Someone asked me why there are so few people investing in Index Funds? I can think of these reasons:

Firstly, there is a significant lack of choices under the CPFIS scheme. With CPF’s muscle, they can negotiate and tender for Index Fund players like State Street, Barclay Global Investors and Vanguard to manage Index Funds. However, this is not happening. I think CPF Board needs to be educated in Index Funds.

Second, most people buy products without fully understanding the real cost of the investment. If they managed to buy a “no-load” structured note, they think it is cheap. Actually, the cost is already embedded into the product. The fees are inside the product. From some of my sources, a structured note can command up to 7% in commission! Good money (for the RM)! Unit Trusts is another kind of product with many hidden fees. Brokerage charges, bid-ask spread (of the underlying buy/sell), impact cost and soft dollar commission are hidden. However, these costs do not need to be disclosed. Hence people think that Unit Trusts is “cheap”. If there is no apparent “problem” seen by investors in their own investment, then there is no desire by them to look for something alternative. In my next issue in Q Magazine (November edition), I’ll be disclosing the true fees involved in Unit Trusts. I think I am going to become fund managers’ number 1 public enemy. I hope they don’t apply any pressure on me.

Third, there is little or no commission to earn from selling Index Funds. The RM or Adviser cannot earn trailer fees or ask from commission from the product provider. For Exchange Traded Funds, these are floated on the stock market. So the RM will not be keen to sell this kind of fund. Advisers like me who need to earn a living will charge some fee to those who wish to purchase Index Funds through me. However, since investors psychologically prefer “hidden” fees then fully disclosed fee, I still have to handle the misconception that my fees are expensive.

Fourth, good index funds are domicile in offshore places, not in Singapore. This creates problems in probate and estate duty due to the fact that the securities are held in foreign jurisdictions. Many ultra-high networth individuals already have the necessary trust structure to overcome these problems. But their RM will not recommend Index Funds – simply because these earn nothing for the RM and their investment bank. “Poor fellows” will find going direct to offshore jurisdiction too risky in terms of probate & estate duty issues. So they prefer to stay within Singapore. Recently, those who are reasonably wealthy (not necessary ultra-wealthy) are able to access Index Funds through a portfolio bond. So the problem is solved for them but the question is will any adviser be willing to recommend Index Funds instead of those “hidden” fee style funds? The same old problem persists that people tend to prefer “hidden” fee style funds then a fund which its fees is totally transparent.

Fifth, people are generally not well educated in financial matters. So they can buy whenever is recommended to them without really understanding. Many younger generation adults who are Internet savvy tend to be more well equipped with financial knowledge. But the older generation like those in their 50s and above, continue to be clueless. At times I get call from these “older generations” after reading my articles in the magazines and they just cannot understand certain terminology used. For example, people don’t understand what is “portfolio” (they have been buying products) or what is “Index Funds” (they have been buying structured notes).

I must admit that I am quite frustrated the way things are moving. It is not that there is a lack of choice in Singapore. There is plenty of choice. But if people do not want to take control of their finances, they will continue to be mis-guided, buying the wrong products and then complain that the products don’t work.