Financial Planning Problems

[limster]

it is also not very fair if you just consider buying and not selling. Yes DW strategy is to buy and hold. but DW does adjust his portfolio every now and then. he will have to sell some then. if I am not mistaken, he did mentioned that he just sold his sabana reits recently.

Dividend warrior: Pays only brokerage commission for the shares

ILP: Pay the insurance agent commission, annual recurring administrative fee, fund manager's fees and bonuses, AND also pay brokerage commission since they are also investing in shares. (furthermore, the brokerage commission is far higher for active fund management since the fund manager need to buy and sell often otherwise people think he's not doing his job - end of year broker will give him a hamper or even Bloomberg terminal if he trades a lot)

 

[dork32]

never in my post did I comment that ILP is good or bad.

I do not have any ILP and do not intend to get any. Even with a 8% project return per year, it takes more than 10 years to break even. I feel that this is too long. some people may find that this is ok.

 

[dork32]

Dividend warrior: Pays only brokerage commission for the shares

ILP: Pay the insurance agent commission, annual recurring administrative fee, fund manager's fees and bonuses, AND also pay brokerage commission since they are also investing in shares. (furthermore, the brokerage commission is far higher for active fund management since the fund manager need to buy and sell often otherwise people think he's not doing his job - end of year broker will give him a hamper or even Bloomberg terminal if he trades a lot)

correct. dw has to pay when he buys and sells, this comes up to about 0.6%

also if dw buys his sti etf at 3.18, he would not be able to sell it immediately at 3.18. he would have to join the queue. if he wants to sell it then he would have to do it at 3.17. for that he will lose another 0.3%.

So saying a spread of 0.3% is not very fair.

 

[dork32]

one more thing. the reason why insurers do not publish the performance of ILP is because it is not practical to do so. very often, the insurers use the investment portion of the premium to buy unit trusts. different ILPs will have different percentages allocated to the different trust.

the insurers do publish the performance of unit trusts.

some of the unit trust outperform the 8% per annum they promised. so lose like shXX.

 

[limster]

one more thing. the reason why insurers do not publish the performance of ILP is because it is not practical to do so.

If they don't publish actual return, then they shouldn't publish projected. return either.

different ILPs will have different percentages allocated to the different trust.

This one I fully agree. Some ILP will have a certain percentage going towards the agent's Mercedes, other ILP will have certain percentage going towards fund manager's yacht.

On a more serious side, since ILP invest our money in unit trust, why don't they be more transparent and report which unit trusts I am getting for my money and how many units.

 

[dork32]

If they don't publish actual return, then they shouldn't publish projected. return either.




This one I fully agree. Some ILP will have a certain percentage going towards the agent's Mercedes, other ILP will have certain percentage going towards fund manager's yacht.

On a more serious side, since ILP invest our money in unit trust, why don't they be more transparent and report which unit trusts I am getting for my money and how many units.

I have seen many ilps that showed which unit trust is purchased and exactly the number of units. eg prulink protection. this was purchased by one of my colleagues. he showed me his statement before.

also it is not possible to publish actual. how are the agents going to predict the exact numbers. to me a 4-8% projection seems fair. i know some funds are underwater but some are above as well.

if you want to see past performance, you can monitor how the unit trust performed before.

 

[Chennie]

If they don't publish actual return, then they shouldn't publish projected. return either.




This one I fully agree. Some ILP will have a certain percentage going towards the agent's Mercedes, other ILP will have certain percentage going towards fund manager's yacht.

On a more serious side, since ILP invest our money in unit trust, why don't they be more transparent and report which unit trusts I am getting for my money and how many units.

They do actually publish actual return (as shown here with AIAs annual report, for 2013 it will be published on Marc 2014): http://www.aia.com.sg/en/resources/...b683c6347/AIA_annual_funds_report_2012_sg.pdf

For more info, you can check the respective ILP company's website (although I don't know about other companies). At AIA, you can see the fund's performance and track it:
ILP Fund Quickrank

The amount of units you have should be in the statement you receive (should at least be annual). I can probably check on this with respect to AIA.

