Scared to Spend

This is very real. It would plague the poor on a daily basis. For the rich, it is fleeting. Some days you will never think about it. Then on certain days, you will wonder about it.

When someone mentions to you that you have a lot of money, you will tell them that it is not really true. There are so much uncertainty in this world.

  1. Your parents healthcare can be on you
  2. You may become disabled
  3. The stock markets are so volatile
  4. Your kids can turned out to be more of a liability than an assets
  5. Inflation is so high nowadays especially for healthcare costs

These are the uncertainty in not just the rich people but also the middle class. You can add a few more and minus some of these, since our priorities are different.

Never Spending the Principal is a Sign of Insecurity?

The Bloomberg article tells us that one of this fear is the notion not to spend your capital:

Many clients think they’re doing something wrong if they spend money in a way that causes portfolio balances to drop. “Never touch the principal” is classic advice that’s a relic of an era of double-digit interest rates, when even conservative investments could produce substantial income. Despite ultra low interest rates, advisers say it can be difficult to persuade retirees to tap savings rather than just live on their tiny bond coupons and dividend checks. “Wealth is really a source of identity for people,” Fellowes says. “By spending their wealth, they’re losing some of their identity. There’s an aversion to seeing their balances go down, even if it’s excess wealth” that they’ll never need.

Nervous Retirees Are Too Scared to Spend

This is pretty common. In how much do you need to be financial independent article, I explain how much is enough based on this framework.

  1. Build up a portfolio of dividend paying stocks
  2. Make sure your dividend income can pay for your annual expenses
  3. Your portfolio of stocks will grow to keep up with inflation
  4. For example, if your expenses is $25,000 and your portfolio of dividend stocks can give a conservative and sustainable income of 4%, then you will need a portfolio of $625,000.
  5. Your principal is protected. It will not run out.

I went through this phase of finding that perfect framework of spending my wealth in a sustainable manner. Come to think about it, the main reason I would do that is due to insecurity.

There is a big part of us worry that the money will run out. For some, there is a bigger fear that their next generation will not have this wealth and because of that, they end up worse off, versus their friends.

My research shows that the dividend income model may be a little flawed. The primary reason is that we estimate too perfect of a future. That usually do not happen. However, this is a story for another day.

To be honest, I wonder how many people could say “This money is not mine. Eventually we are all dead. We only have one life. So why not take the money and use it in a way I think is meaningful to me. Money will work itself out.”

One of my university mates and good pal used to tell me that when we started working. He is right. But right now, 15 years later, insecurity is breeding within him and his wife.

That is life for a lot of people. We go through this cycle of YOLO and Insecurity, YOLO and Insecurity.

Lifestyle Security is What We Seek

Sometimes I think we all benefit by ERS being early retired, not working and writing out his thoughts.

Because some of these things, we seldom hear it anywhere else.

ERS makes the statement :

When people talk about financial security, they usually mean lifestyle security. They want to maintain some form of lifestyle. So… typically, it’s not really ALL about the money. IF you can maintain the same lifestyle WITHOUT money, that’s also ok right?

BUT we lived in a world where the Government says, “Ok, we’ll take care of your food, lodging, medical expenses, if you earn more that’s your bonus.”
There will still be people who feel insecure, although, by right, that shouldn’t make sense.

ERS

In a lot of ways he is right.

In the financial planning space this is what we try to balance for our clients often. They will come in with that expectation to secure their current lifestyle. Say they need $200,000 a year.

And they wants this plan to be REAL secure.

So the figure usually comes up to around $6.5 – 7 million. Some of us can be real productive at work. But when you see such a figure, it puts you down. And your plan is to have this within the next 10 years.

This is similar to the project management problem: You can only have 2 of fast delivery, quality and cost.

The need to protect their lifestyle and be real secure is real for a lot of people.

The Solution… I Think… for Now….

At 39 years old, I am not going to say I figured everything out to say this is the solution.

I worked this problem out enough that I think I have a framework or list for you to explore.

Here it is.

1. Reflect and List Down a List of the Financial Fears that Plague You

ERS is right. The thing you are searching for is inward.

But to help yourself, you need to find these “monsters” first. You need to prioritize time to reflect. Sometimes, it is not that. Maybe always have a list in your phone. Whenever you come across these concerns, list them out.

I would give you a trigger list for a start:

  1. Your wealth is not enough for _____________
    1. lasting for 1 month, 3 months, 1 year, 5 years, 30 years, perpetuity
  2. I have wealth but I am worried about___________
    1. Me dying and what will happen to my family
    2. Can I sustain my parent’s future health cost
    3. Not reducing the quality of life

If you still say you do not know, then you better sit down with someone you trust, that is a good critical thinker, asks good questions to try and get this out.

