A friend approached me and told me that he intend to setup an FA firm that has portfolios investing into ETFs. He asked me to about it (perhaps wanting me to join him in this joint venture!) Unfortunately life is not so simple in Singapore. After listening to me, I think he is considering another business unrelated to ETF! The following are some the obstacles based on my personal research into the subject (accuracy of the following cannot be guaranteed by me because it involves legal understanding which I am not qualified):

1. Most of the ETFs from the SGX cannot be used because of liquidity issue. With the exception of iShare MSCI India and Lyxor Taiwan, most of other ETFs have little or no liquidity. Granted that there are market makers for most ETFs, the important aspect about ETF is to ensure large liquidity because nobody would want to large amount of their retirement money relying on a single entity. It is unclear to me how much liquidity can a market maker provide. Can they guarantee a transaction of $1m in a single trade?
2.  A financial adviser will thus have to use ETFs listed offshore such as those listed on the AMEX, NYSEArca and LSE. The following are problems going offshore:
1. Estate planning problems. Difficulty repatriating back the money in the event of death of the investor and secondly high death tax in certain countries like USA.  These estate problems can be solved using either a trust vehicle or portfolio bond but it is only for Accredited* Investor.
2. Since an ETF is considered Collective Investment Scheme (CIS), it has to be lodge with MAS under recognized or authorized scheme to be sold to retail investors in Singapore. However, if the ETF fund managers do not apply to MAS, MAS cannot approve it to be recognized or authorized. Therefore, ETFs cannot be marketed to the man-in-the-street! All financial advisers in Singapore know that it is prohibited to market any non-MAS approve CIS to the man-in-the-street. Hence, it can be at most be offered to Accredited* Investor.
3. Another way to go around the problems listed above is to create a CIS approved under MAS as authorized scheme and have the CIS invests in offshore ETFs. This is exactly what a famous fund house did recently (although I have not seen it market their new products) but it is impossible for an FA firm to do it due to the resources required. My problem creating a CIS  is that it adds an extra layer of charges. Since the distribution channels like financial advisers need to eat rice and feed their family, it is expected that the distribution channel will add another layer of fee. End of the day, the client is better off buying a plain vanilla unit trust.
4. The paradox of the entire matter is that ordinary folks can just open an online stock training account that has access to international markets and buy the offsore ETFs themselves. They can also call up their stock broker and tell them to buy the ETF listed in say at the AMEX. If the man-in-the-street can buy ETFs through securities houses, I personally do not see why financial advisers cannot offer ETFs to their clients if this is the case. Of course, the problem of people buying ETF is estate problems which can be very serious issue. By the way, would anyone buy an ETF from a financial adviser if it is cheaper to buy through an online trading account? Of course, because majority of investors wants to have financial advice and not just merely product purchase. 

I am still trying to understand all these legal jumbo jumbo. It is very hard to find someone who can have a big picture of what is happening and how to overcome the problem. I got a feeling that I might be the only financial adviser in Singapore that has the biggest picture yet the only way to have the most complete picture is likely a legal adviser with specialization in Securities and Futures Act and Financial Advisers Act. If anyone knows of such lawyer, please introduce them to me.

*Accredited Investor means a person with net asset of S$2m or having an income of $300,000 in the proceeding 12 months.

In Singapore there are two kinds of investor: Accredited Investor and “others”. From my limited knowledge, only United States and Singapore have these peculiar definitions. In Australia, Hong Kong and United Kingdom, there is no such thing (I stand corrected though). But what I can confirm is this: I have a real-life Singaporean client who was a student in Australia and he purchased a hedge fund from MAN Investment. He is just an ordinary guy. When he is in Singapore, he wanted to buy another MAN fund from me but was dismay to know that he don’t qualify because he is not rich. I found this ridiculous! Actually if I were in his shoes, I would really feel insulted!

Anyway to cut the long story short, I have only been able to offer ETF to Accredited Investors and if anyone felt insulted that he is not “rich” enough to invest in these, please help me recommend a lawyer to help get around these irritating problems!