Also, aren't you allowed to choose which fund you want to invest in at the start of the policy? You are allowed to select the funds and the % allocation as far as I know.

 

[Chennie]

I have seen many ilps that showed which unit trust is purchased and exactly the number of units. eg prulink protection. this was purchased by one of my colleagues. he showed me his statement before.

also it is not possible to publish actual. how are the agents going to predict the exact numbers. to me a 4-8% projection seems fair. i know some funds are underwater but some are above as well.

if you want to see past performance, you can monitor how the unit trust performed before.

AIA does show the actual returns. You simply have to look at what price you bought into the fund (this is shown in the statement) and then from there, you can track the performance of your chosen months based on the time period since inception. Most people use the 3 month and 6 month to track, while using the 10 year and 5 year to estimate trends and high-points to figure out when they can buy into the fund.

A chart is provided on the website.

 

[dork32]

it was seeing my colleagues statement that makes me decide that ilps are not for me.

but it was totally transparent. it showed
it showed annual premium of 2000
it showed deduction of 1700
it showed exactly how many units of funds were purchased using the remaining 300 down to 4 decimal places.
it showed exactly how many units were sold to pay for the insurance coverage
it showed that the surrender value was 88 after one year

 

[limster]

Good to hear that some ILPs inform you of the number of units purchased with the premiums paid. That enables a fair comparison of DIY (i.e. how many units would you get if you had DIY and bought a term policy) and the ILP.

Final question, in such a situation, will the surrender value of the ILP be equal to the value of unit trusts that are reported in your annual statement, or does the insurer charge an early termination fee (in which case, no difference or more likely worse than the brokerage commission for selling shares)

 

[Chennie]

it was seeing my colleagues statement that makes me decide that ilps are not for me.

but it was totally transparent. it showed
it showed annual premium of 2000
it showed deduction of 1700
it showed exactly how many units of funds were purchased using the remaining 300 down to 4 decimal places.
it showed exactly how many units were sold to pay for the insurance coverage
it showed that the surrender value was 88 after one year

Was it his first year of the ILP? The low allocation ratio indicates it's likely to be his first year.

Usually, for those buying ILP, I recommend a lower regular premium and ad-hoc top up the rest if you want to see the returns faster (especially if you know which fund is at its low point and can see some prospects in it). That's how to properly structure the sale of the ILP. Your commission will be lower, but in the long run its better for the individual.

Annual premium of 2k is very common for ILP, but allocation suffers as you've seen. I prefer either 1.5k (leaving 500 or more p.a. for ad-hoc top up) or 2k p.a. with higher top-ups (if they are in an upper income band and want to participate).

 

[dork32]

AIA does show the actual returns. You simply have to look at what price you bought into the fund (this is shown in the statement) and then from there, you can track the performance of your chosen months based on the time period since inception. Most people use the 3 month and 6 month to track, while using the 10 year and 5 year to estimate trends and high-points to figure out when they can buy into the fund.

A chart is provided on the website.

i think what limster means is that you should not give a projection of 4-8% when you sell your insurance to us. you should show us exactly how the ilp you recommend performed in the past.

if i have to wait until i buy it then knows how it performs, it will be too late for me to retract.

what i say is different people have different percentages allocated to the different funds. so it is very difficult to show how the combinations have performed. but pass performance of individual funds can be tracked. so if you want to know the performance of the entire ilp in the past, you have to do some maths.

 

[Chennie]

i think what limster means is that you should not give a projection of 4-8% when you sell your insurance to us. you should show us exactly how the ilp you recommend performed in the past.

if i have to wait until i buy it then knows how it performs, it will be too late for me to retract.

what i say is different people have different percentages allocated to the different funds. so it is very difficult to show how the combinations have performed. but pass performance of individual funds can be tracked. so if you want to know the performance of the entire ilp in the past, you have to do some maths.

Yes, I understand. It depends on the Agent, I ignore the 4-8% in the B.I. usually the agents that show that will only look at the product summary and believe they understand the product.