2. Find the Framework or Models to Solve These Financial Insecurities

For each of these financial worry, there are usually a money value that you can assign to it.

For example, you do not know how much you need to be financially secure.

I would say KNN, you have been reading this blog long enough, you should notice a few variation of looking at it. Collate your expenses. Build wealth so that it is large enough to cash flow to pay for the expenses.

How much is more secure?

  1. There is the conservative dividend paying model.
  2. There is the withdrawal rate model.
  3. There are the variable withdrawal rate model.
  4. There is the endowment model.
  5. You can also figure out roughly how to generate cash flow perpetually.

The idea is that these topics are rather popular and prevalent. If this is a worry that is big enough, then you should prioritize to go down this rabbit hole and seek out how much you need.

That is one of the main way I solved a large part of my insecurity. At least now I know “damn this is a big figure” or “OK I am not so far off”

We want to know where we are on this ruler.

You will tell me but some of these things are so uncertain. Like healthcare cost. Like whether your parent will have dementia and how long they are going to live.

For most things, you can put a value to it.

Don’t know the inflation rate of medical cost? You can work out the present value of a stream of expenses on 3%, 5%, 7%, 10% inflation rate. For different duration.

If you are so insecure, then take the largest one. 10% inflation and for 40 years. This is a future financial liability. Save enough of this Sinking Fund.

For all financial insecurities, there is usually a value attached.

3. Reflect upon these Financial Insecurities

Assigning the real values removes uncertainty and confusion. But it does not solve the insecurity.

ERS is right. You have to look inward.

You might be looking for lifestyle security. But how much of this lifestyle to you really wish to secure? All of it?

You have just listed out 10 things you are worried about and here are the costs. Realistically can you save and fund all these 10 financial liabilities?

How do people with less money tackle all these things? How did people with NO money tackle these worries?

Some of these questions, take you down some mental rabbit hole and hopefully, you come out of these to a better place.

Your Network is More Important than Your Net Wealth

I reflected upon my experience building wealth and learning about spending wealth and recently, I lean towards this idea.

There is the net wealth you need to build up. But your network may be far better.

I dunno how to describe it. Maybe this will be another post. But it seems that how you carry yourself, and how open you are to create deeper relationships will allow you to have a safety net.

  1. People you help to take care of little chores. They help you take care of little chores
  2. People that refer you for work. You do the same if they need it
  3. People show you where to get food and supplies
  4. People giving you medical help

If you rely on money solely, it is going to be expensive. Perhaps not enough. But you also can’t depend on network alone. You also need money.

Figure out Enough then Let it Go, Let it Flow

My solution is to figure out the framework and model to look at these money insecurities. Then look inward.

After that, let it go after you know you have explored enough. ERS is also right. The more you look at this, and trying to seek the holy grail, the more fxxked up it feels.

But I do caution: Most people never found these models that help them quantify these financial worries.

But they choose to let it go.

This is not Zen. This is postponing the inevitable. You may have a financial fall out big enough that you could have easily prepared for.

Going down this financial independence rabbit hole for many is a journey to tackle our insecurities. For most, we emerge in a better place. But many still have a lot of worries.

In that case, maybe the answer is not financial anymore. You might need more spiritual help.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

REPS Holding’s Resale Endowments: What You Need to Know

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Resale endowment policy is not something new.

However, in the realm of wealth building, it may be less talked about. And therefore, a lot of investors may not be aware about it.

The concept from what I remember originate from UK. UK Tradeable Endowment was a pretty hot concept in the unit trust and investment forums that I frequent when I started investing in 2004 to 2006.

Since then, the talk about UK Tradeable Endowments have died down. In their place, there are some brokers who started dealing with Endowments that can be traded in Singapore.

One of them is REPS Holdings.

In this article, I will do a deep dive on the resale insurance endowment business. The value proposition to you as a potential investor. The risks involved as well.

How are Insurance Endowments “Traded” or “Resold”?

Absolute assignment is a process where a current owner of a policy (we call this the assignor) can legally transfer the rights and benefits of a policy to a new policy owner (we call this the assignee).

For each insurance company, they have their own assignment form that the assignor can fill up with the assignee to transfer the policy.

You can review the assignment forms for the various insurance company here.

