Financial Planning Problems

[chopra]

With ILPs, there portion of winners is very substantial, assuming the agent knows what they are doing.

I do not agree. I am skeptical.
You are neither an actuarist nor a fund manager.
Do you really know what's going on behind the maths?
Again, are you able to show any underlyings behind the supposed 4.75%?

 

[Chennie]

I do not agree. I am skeptical.
You are neither an actuarist nor a fund manager.
Do you really know what's going on behind the maths?
Again, are you able to show any underlyings behind the supposed 4.75%?

It is okay to be skeptical, as I stated previously the underlyings are on the AIA website and you can go have a look. Browse it and read the information available (^_^)

 

[JoePilot]

We know this. I was simply stating that the par fund is a regular mutual fund and not mirrored.

Same with the ILP sub-funds.

Par fund is a regular mutual fund, u say?

O RLY???

Uhm...okayyyy...

 

[Chennie]

Par fund is a regular mutual fund, u say?

O RLY???

Uhm...okayyyy...

Yes, the participating fund is directly invested into, hence it is a mutual fund. This means that it is a regular mutual fund as it does not have the structure of a mirror fund, nor any of the characteristics of a mirror fund.

 

[JoePilot]

Yes, the participating fund is directly invested into, hence it is a mutual fund. This means that it is a regular mutual fund as it does not have the structure of a mirror fund, nor any of the characteristics of a mirror fund.

uhmm...okayyyy....

 

[Chennie]

 

[NiteX2]

your 5% of diy is miserably wrong.
buying cpf sa, sgs new bonds have no spread. If one's risk appetite is higher, sti etf have a buy+sell spread of merely 0.3%.

people can't meet ms maybe becos they got conned too much into life/ilp? hurhur.

Didn't really want to jump in but I have to.. The 5% DIY part is really quite ridiculous. Too much smoke here lol. I can trade thru any of the brokerages in Singapore and pay nothing more than 0.3% per transaction. Low costs doesn't equate to low returns, I wonder where ts got that from. Some points by TS made some sense to me but there are a lot of points where he contradicts himself as well x.x

Chopra: I dun see how ms has anything to do with ppl getting 'conned' by agents?

 

[Chennie]

Didn't really want to jump in but I have to.. The 5% DIY part is really quite ridiculous. Too much smoke here lol. I can trade thru any of the brokerages in Singapore and pay nothing more than 0.3% per transaction. Low costs doesn't equate to low returns, I wonder where ts got that from. Some points by TS made some sense to me but there are a lot of points where he contradicts himself as well x.x

Chopra: I dun see how ms has anything to do with ppl getting 'conned' by agents?

I see, I will reevaluate my opinion on the bid offer spread and do a little more research.

If I have made a mistake, then I will learn from it. That's the way I feel I should go.

 

[Shiny Things]

Bid-offer spread for DIY is often at 5% for stocks projecting higher returns, this is because the market is illiquid. [...] Furthermore, include transaction costs and administration fees, and the cost of all your time and you're looking at a very costly product.

This is beyond wrong: this is disgraceful scaremongering.

Bid-ask spreads only reach 5% in penny stocks (which is another great reason not to invest in them). The spread in the STI ETF is 0.3% all day long in whatever size you like, and the transaction costs and administration fees for a stock portfolio are vastly lower than the administration fees for any ILP I've ever seen.

Chennie, you've done a great job of arguing your position, but the facts you're using to support your arguments are wrong. Let's dig into that wall of text you wrote:

I can certainly see your points, but I feel that you have probably met very poor agents or been subjected to some misinformation. Allow me to clarify certain key points (^_^)

Are you a 12-year-old girl? Cut it out with the emoticons.

One - With respect to the huge bid-sell spread. It is not at all large, it is standard. In most companies it is around 3%, compared to the market average which is often 5% if you DIY. There is also no bid-offer spread when switching funds (in AIA) and there are no fees payable for switching either (same with rebalancing).

I already explained why this is rubbish.

