By Lorna Tan
THE government's move to lower the costs of investing retirement funds under the CPF Investment Scheme (CPFIS) will help improve investment returns and counter the undesirable practice of "churning", said financial experts on Monday.
They were reacting to the news that the sales charge and wrap fee imposed under the CPFIS would be cut in two phases, the first from Oct 1.
Sales charges for new purchases of CPFIS products, such as investment-linked insurance policies (ILPs) and unit trusts, will first fall from 3 per cent to 1.5 per cent. This charge will then be removed from Oct 1, 2019.
The aim is to remove the incentive for financial advisers to sell products under CPFIS merely to earn more commissions. This practice of "churning" - the buying and selling of products benefits financial advisers at the expense of the investor.
David Gerald, president of Securities Investors Association (Singapore) or SIAS, said he welcomed the move as the fees are a "drag on investment return".
Sam Phoen, co-founder of investment management firm Wateram Capital, said: "The eventual removal of the sales charge ensures every dollar invested goes straight into the fund and earns a return."
The Life Insurance Association Singapore (LIA) added that the fee cut and its eventual removal may result in a dip in the volume of transactions for CPFIS-included policies, given that insurance-linked policies (ILPs) under the scheme generate up to 3 per cent sales charge for financial firms.
"Individual life insurers can be expected to assess ... their continued participation in the CPFIS," it said.
"For instance, life insurers could market CPFIS-included products online without financial advice to cater to knowledgeable self-directed consumers." (CPFIS investors are already able to buy unit trusts via online platforms without incurring a sales charge.)
The cap on annual wrap fees will be lowered to 0.7 per cent this Oct 1, and to 0.4 per cent on Oct 1 next year.
Currently, financial advisers can charge a wrap fee of up to 1 per cent of assets under management (AUM) a year for CPFIS members with wrap accounts. This fee covers advisory services and the costs of maintaining the account.
The Manpower Ministry said the 0.4 per cent cap to take effect in October next year is similar to fees charged by online investment platforms in the cash market.
Providend chief executive Christopher Tan said that removing sales charges will help counter churning, but that the side effect is that advisers may not earn enough when giving investment advice.
This could induce them to sell insurance products such as endowment plans instead of low-cost unit trusts under the CPFIS, which may not be in the best interests of consumers.
He suggests capping the sales charge at, say, 1 per cent instead of removing it completely, and lowering the total expense ratio (TER) instead of lowering the wrap fee.
The TER comprises management fees and additional expenses, such as trading, legal and auditor fees and other operational costs. The more actively managed the fund, the higher the TER.
"By lowering wrap fees and not TER, you penalise good advisers who recommend low TER funds, which are better for the consumers, and reward advisers who recommend high TER unit trusts, which are bad for consumers," said Mr Tan.
He suggested that the TER of funds under the CPFIS be capped to a "more reasonable" amount, for example, below 1 per cent a year. The current cap of 1.75 per cent is "too high and eats into returns", he added.
Lower costs of investing aside, CPF members looking to open a CPFIS account from Oct 1 will be directed to take a self-awareness questionnaire to find out their level of basic financial knowledge. This assessment will help them decide whether the CPFIS is suitable for them.
CPF members who already have a CPFIS account will be encouraged to fill up the questionnaire as well.
As at Dec 31 last year, 930,000 CPF members invested S$17.32 billion of their CPF-Ordinary Account savings; 324,000 members invested S$5.05 billion of their CPF-Special Account savings.
CPFIS fee changes