The first part of the process is when the original seller assigns the policy to REPs Holdings. REPs Holdings is the assignee in this case:

The original owner sells the policy to REPs Holdings

Once the form is filled, signed and accepted, the policy is assigned to REPS Holdings.

REPs Holdings sell to a prospective policy owner

An interested investor would then browse the policies that REPs Holdings have taken over. When the investor found a policy that matches what he or she is interested in, the policy is then assigned to the investor. The investor became the new policy owner.

In these assignment forms, we can pick up more things regarding what the assignor is signing over, and what the assignee is taking over.

NTUC assignment form

We learn here that any policy under trust nomination or HPS cannot be re-assigned. So this weeds out some of these policies that are more complex in nature.

Prudential’s Notice of Assignment form

We learn all future correspondence and dealings on the policy will only require the new policy owner’s consent.

HSBC Assignment form

In HSBC’s assignment form, it provides the clearest take on specifically sell, assigning and transfer of the cash surrender and loan value, the bonus declared.

AIA Assignment form

In AIA’s assignment form, it explains that any nomination of beneficiaries that the assignor made, once the policy is assigned to the assignee, will be revoked.

This means that once the policy is assigned to the new owner, the beneficiary will be the new owner.

How does a policy sold through REPs Holdings look like? A Case Study of a $24,900 Investment

It would be something like an 8-year endowment policy listed by REPS Holdings shown below:

An 8-Year REPS Holdings Resale Endowment
An 8-Year REPS Holdings Resale Endowment

This was originally a 10-year endowment plan (29-Nov-17 to 29-Nov-27). The original owner of this policy sold to REPs Holdings after less than 2 years of owning it.

The surrender value the original owner got when he or she surrendered should be at a loss. The owner surrendered to REPs Holdings instead. In return REPs Holdings is able to give the original owner a better surrender value.

REPs Holdings would typically incubate the policy from 3 year upwards. Some policies have tenure as long as 20 years.

If you are interested in this policy, you can buy from REPs Holdings. The green numbers show the cash flow that you will need to put in.

In this case, the new owner will need to fund $24,891, and 3 x $15,000.

(Do note that this is not a one-time investment. If the policy requires on-going premium payment, you need to be ready to commit. In this case, you can see there are three $15,000 a year payment)

8 years later when the policy mature, the policy will pay out $92,416.

If you would like to know your projected return, you can look at the Price Discount Rate. The 3.8% here, is the XIRR or internal rate of return.

This is typically the way we view and how the insurance company view the “interest rate” of this stream of cash flow. It allows you to compare to other financial assets such as equity, bonds, commercial offices.

A 6-Year REPS Holdings Resale Endowment
A 6-Year REPS Holdings Resale Endowment

Here is another case study.

This policy is a shorter 6-year maturity that will yield a projected 3.6% XIRR/discount rate.

The main difference is that the cash flow is different. It is a smaller amount.

For some of you, your capital might not be as large as the previous case study.

Since these policies comes in different capital commitments, you will have to choose one that you are comfortable with. (Now you know why I say this is like buying second hand laptops)

How different is this resale endowment versus the traditional endowment

A resale endowment does not have a lot of difference from the traditional endowment:

  1. There is an assured person (life insured)
  2. The participating fund, which helps the policy owner invest their money is also the same
  3. The rate of return is thus the same had the policy not been sold
  4. In a traditional endowment plan, your actual return may vary from the projected return. This does not change as well
  5. The recurring premium contributions are also the same

What is different will be your return and margin of safety versus the first owner.

Why are the returns higher?

The returns if you choose to buy this resale endowment is higher because the initial amount you put in is lower.

Going back to this example, the original owner of the policy, for the first 2 years would have paid in total $30,000 in premiums during the first 2 years.

When the original owner surrenders the policy to REPS Holdings or the insurance company normally, the original owner would only get back say $22,000 in surrender value if the original owner chooses to surrender to REPS Holdings.

REPS Holdings resell this policy to you at $24,891. So the premiums you paid, versus the original owner ($30,000) is lower.

When your capital is lower, your discount rate/XIRR is higher than the original owner.

What if the original assured passes away? Who gets the sum assured?

When the policy is sold to REPS Holdings, the original owner will sign a change in assignment form to transfer the ownership to REPs Holdings.

After the sale, REPs Holdings (the new owner) is the only one who is able to claim any death proceed should something happen to REPs Holdings.

Usually the original owner is also the insured person. The original owner can name a few beneficiaries. These are the people who can receive the money should the insured (usually himself or herself) passes away.

