30-10-2010, 09:19 AM
Business Times - 30 Oct 2010
A change will do you good
New developments announced recently in the realm of personal finance promise to be hugely beneficial to retail investors. By Genevieve Cua
THE last couple of weeks have seen three developments on the personal finance front that promise to be hugely beneficial to retail investors, even if the banking and financial advisory market may have to jump through a few hoops to comply.
Last week, the Monetary Authority of Singapore (MAS) announced two developments - a tighter regime to govern the sale of listed and unlisted investment products, and a new registry for financial advisers.
On the insurance front, Senior Minister Goh Chok Tong's comments at Income's anniversary dinner on the chronic under- insurance problem in Singapore may actually spur some real and long overdue change in the industry. A number of insurers, for one, are looking at re-pricing and even redesigning their pure protection plans. Watch this space.
New registry for advisers
Over the next month, MAS is expected to roll out a new Representative Notification Framework, where all financial representatives who give financial advice or capital market services will be listed.
This is significant as it covers even exempt institutions and those representatives from financial advisory firms who at the moment have to be individually licensed. More than 30,000 representatives are expected to be on the register.
Through the register, the public will be able to verify if the people they deal with are authorised representatives, what activities they are allowed to conduct, and most of all - whether they've had any suspension, revocations or prohibition orders issued against them.
For the longest time, MAS has been reluctant to 'name and shame' such advisers. In the early days when the Financial Advisers Act first came into force, this reluctance was ostensibly because the advisory market was in its infancy.
Critics have now and again raised concerns that non-transparency on disciplinary issues meant that advisers with banks could shift banks when issues arose, with customers being none the wiser.
Under the new regime, the onus is on advisory firms, banks, and insurers to check that their advisers are 'fit and proper'. In an article in The Business Times, MAS said: '. . . if MAS has reason to believe that an FI has not conducted sufficient due diligence on its proposed representatives, MAS will ask the FI to conduct further checks or refuse to enter the name of the person . . .'.
Tighter rules on investment sales
MAS last week also announced a slew of safeguards, mandating additional steps in an effort to ensure investors do not overstep their risk tolerance or knowledge base.
The measures cover most retail investment products, including unit trusts, structured deposits, investment-linked insurance plans, and exchange-traded funds.
Most of the measures are imposed on the advisory process. Advisers, for instance, will have to sit for an additional exam. Product due diligence must be approved by senior management. Advisers must also assess whether customers have the relevant knowledge or experience in the product.
Obviously the rules are meant to forestall another mis-selling fiasco along the lines of Lehman Minibonds. It remains to be seen whether the advisory process actually becomes cumbersome and lengthy, which may turn investors off.
The rules also do not address advisers' remuneration structures that actually drive their behaviour. These structures are not transparent to consumers.
By now, banks are unlikely to want to even touch structured products for the retail market, but prior to the crisis, investors were blithely told there were no fees or costs. But in reality they were remunerated up front for the sale, and there were implicit fees taken from products' yields.
More protection, at last
Insurers have long lamented Singaporeans' state of under-insurance. Remarks at Income's anniversary dinner last week by Mr Goh were pointed, as he urged insurers and advisers to emphasise pure protection plans. 'I could not afford a whole life plan, but had the good sense to choose a term assurance policy,' said Mr Goh.
Term life plans are substantially more affordable than whole life plans. But Singaporeans' preference for whole life may be due to two factors - they hold the misconception that they do not get any 'returns' from term plans which expire without any cash value; and they are ill advised by advisers who stand to get paid a higher commission from whole life plans' higher premiums.
A 2007 survey by the Life Insurance Association found that the average policyholder is under-insured by about $368,000 or 8.5 times the average income then. It was estimated that the average Singaporean needed about $480,000 of cover, but had only $118,000 - comprising $47,000 in group life cover, a paltry $24,500 in personal life cover, and $47,000 from the CPF's Dependants' Protection Scheme.
The principle behind insurance is to protect the breadwinners' dependants in the most cost-effective manner - which should point customers to term assurance.
The caveat is that they do not protect you for life, but then the expectation is that after 20 or 30 years, your children would be financially independent and you would yourself have accumulated enough savings to be self-insured.
Whole life plans are costly because they bundle a savings portion, which investors can replicate with a balanced portfolio, plus a cost for the death benefit which may not be transparent.
Here's an example of the cost saving. Manulife's whole life plan for $500,000 will cost more than $6,400 annually for a 40-year-old male non-smoker. Its pure protection plan (20-year level term) will cost just about $1,529.
By buying a term plan, you could invest the balance of nearly $4,900 yourself. At the end of 20 years, assuming a 5.25 per cent rate of return, your portfolio could grow to over $166,000.
Based on the compilation by BT, the most cost-effective term rates appear to be from Aviva, which charges an annual premium of $1,145 for a sum assured of $500,000 for a 40-year-old.
Aviva also offers a term life product for the Singapore Armed Forces, where a 40-year-old can get $500,000 in cover at an annual premium of just $768. The maximum cover under the plan is $600,000.
Manulife said it will reprice its term offerings, and look into new features to be launched this year. 'Not only will (the new plan) provide good value to Singaporeans for protection, it will come with a differentiator - a product benefit that currently no term plan has in the market,' said a spokeswoman.
David Beynon, chief executive of Tokio Marine Life Insurance, is looking into a term plan with a return of premium feature. 'It will cover you for 20 years, but you pay for 10 years . . . We're also looking at relaunching our term assurance with extra pieces.'