Though I'll give you this: the bit about "no bid-offer spread or fees when rebalancing" is true. But here's the thing - you only pay those fees once a year if you do it yourself, and they're only paid on a tiny sliver of the portfolio (the rebalancing amount). That doesn't make up for the high fees embedded in ILPs.

Two - The charges with respect to the policy are only "huge" in later years (i.e. past 60) because of heavy mortality charges and other problems that eat into your fund returns.

When we complain about the fees embedded in ILPs, we're not complaining about the insurance charges, we're complaining about the administration fees. You should never have to pay 3% per annum in administration fees, or 50% of your first year's premiums into the agent's pocket. That's just extortion.

Three - DIY is very difficult. The reason most people do not achieve the projected return in an ILP is because they themselves are lazy (hence they would be too lazy to DIY).

AIA allows you to choose your own funds and choose your own allocation. You should never ask for an agent to recommend funds to you, as we are NOT trained in investment banking. Read up on the funds and find the ones that suit your objectives. This type of homework is a must.

So on the one hand DIY is difficult and we should do it through an ILP instead; but on the other hand we should do our own research and select our own funds because agents aren't "trained in investment banking" and can't give us advice. Do you see the contradiction here?

(Also, "investment banking" doesn't mean what you think it means. I think you meant to say "giving investment advice".)

Four - ILPs ARE for young people, because they have a longer horizon to accumulate returns.

This isn't an argument for ILPs, it's an argument for investing in general. I'd get the same argument if I replaced "ILPs" with "ETFs" or "blue-chip shares" or "bottles of wine".

Those that are willing to give decent dividends are called blue-chip shares

That's not what "blue-chip shares" means.

For a share to give you a 1% return, with a share price of $1.76. That share will need to rise by about 2 cents ($1.76 x 0.01). That's very plausible, but out of the many choices, how many of them will actually do that?

What is this I don't even. This is gibberish.

That is the nature of an ILP, it is not a super investment product. It is protection with an element of investment. If you do not want this, buy a term policy and invest on your own. Many people tout this strategy and I think its worthwhile, but in life we only see the successes, not the failures.

Let me explain something to you, Chennie. The problem people have with ILPs is that they're an expensive way to invest. You get the same (or worse) returns as you would from buying-term-and-investing-the-rest, but you pay significantly more for those returns - like 2-3% per year more, and over 20 years that's 50-80% more money in your pocket if you BTIR.

There are two counter-arguments in favour of ILPs:

1. The tax advantages - they help you dodge inheritance taxes, dividend taxes and capital gains taxes. This is irrelevant in Singapore because none of those taxes exist.
2. The advantage of enforced savings (because blah blah early withdrawal penalties whatever). Charging people huge withdrawal penalties seems like a very harsh way to enforce savings, though! Especially when auto-saving alternatives exist, like OCBC's BCIP or POSB's Invest Saver, that don't charge you a phenomenally large amount of money if you need to pull the money out to fund some unexpected expenses, and don't lock you in to writing cheques for twenty years.

Basically, ILPs are bad insurance products and bad investment products, but insurance agents sell them really hard because the sales credits are gigantic. The reason we're so hard on them here in Money Mind is that we want people to keep that money for themselves instead of lining the pockets of the big insurance companies.

 

[Shiny Things]

I see, I will reevaluate my opinion on the bid offer spread and do a little more research.

If I have made a mistake, then I will learn from it. That's the way I feel I should go.

I think you've been told a lot of things that aren't true. Where'd you learn that little tidbit about bid-ask spreads?

 

[limster]

I think you've been told a lot of things that aren't true. Where'd you learn that little tidbit about bid-ask spreads?

She will unfortunately not be the first insurance agent to say untrue things about competing products or competitors.

 

[Chennie]

The average of 5% is used in most of our calculations, especially for comparison from company to company. Perhaps the spread is not the same for people who are going DIY.

This 5% however, does hold for ILPs

 

[dork32]

To me the offer-bid spread is more than 0.3% for stocks listed in the sgx.