Once the policy is assigned to a new owner, all past beneficiaries will be revoked. The new owner is the only one able to claim any death proceeds should something happen to the insured.

In some situations, a mother would buy a policy for her son. The mother is the first policy owner and the son is the insured.

For policies like this, the policy cannot nominate a beneficiary. This is because if anything were to happen to the son, the owner, which is his mother, will automatically be the beneficiary. Thus, nomination is not allowed.

When this policy is resold to you, as the new owner, you are not allowed to name any beneficiaries to the policy as well.

Who Gains, Who Loses?

My readers tend to be more sceptical than most. You are thinking about how this adds up. There should be some party who loses. It cannot be that all parties gain.

So here is the summary:

  1. The biggest person who loses is the one who surrender the policy. The original owner surrenders the policy at a big negative difference to the premiums he or she paid (the lesson learn is know what you are putting your money into, know how it works, how it fits into your financial net wealth!)

You can liken a resale endowment like a distress debt. REPS Holdings takes over from the original owner at a big discount to the original par value.

There is margin of safety there for them.

Here are the folks that benefit

  1. The person who purchased the endowment gets a product that he or she understands, matches his or her risk profile, matches his or her time horizon and a decent return
  2. The insurance agent (that sold to the original owner) and the insurance company still get their commissions as the policy is still in-force
  3. REPS Holdings earns a profit margin for taking over and reselling the policy
  4. The original owner who surrendered the policy get a higher surrender value compared to if the owner surrendered with the insurance company

Are the Returns on the RESALE Endowment Guaranteed?

The mechanics of the resale endowment is the same as how the original owner of the policy experiences it.

  1. The original owner’s returns are partly guaranteed and non-guaranteed
  2. The returns are dictated by the performance of the insurance company (not REPS Holdings) participating fund
  3. The original owner will get the reversionary bonus and may get the terminal bonus
  4. The policy may fall short of expectations when the insurance company cut the bonus. The owner’s returns will be cut lower

When you take over the policy, you will have experienced the same uncertainty as the first owner.

What are the Returns Expectations?

When REPS Holdings take over the policy, they will get the most up to date returns projection from the insurance company to work out the XIRR/Discount Rate that you would get, if you choose to purchase this policy. Remember that if the insurance company cuts the bonus, the returns projection changes.

So REPS Holdings do their best to give the closest projection and not based it on the original projection that the original owner gets when the original owner first bought the policy.

I have written a crowd sourced article in the past, where I tabulated the matured value of readers, friends and family’s insurance endowment plans. You can read it here.

from Investment Moats

Longer term policies should have a higher return, compared to shorter term policies. However, your experience will very much be determined by the performance of the insurance company’s participating fund.

In the summary table above, taken from my previous article, you can see the returns can vary.

Going forward, the returns of the policy is fundamentally based on the underlying returns of the financial assets in the participating funds. In the table above from Business Times, you can observe the asset mix for different insurer.

If you purchase these resale endowments, your cost is lower than the original owner, so your returns are also higher.

Are REPs Holdings Licensed by MAS?

There are currently no MAS administered regulations which govern the sale, purchase and distribution of Resale Endowment Policies.

This means that if a person purchased a resale endowment policy, the person cannot rely on laws administered by MAS to take action against either REPS Holdings should they encounter any problems with the investment process.

You can however seek recourse under the Consumer Protection (Fair Trading) Act (CPFTA). The CPFTA allows consumers aggrieved by unfair practices to pursue civil remedies before the courts.

Who buys these Resale Endowments?

This is an interesting question.

I asked my representative about this and the folks that likes these policy (and they tend to keep coming back to purchase) are those very conservative wealth builders.

Firstly, they understand how these things work.

Why is this better than the traditional endowment?

  1. The maturity period tends to be shorter
  2. They have less risk of surrendering the policy with a bigger loss, versus the premiums that they paid, if they need to surrender the policy. This is because the capital they put in is smaller (than the original owner)
  3. They get higher return

So it is a no brainer to them.

Unlike the original policy owner, these folks tend to be more composed and assured about using endowments in their wealth building.

How should we view Resale Endowments in our Financial Net Wealth Allocation?

A wealth builder needs to know how the financial assets that goes into their portfolio work. You would have to know the characteristics such as returns, risk, liquidity and the amount of work involved.

And the wealth builder has to view these instruments as part of their overall financial net wealth.

