What I hear from some of my acquaintance is that there is a change in tactics of some advisory firms.
They do see the prevailing trend that because of the internet, more people know about the virtues of Term Life Insurance and see Whole Life Insurance as costly insurance (see here)
Being the ever evolving salesmen, the tactic have shifted to
- recommending term insurance through the buy term and invest the rest plan
- sell the invest the rest through many unit trust
This in turn use a prevalent generally good methodology to make people accept the idea. The cheap insurance component also makes it more appealing.
Since money is freed up, it allows the advisor to recommend a suite of unit trusts where they can earn recurring commissions from.
Because most are concern over low interest rates in savings and the need for protection, it is likely this is easy to sell.
The caveat for the consumers are these:
- The advisor is not well train in advising setting up a portfolio that is balanced, aligned to the customers risk profile
- The advisor and the customer buys into the latest fad, where they usually do the worse due to reversion to the mean
- Unit trusts are actively managed and majority don’t do well versus indexed ETF which are available to Singapore investors
- The sales charges and expense ratio result in long term high hurdles which active managers are unable to beat
Overall the situation financially is perhaps better for the consumer versus old sales practices but the consumer can still do better.
Numbers here show the % of funds for each year that UNDERPERFORM the index. This means that you pay a manager thinking they can manage the money better than you, keep you from losing money.
This basically show that consumers have a high chance of selecting a fund that will do poorly versus a mechanical means (so basically why pay them management fee at all)
I would even admit that as an active manager of my own funds I do struggle to beat the performance index as well.
The hedge fund managers are suppose to be the smartest guys around, assess to the best resources so they should do better than the unit trust isnt it. This article here (Hedge fund is for suckers) outlines that the majority of the hedge funds actually didn’t anticipate this rising bull from 2009 onwards.
The unit trust manager earns an annual fee as high as 2% on top of the sales charges you pay when you buy. That’s possibly 4% per annum cost.
If the long term return of equities based In the past is 6-7%, before the war you have already lost 4%.
Index ETF in Singapore at most cost an expense ratio of 0.65% and the commissions if you invest in lump would cost around 0.256% (if you use a platform like Standard Chartered Trading) for a total of 0.9% (verus 4%)
This chart shows the difference 1% will make to your return.
Stick to a low cost ETF investment strategy
For most folks who lead a normal life, and do not want to get into the active participation part of investing too much, an investment into 2 broad based ETF would be a better strategy
- Set up a brokerage account like Standard Chartered Online trading
- Buy a domestic based ETF – SPDR STI ETF or Nikko STI ETF
- Buy a global stock market ETF – Vanguard Total World Stock Market ETF listed (Ticker VT) in US or Vanguard FTSE All-World ETF (GBP) (Ticker VWRL) in UK. Singapore’s ETF majority are synthetic unless a viable alternative, it will be better to stick to these choices