For me, I always teach my clients how to look at the current fund price and to see the fund's position. If it's at the all time high, you are guaranteed to lose money. I also advocate using simple percentages (like 25% into four funds) in order to limit the amount of mathematical calculations they need to perform.

However, completely avoiding the maths and just buying into any fund and hoping to make the 4-8% is impossible.

Hence, if any agent just shows you that 4-8% and talks about it. They are not good agents.

A good agent should teach you what the ILP is for, they should know how to structure it such that you don't suffer from the horrible allocation problems during the first few years (as stated before, this is done by reducing the regular premium and throwing in the remainder via ad-hoc top up to take advantage of the 100% allocation rate of ad-hoc top ups).

And lastly, they should tell you that ILP is protection first, with some chance to accumulate returns. It is not a magical investment vehicle. It is, at the end of the day, an insurance product.

 

[dork32]

Was it his first year of the ILP? The low allocation ratio indicates it's likely to be his first year.

Usually, for those buying ILP, I recommend a lower regular premium and ad-hoc top up the rest if you want to see the returns faster (especially if you know which fund is at its low point and can see some prospects in it). That's how to properly structure the sale of the ILP. Your commission will be lower, but in the long run its better for the individual.

Annual premium of 2k is very common for ILP, but allocation suffers as you've seen. I prefer either 1.5k (leaving 500 or more p.a. for ad-hoc top up) or 2k p.a. with higher top-ups (if they are in an upper income band and want to participate).

correct it is the first year. however, the allocation for the second to fourth year is only 50%. there is no way one can make money make money in the first 4 years. with people investing for dividends at 5% pa, he would have already made more than 20% after 4 years

i have one other point and one question.

point is people buy ilp so that they do not have to make a decision what or when to invest. if they are so good at predicting the high and low point, they might as well as do the investment on their own.

question is based on what you recommend, i might as well as use 100 for regular and 1900 for top up. will this result in a lower commission and higher amount going to the funds? or better 0 for regular and 2000 for top up.

 

[dork32]

For me, I always teach my clients how to look at the current fund price and to see the fund's position. If it's at the all time high, you are guaranteed to lose money. I also advocate using simple percentages (like 25% into four funds) in order to limit the amount of mathematical calculations they need to perform.

i do not agree that buying funds at all time high is bound to lose money. All funds starts at $1. some of the funds are trading at more that $2. to get there, it would have to reach a all time high of $1.5. people buying in at all time high of $1.5 would continue to make money because the fund continued to rise to $2. It is very difficult to predict the movement.

also i appreciate your efforts to advise clients to adjust their portfolios based on the performance of the funds. but if you have many clients, you will find that this is difficult. also your client may blame you if you provided wrong advices.

 

[Chennie]

correct it is the first year. however, the allocation for the second to fourth year is only 50%. there is no way one can make money make money in the first 4 years. with people investing for dividends at 5% pa, he would have already made more than 20% after 4 years

i have one other point and one question.

point is people buy ilp so that they do not have to make a decision what or when to invest. if they are so good at predicting the high and low point, they might as well as do the investment on their own.

question is based on what you recommend, i might as well as use 100 for regular and 1900 for top up. will this result in a lower commission and higher amount going to the funds? or better 0 for regular and 2000 for top up.

First to clarify. At AIA allocation is like this: 1st year - 20%, 2nd year - 50%, 3rd - 55% and 4th - 100% 6th onwards - 102% 11th onwards 105%

It is currently the best allocation (as far as I know) compared to others in the market.

How do they make money? The clients of mine that wish to achieve higher returns will usually choose an ad-hoc top-up component that can assist them in off-setting the low allocation in the initial years. Towards later years, they top up a little less. (Since top-up allocation is always 100%)

To beat the guys getting 5% dividends p.a. You would need to match your investment as closely as possible and earn above the 5% p.a. Is this possible? Yes, last year one fund had a return of about 16% (so it's not impossible).