Income said the take-up rate of its term plans has risen three-fold in the last three years. 'Part of this sharp rise in interest is the result of the emphasis that (we) have directed to this marketplace. (We) saw the need for a basic insurance product, which offered value and accessibility, which are part of the values of NTUC Income.'
gen@sph.com.sg
A change will do you good
New developments announced recently in the realm of personal finance promise to be hugely beneficial to retail investors. By Genevieve Cua
THE last couple of weeks have seen three developments on the personal finance front that promise to be hugely beneficial to retail investors, even if the banking and financial advisory market may have to jump through a few hoops to comply.
Last week, the Monetary Authority of Singapore (MAS) announced two developments - a tighter regime to govern the sale of listed and unlisted investment products, and a new registry for financial advisers.
On the insurance front, Senior Minister Goh Chok Tong's comments at Income's anniversary dinner on the chronic under- insurance problem in Singapore may actually spur some real and long overdue change in the industry. A number of insurers, for one, are looking at re-pricing and even redesigning their pure protection plans. Watch this space.
New registry for advisers
Over the next month, MAS is expected to roll out a new Representative Notification Framework, where all financial representatives who give financial advice or capital market services will be listed.
This is significant as it covers even exempt institutions and those representatives from financial advisory firms who at the moment have to be individually licensed. More than 30,000 representatives are expected to be on the register.
Through the register, the public will be able to verify if the people they deal with are authorised representatives, what activities they are allowed to conduct, and most of all - whether they've had any suspension, revocations or prohibition orders issued against them.
For the longest time, MAS has been reluctant to 'name and shame' such advisers. In the early days when the Financial Advisers Act first came into force, this reluctance was ostensibly because the advisory market was in its infancy.
Critics have now and again raised concerns that non-transparency on disciplinary issues meant that advisers with banks could shift banks when issues arose, with customers being none the wiser.
Under the new regime, the onus is on advisory firms, banks, and insurers to check that their advisers are 'fit and proper'. In an article in The Business Times, MAS said: '. . . if MAS has reason to believe that an FI has not conducted sufficient due diligence on its proposed representatives, MAS will ask the FI to conduct further checks or refuse to enter the name of the person . . .'.
Tighter rules on investment sales
MAS last week also announced a slew of safeguards, mandating additional steps in an effort to ensure investors do not overstep their risk tolerance or knowledge base.
The measures cover most retail investment products, including unit trusts, structured deposits, investment-linked insurance plans, and exchange-traded funds.
Most of the measures are imposed on the advisory process. Advisers, for instance, will have to sit for an additional exam. Product due diligence must be approved by senior management. Advisers must also assess whether customers have the relevant knowledge or experience in the product.
Obviously the rules are meant to forestall another mis-selling fiasco along the lines of Lehman Minibonds. It remains to be seen whether the advisory process actually becomes cumbersome and lengthy, which may turn investors off.
The rules also do not address advisers' remuneration structures that actually drive their behaviour. These structures are not transparent to consumers.
By now, banks are unlikely to want to even touch structured products for the retail market, but prior to the crisis, investors were blithely told there were no fees or costs. But in reality they were remunerated up front for the sale, and there were implicit fees taken from products' yields.
More protection, at last
Insurers have long lamented Singaporeans' state of under-insurance. Remarks at Income's anniversary dinner last week by Mr Goh were pointed, as he urged insurers and advisers to emphasise pure protection plans. 'I could not afford a whole life plan, but had the good sense to choose a term assurance policy,' said Mr Goh.
Term life plans are substantially more affordable than whole life plans. But Singaporeans' preference for whole life may be due to two factors - they hold the misconception that they do not get any 'returns' from term plans which expire without any cash value; and they are ill advised by advisers who stand to get paid a higher commission from whole life plans' higher premiums.
A 2007 survey by the Life Insurance Association found that the average policyholder is under-insured by about $368,000 or 8.5 times the average income then. It was estimated that the average Singaporean needed about $480,000 of cover, but had only $118,000 - comprising $47,000 in group life cover, a paltry $24,500 in personal life cover, and $47,000 from the CPF's Dependants' Protection Scheme.
The principle behind insurance is to protect the breadwinners' dependants in the most cost-effective manner - which should point customers to term assurance.
The caveat is that they do not protect you for life, but then the expectation is that after 20 or 30 years, your children would be financially independent and you would yourself have accumulated enough savings to be self-insured.
Whole life plans are costly because they bundle a savings portion, which investors can replicate with a balanced portfolio, plus a cost for the death benefit which may not be transparent.
Here's an example of the cost saving. Manulife's whole life plan for $500,000 will cost more than $6,400 annually for a 40-year-old male non-smoker. Its pure protection plan (20-year level term) will cost just about $1,529.
By buying a term plan, you could invest the balance of nearly $4,900 yourself. At the end of 20 years, assuming a 5.25 per cent rate of return, your portfolio could grow to over $166,000.
Based on the compilation by BT, the most cost-effective term rates appear to be from Aviva, which charges an annual premium of $1,145 for a sum assured of $500,000 for a 40-year-old.
Aviva also offers a term life product for the Singapore Armed Forces, where a 40-year-old can get $500,000 in cover at an annual premium of just $768. The maximum cover under the plan is $600,000.
Manulife said it will reprice its term offerings, and look into new features to be launched this year. 'Not only will (the new plan) provide good value to Singaporeans for protection, it will come with a differentiator - a product benefit that currently no term plan has in the market,' said a spokeswoman.
David Beynon, chief executive of Tokio Marine Life Insurance, is looking into a term plan with a return of premium feature. 'It will cover you for 20 years, but you pay for 10 years . . . We're also looking at relaunching our term assurance with extra pieces.'
Income said the take-up rate of its term plans has risen three-fold in the last three years. 'Part of this sharp rise in interest is the result of the emphasis that (we) have directed to this marketplace. (We) saw the need for a basic insurance product, which offered value and accessibility, which are part of the values of NTUC Income.'
gen@sph.com.sg