0.3% to buy, another 0.3% to sell.

The other is offer and bid for most shares is 1 cent apart. That will add another 0.xx% to the total.

 

[limster]

To me the offer-bid spread is more than 0.3% for stocks listed in the sgx.

0.3% to buy, another 0.3% to sell.

The other is offer and bid for most shares is 1 cent apart. That will add another 0.xx% to the total.

Insurance companies that take your money and deduct agent's commission and admin fees will have to invest your money somewhere. When insurance companies invest whatever is left of your money, aren't they also ultimately subject to the same bid-offer spread?

For a dividend warrior strategy, where the object is to accumulate a portfolio that gives a few thousand a month dividends by the time you retire, there is only 1 cost, the initial 0.3% commission when you bought the shares. You can look at the books on dividend investing recommended by Dividend Warrior. I really don't see how an ILP can compete against such a strategy.

One more point. Insurers do not publish the past performance of their ILPs, for example, % of ILPs that they have sold that gave the projected return or better. If ILPs are so good, why not publish this. I already mentioned elsewhere I had a relative that bought a 'capital protected ILP', after the ILP matured, she got back her capital and zero return. So effectively she was giving the insurers an interest free loan...

 

[chopra]

so there you go.
read up more, listen more before you post, especially if you aren't familiar...

if not, everyday I need to clarify and clean up mess in this sub forum. not that I'm complaining.

 

[Dividends Warrior]

For a dividend warrior strategy, where the object is to accumulate a portfolio that gives a few thousand a month dividends by the time you retire, there is only 1 cost, the initial 0.3% commission when you bought the shares. You can look at the books on dividend investing recommended by Dividend Warrior. I really don't see how an ILP can compete against such a strategy....

Yup. Stay away from ILP.

Investment is investment. Insurance is insurance. Dun mix both.

 

[WindBoi]

there seems to be some confusion here. there are a few costs to passive investing using ETFs

1) the commission (depends on the size of transaction and brokerage terms used)
2) bid-ask spread (STI ETF looks ok, but some ETFs can be bigger), depends on market maker and liquidity
3) expense ratio (looks like it explains alot of doesnt explain all costs)
4) currency conversion (for those who buy vanguard ETF in US or GDP)

the costs could be more but doubt its 5%.

the case against ILP is that no agent will help their clients see it through to convert more units to insurance later on in life.

and that its hidden fees in the black box. a lot of fees.

 

[dork32]

there is nothing wrong with my argument.

5% refers to difference between to the buy and sell prices of unit trust. this is the same as the difference between the buy and sell prices of sti etf 3.17 and 3.18.

if you refer to this then it is about 0.3+%. but if you refer to ascendas reits, 1 cents spread is about 0.5%. if you refer to dbs preference shares, then the spread is 0.1%. it is not wrong to assume that the 0.3% refers to the brokerage which is almost constant at 0.3%.

yes I know how an ilp works. first year agent take 85%, another 7 percent used to pay insurance premium only 8% is used for investment. the portion of the agent. on the 8 %, a management fee will be charged.

 

[dork32]

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.

 

[Chennie]

Putting in my point of view (yes, I am an agent for those that don't know).

Following a strategy that gives you good dividend payouts is great...if you have the capital to do so. However, not everyone is excellent when it comes to diligently investing in shares.

As such, I market my ILPs NOT as investment products, but as protection products with a chance to accumulate some returns. However, these are not guaranteed and you have to be aware of when you should buy into the fund (no point buying when it is at its peak). The agents that recommend ILPs blindly are the ones that cause people to lose money.

Yes, there are better strategies than ILPs. My favourite product to sell is also NOT the ILP (I very much prefer to market the G8 limited pay life policy, pay for 8 years, protected for life). However, I do believe ILPs have their uses, again, not as an investment, but as protection with some chance of accumulating returns.

As others have noted, insurance and investment should not be mixed, but there are those who like it that way. To each their own right?