Now to clarify your other points:

1) Yes, people buy ILP so they don't have to time it and focus on it too much. However an agent should still educate them on this. If the agent doesn't know and the client doesn't know, then...we can't just stare at each other right? Hence I always try to teach my clients the basics of timing. Even if they want to just throw in the money and hold for 5 - 10 years, it would be better to do it with a fund that is at its 10 year low, since the probability of it going up in the next 10 years is high. However the client should be responsible for checking on their funds at least once every quarter or so. They can then switch funds as they see fit or rebalance their fund allocation (AIA has an automatic rebalancing option for clients, free)

2) Yes if they choose 100 regular and 1900 top-up the agent will have very low commission. Generally, I like to see a balance between the regular and ad-hoc. The reason being, the ad-hoc offsets the regular in the short-run, but in the long run (if you are thinking of keeping the policy and managing it over the next 20 - 30 years) the regular will be gaining at 105% while the ad-hoc remains at 100%. Secondly, with low regular premium, the protection element is very weak. As I've stated before, I do tell clients that the main focus of ILP is the protection element, you are buying protection first.

To conclude the second point, you can indeed set the sum-assured very low, but both you and the agent lose out in the long-run (especially if you find that the product suits you and you like it, since that 105% stacks up nicely), the low commish will also make the agent unwilling to service you. Hence there must be some balance between these factor (^_^)

 

[dork32]

Final question, in such a situation, will the surrender value of the ILP be equal to the value of unit trusts that are reported in your annual statement, or does the insurer charge an early termination fee (in which case, no difference or more likely worse than the brokerage commission for selling shares)

to me 88 surrender value after i have paid 2000 is terrible even there is 0 additional fee.

 

[Chennie]

i do not agree that buying funds at all time high is bound to lose money. All funds starts at $1. some of the funds are trading at more that $2. to get there, it would have to reach a all time high of $1.5. people buying in at all time high of $1.5 would continue to make money because the fund continued to rise to $2. It is very difficult to predict the movement.

also i appreciate your efforts to advise clients to adjust their portfolios based on the performance of the funds. but if you have many clients, you will find that this is difficult. also your client may blame you if you provided wrong advices.

Indeed you are correct, but the probability of loss is high within the next 1 to 2 years. What goes up, must come down, it may not come down immediately, but the risk is higher.

With regards to the second point, that is why I choose to educate clients prior to signing the policy, doing it after is what will result in complaints and clawback of commission. Clients must know and understand that they are the ones who choose the funds to put their money in. I will always ask them for the basis of their choice.

Remember, we are agents, not investment bankers or financial analysts. To provide a solid recommendation and to say that the client will make money is usually asking for trouble. Hence, I always make sure the client understands that the final decision will rest with them and I can only teach them how the system works. How they choose to use it, will be for them to decide

Of course, this is part of why I generally prefer not to sell ILPs if the client tells me they want a life product. The traditional stuff is the way to go!

 

[Chennie]

Good to hear that some ILPs inform you of the number of units purchased with the premiums paid. That enables a fair comparison of DIY (i.e. how many units would you get if you had DIY and bought a term policy) and the ILP.

Final question, in such a situation, will the surrender value of the ILP be equal to the value of unit trusts that are reported in your annual statement, or does the insurer charge an early termination fee (in which case, no difference or more likely worse than the brokerage commission for selling shares)

The surrender value of the ILP will be = to the value of the units you have. There is only a surrender charge in the 1st year (for AIA its 50%), after that there is no surrender charge.

There is also no penalty for partial withdrawals, contrary to what some people think x'D

 

[dork32]

First to clarify. At AIA allocation is like this: 1st year - 20%, 2nd year - 50%, 3rd - 55% and 4th - 100% 6th onwards - 102% 11th onwards 105%

It is currently the best allocation (as far as I know) compared to others in the market.

agree that the allocation is better that what my friends purchased.

but i did a quick calculation. after 4 years, you are down 175%. after 10 years, you are down 165%. you need another 33 years to get back the 165%. i know my estimation is based on 0% appreciation in prices and is not very fair based on what agents project.