Chasing Returns In The Retirement Game

Over a business lunch recently, one senior gentleman was relating to me on how his private banker tried to sell him a financial product. It was an equity-based investment meant to give a certain expected return over the long term. He said to his banker in half‐jest that by the time the product delivers the returns, he would be in the grave already. This well-travelled senior gentleman then commented that our local wealth management industry is still in its infancy and not ready to serve retirees like him. As someone in this profession, I was of course upset. But instead of frowning, I began to think deeper into what was said to see whether there are truths to his comment.

Retirement planning consists of two phases: The accumulation phase, where an individual still has some years before his golden years and is focused on investing his assets and income to achieve the lump sum required for his nest egg. The distribution or consumption stage is the stage where an individual is already retired and require an immediate monthly income to fund his lifestyle. Currently, we are so focused on the accumulation stage that the consumption stage is almost completely ignored. Why is this so? Well, let’s delve deeper.

Although the wealth management industry consists mainly of 3 key players: The product manufacturers, the distributors as well as the consumers. We all know that the main driver of this industry is the distributors.

On the distributors’ side, i.e. the wealth management, financial advisory companies or banks, the focus on retirement planning is often on the accumulation phase. Take a look at their websites, check out their service offerings on retirement planning and you will understand what I mean. Almost everyone that I checked talks about accumulating towards a gracious retirement. Even the Certified Financial Planner (CFPcm) programme, the professional paper for aspiring financial planners and wealth managers focus only on the accumulation phase of retirement planning. Investment portfolios created by these institutions are also often not meant for immediate drawdowns but growth over a 5‐10 years period. Even on the accumulation aspects, consumers are sold products that may never help them reach their nest egg requirement. Table 1 & 2 shows Singaporeans investing using their CPF and SRS monies. Most of it has gone into buying insurance policies that give low returns and not helpful in reaching the big retirement goal of Singaporeans.

Table 1

CPF Investment Schemes (CPFIS‐OA) As at 30 June 2006
No. of Members 790,713
Total Amount Invested $25,395.5 m 100%
Stocks and loan stocks $5,486.6 m 21.6%
Insurance Policies $15,940.6 m 62.8%
Unit Trust $5,211.8 m 12.6%
Others $756.5 m 3.0%
CPF Investment Schemes (CPFIS‐SA) As at 30 June 2006
No. of Members 449,346
Total Amount Invested 5236.7 m 100%
Insurance Policies $4,529.5 m 86.5
Unit Trust $707.2 m 13.5
Others 0 0


Table 2

Cumulative SRS Statistics As At Dec 2005
No. of Account Holder 31,413
Total SRS Contribution $952 m
Composition of SRS Investment Portfolio (At Cost)
Cash Balance 24%
Unit Trust 19%
Insurance 39%
Singapore Fixed Deposit 6%
Shares 9%
Others 3%

Source: Ministry of Finance

The reasons for the current situation are not new. I have said many times that how the wealth management game is being played really depends on the competence of the adviser, the compensation of the product and the comprehensiveness of products available to these financial institutions. As a start, at the mass affluent level, many consumers use insurance salespeople as their advisers. Unfortunately, the competence, compensation and product availability of these advisers are really restricted to insurance products and as such you would expect only insurance products to be recommended. At the affluent level, many are served by financial advisory companies and again, the competence and product availability is really restricted to locally registered unit trusts which are mainly accumulating products. At the high net worth level, the game is played slightly different. These clients are served by the private banks which has access to the full suite of financial instruments. However, the kind of recommendation given often depends on the compensation of the products. Let me explain further.

As an independent private wealth management firm, our clients are affluent individuals. For those clients who has more than USD1 million, we will structure a portfolio comprising of various global bonds, income-generating instruments such as REITS as well as structured notes. Depending on the requirement of the client, it could either be in local currency or foreign currencies hedged against the SGD. This will allow the client to draw down immediately a regular income (through regular coupons) as they will be holding the bonds to maturity (provided there are no defaults) and still have their capital preserved. For clients who may have lesser than USD1 million, we will structure a portfolio comprising of equities‐based mutual funds as well as cash and bond mutual funds. This will also allow the client to do an immediate drawdown. But if it is so simple, why is it that my senior gentleman lunch partner has such a hard time finding someone to do it for him?

Because of the bond portfolio, it is usually a case of compensation and competence. The bond portfolio has a much lower management fee as well as transaction fees for the financial institutions as compared to a managed portfolio consisting of stocks and mutual funds. In many instances, the difference can be as much as 50% or even more. In addition, it is not easy to find investment specialists that are good at picking bonds. For the equities, bonds and cash mutual funds portfolio, it is really a question of infrastructure. As generally, mutual funds usually do not have a fixed period of the income distribution, the wealth management company must set up a CRM system to monitor the drawdown for the clients.

So, maybe our wealth management industry is not at its infancy after all. But it takes the competence and conscience of the adviser and the capabilities of the wealth management provider to make that difference. I think I am going to have lunch with that senior gentleman again soon.

The writer, Christopher Tan, is Chief Executive Officer of Providend, a Fee-only Wealth Advisory Firm. Besides being financially trained, he is also an Associate Certified Coach with the International Coach Federation. The edited version has been published in The Business Times on 20th December 2006.

For more related resources, check out:
1. The Importance Of Liquidity In Your Investment Portfolio
2. Retirewell® Part 2: Offering Retirees Security and Peace of Mind
3. How To Identify Good Advice?

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