Investing Costs – Impact on Retirement

I received in my mailbox a 4-page colour brochure, “Do Not Open – If You Know All About Growing Your Money”.

Among other things, it states that “So, how can we help you GROW YOUR MONEY… Grow Your Capital… 0% you pay nothing upfront… we focus on performance. If we don’t beat the previous high, you don’t pay us anything!”

One is invited to “Attend a FREE investment seminar or receive a FREE consultation on wealth management – Alternatively you may like to visit our website for more information”.

The brochure also said “In partnership with…” – 13 financial institutions were listed including the advertiser, a “Financial Adviser licensed by the Monetary Authority of Singapore (MAS) under the Financial Advisers Act”.

I visited the website which lists the following charges: -

0.125% administrative charges per month

20% performance fee if the annual return is more than the hurdle rate, which is the average fixed deposit rate of the top 10 banks in Singapore (I understand that this rate is not about 2%)

No performance fee if the return is not more than the hurdle rate

Realisation fee of 3% for redemptions in the first 12 months and 2% for the next 2 months

So, if the net return is say 8%, the fees charged by the Financial Adviser would be 3.1% (0.125% X 12 months +20% of 8%). Since the typical expense ratio of an investment portfolio of “best-in-class funds, handpicked from a globally diversified basket” is about 1.5%, does it mean that the total expense ratio is 4.5%? After taking into account the funds expense ratio of 1.5% the total expense ratio is 48% of the funds’ gross return of 9.5%.

Similarly, the total expense ratio is 5 and 4.2 per cent respectively, for a net return of 10 (gross 11.5) and 6 (gross 7.5) per cent.

Are there any regulations on what fees Financial Advisers can charge?

Will MAS’s new Fair Dealing Guidelines for the board and senior management of financial institutions – which is now in its post consultation stage – have any implications on how much consumers can be charged?

By the way, what is the probability of a globally diversified portfolio returning not more than 2% (in order to not be charged a performance fee)?

Leong Sze Hian

A Wharton Fellow and alumnus of Harvard University, has authored 3 books, been quoted over 1000 times in the media, and been invited to speak more than 100 times in 20 countries across 5 continents. He has served as Honorary Consul of Jamaica and is the President of the Society of Financial Service Professionals.