Resale Endowments have the following profile:

  1. They are illiquid, unless you resell them back to Reps Holdings
  2. Since majority of the assets are bonds and property, the returns tend to stick close to bond returns, if you hold them to maturity
  3. They should yield positive expected returns if held to maturity, due to the way they are constructed
  4. Since their value is not priced so often, on a portfolio basis, they look less volatile
A portfolio allocation that younger folks would appreciate.

For those who wish to build wealth, and are younger, equities tend to have more market risk, more volatility, and expected to provide a higher return. Resale Endowment can take the role of the bond to reduce the volatility of the net wealth.

Since property is also not revalued so often (at least on a daily basis), the overall net wealth would look less volatile.

A more risk adverse asset allocation

For some of you who are more risk adverse, your financial net wealth can be like this. The volatility to your financial net wealth is going to be very low.

However, you have to take note of the illiquidity of your financial net wealth.

  1. Your property is less liquid
  2. Your endowment is also less liquid

If you need to liquidate them, it might not be as easy as liquidating equity, unit trust, bond funds. When you liquidate your property and endowment in an illiquid market, the value that they may fetch might be far less.

Conclusion

REPS Holdings have provided an interesting prospect for those who wish to surrender their policy with a higher value.

As a broker, they have also provided a way for investors with certain risk appetite to purchase policies that meets their rate of return through REPSINVEST.

If you are interested to know more, do contact REPSINVEST here.

This post is Sponsored by REPS Holdings. The views are Kyith’s.

Shangri-la Asia’s Presentation shows the Impact of Hong Kong Protest and China Slowdown

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How do we know whether these political and government policies have an impact on the businesses you invest in?

Perhaps a review of a slew of companies will tell you something. That is lots of work. But if you want your money to be safe, you got to do it. If this is not for you, there are always index funds.

Shangri-la Asia Limited (Stock code: 69) is a hotel operator listed in the Hong Kong Stock exchange. It is owned by Robert Kuok, His Daughter is the executive chair person.

Yesterday, Shangri-la Asia released its interim results.

It’s business involves

  1. Owning and operating the hotels it owns. This can be directly or with joint venture partners Kerry Properties Limited (KPL) which is also affiliated with Robert Kuok
  2. Owning and operating investment properties
  3. Development of hotels
  4. Management of hotels

The main bulk of its profits or EBITDA have come from owning and operating the hotels.

In total they operate around 102 hotels around the world.

Like a lot of property stocks in Hong Kong, there is a big discount to NAV. At the share price of HK$8.65 the market capitalization is about US$3.86 bil. Dividend yield is about 2.6%. Share price was as high at HK$18 at one point in the last 2 years.

If we take the annual report and value it, your RNAV could be US$6.8 bil if you use the historical cost minus depreciation for hotels or US$8 bil if I roughly estimate based on their EBITDA and Cap Rate.

You can see the upside.

Perhaps there is a need to look at the results more. These firms in HK all trade at a large discount but the unique thing about Shangri-la is that 10% of their EBITDA is in Hong Kong. Not too much but also not too little.

This period of protest brings out a learning lesson about the benefits of adequate diversification. You will notice that some of these service residence and hotel players are pretty diversified around the world.

A single protest event in HK affects Shangri-la but it could have been worst if its very concentrated. It would take a global slow down, or a secular shift in travel and hotel dynamics to really affect them.

Sometimes looking at the results of these companies gives you an assessment of just how bad or good things are in certain regions you are interested in.

China is one. How were they impacted by trade war, or for the matter are things slowing down?

And how was the protests affecting business.

A large amount of the properties owned by Shangri-la or under the associates is in China. They have hotels in Hong Kong as well.

So it is great that they provide some color on the Hong Kong and China situation.

Shangri-la Asia operation updates

The interim results show the results for the first 6 months.

Occupancy for both HK and China in the first half of the year was pretty good. The average daily rate (ADR) for China have weakened yer on year while the average daily rate for HK was better.

When we put occupancy together with ADR, it shows that the charge rate and quality for the HK hotels were doing better. China worse off.

RevPar for both declined, with China being more significant.

Here is the data, broken down by different cities in China.

Shangri-la Asia also furnish some general Hong Kong GDP and retail sales figures. I am more interested with the retail sales figures for the past 6 months. Not very optimistic about it.

According to the general tourism and restaurant data the 1.5 month’s protests really affected the visitor arrivals.

In the slide above, we can really appreciate the difference between the RevPar, ADR and Occupancy for the first 5 months of the year in 2 different sub-market in Hong Kong and the past 3 months.

If your business operates in an environment where it is dependent on good relations, tourism, these data does show that these protests will caused an impact of a larger degree.

Shangri-la’s China data gives me some glimpse of the situation there. Together with some other companies, it seems the slowdown is pretty evident.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

Interactive Brokers setting Up Singapore Offices

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There are a bunch of investors who are always searching for a cost effective broker platform. Through these platform they wish to handle the majority of their transactions.

I think cost is one aspect but there are other considerations

  1. Think in terms of whether the broker will continue to be in business
  2. If you have a problem with the platform, or your trade, are they responsive
  3. The variety of products they allow you to trade
  4. How easy will it be for you to transfer your money in to start and transfer the money out
  5. How intuitive is the interface

One of my friend told me that Interactive Brokers (IBKR) are in the midst of setting up their Singapore office. They are probably in the process of getting the necessary license through MAS to operate in Singapore.

My friend did a check in ACRA (that is diligent of him) and it seems they really did setup this year.

Subsequently, a reader from Telegram group informed me that Interactive Brokers have posted an ad on LinkedIn looking for a role in Singapore:

Interactive Brokers was in Singapore but this time round, maybe they are looking for something more.

The Benefits of Interactive Brokers

The biggest deal about having an overseas broker having a local office is perhaps that it gives both sides an opportunity to build trust with each other.

The older investors would feel uneasy having their net worth in anything other than CDP, or the traditional brokers such as Vickers, Kay Hian and GK Goh.

The younger investors do not know what the big deal about this. They probably assume some of worries of the older investors would not happen to them. They are more accepting about this.

The more savvy local investors are familiar or at least have heard of IBKR. In my Dimensional Fund Advisers article, I pitted the cost for the Roboadvisers, the banks and my current company against do it yourself investing with a IBKR broker.

Comparing the cost stack for various ways to invest in low cost funds

Their commission for the fixed tier, which is 0.05% subject to the minimum of US$5 is pretty hard to beat.

In recent years, the local brokers such as iFAST, POEMS, Kim Eng, and like, have started to offer pre-paid accounts. These are accounts where you keep your shares with the broker. They become your custodian. You are able to get 0.08% to 0.12% per transaction commissions.

We should not be comparing against transaction cost of 0.25%, which is what offer by traditional brokers (full disclosure: I am still paying at such obscenely not cheap charges)

The appeal of IBKR is the whole package:

  1. It is a listed US Company. Actually, it may be a company you wish to invest in
  2. The way I think about it, people outside of US are looking for a platform that is cost effective enough to invest through. Turns out the savvy folks out of US, whether is Europe, Hong Kong or Singapore uses IBKR
  3. If your account size is US$100,000, there are no custodian charges. If you have less it is $10 per month unless you make certain trades. As you make some trades, it gets deducted from this $10. To me this is not a problem even if your amount is small. Eventually, if you follow my wealthy formula, it is likely you will have US$100,000. Your $120/yr is just going to spread over the future years
  4. The commission is low as previously stated
  5. They allow you to invest in a lot of markets
  6. Thus those who wishes to buy UCITS Exchange Traded Funds (ETF) that is relatively low cost, listed in London Stock Exchange are able to do so at very low cost
  7. With different broker platforms, you tend to incur some cost when you convert between SGD to USD, GBP or HKD. This is typically in the 0.50% range more or less. What I understand is the slippage in this is very very low
  8. Many have complained that their platform is not intuitive. To me this is perhaps just trying to get used to. I heard they are able to compute your portfolio overall return and let you review these numbers. I think that is a benefit of housing all your net wealth in one platform
  9. Currently, Singaporeans can FAST transfer their money in. You can Google around to see the process

A lot of advantages, very little disadvantages. The main one from what I understand, as Singaporeans, you cannot trade Singapore stocks through IBKR. Overseas investors can (very ironic)

My friend have list out some of the advantages he sees as a private investor:

  1. It is easier to manage your account through a local office in Raffles Place area
  2. It gives greater confidence in Singapore based users
  3. May be easier for Independent Financial Advisers to set up and manage B2B enterprise accounts with IB
  4. Put pressure on local brokers. So this may result in things cheaper for everyone

I like the B2B angle. A lot of the current B2B business is undertaken by IFAST. IBKR have their institutional side of the business.

It remains to be seen whether they prefer to focus on the B2B or B2C portion of things. I think there might be very little alternative to IFAST. The rest of the B2B platform, from what I heard, were not able to deliver as good of a service than IFAST.

With some competition, we might be able to enjoy better rates. Of course, we may benefit when local brokers scramble to try and offer what IBKR is able to.

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