The following is an illustration on a case for a fee-based investment plan service I did for a real client. Many details have been modified and omitted to protect the identity of the client.

Mrs Elizabeth Koh Tay Tay (not her real name) is a professional who has various investment and cash deposits. Her asset is worth $1.9 million excluding properties. She engaged me to review her existing investment portfolio and asked me to make various recommendations.

After I have gathered the relevant facts, the following were the outcome of my analysis:

1. Financial sector over exposure risk. She has large exposure to risk in the financial sector in large amount of banking shares in just 3 banks. Her fixed deposits are only insured for S$20,000 per person per bank. This risk represents a large part of her wealth.
2. Concentrated non-systematic risks in merely 4 companies representing the entire fixed income asset which consists a major part of the existing portfolio.
3. Exposure to CDOs. She bought some so called “bonds” but they are actually CDOs.  CDOs have been blamed for the recent financial market problems.
4. Liquidity issues. Certain exposure to non liquid assets means that raising cash in times of need becomes an issue.
5. Overlap in similar strategy. Ownership in three hedge funds with the same underlying commodity trading program
6. Underperformance in unit trusts. In the existing portfolio, there is a significant number of underperforming unit trusts. Most of the unit trusts she owned underperformed the index. She is better off just buying the index. Considering the market is in bear period, her losses were greater than the market’s losses.
7. Large single country risk. More than $900,000 of the portfolio is in Singapore investment assets. This is not prudent. Having personal investment assets in Singapore means there is a direct correlation between personal investments and her income through her professional practice in Singapore.
8. Creditor’s protection program. As there do not appear to be any plan for protection from future creditors, her personal assets are directly exposed to them. As a professional, the exposure to lawsuit by customers, competitors and regulators due to negligent (or whatever reasons) is not insignificant.
9. Inappropriate risk level. Considering that she is moderately conservative (through the risk profiling did during the fact find), the existing overall portfolio is not suited for her risk profile since the existing risks are quite high.

The following were my recommendations:

1. For Financial sector over exposure risk - reduce or eliminate current positions in banking shares.
2. Financial sector over exposure risk (fixed deposits) - to consider holding such cash in larger insured amount (e.g. 90% instead of S$20,000)
3. Concentrated non-systematic risks in the fixed income assets - reduce or eliminate current positions in the bonds
4. Exposure to CDOs - reduce or eliminate current positions in the CDOs (note: the market value of the CDOs maybe significantly lower than principal)
5. Liquidity issues - reduce or eliminate securities that have low liquidity and no market maker. Note: This may not be possible since the securities are not liquid.
6. Over exposure in the same commodity trading program. – advice her do not add and purchase such similar funds in the future even if the performance is good
7. Underperformance of unit trusts - reduce or eliminate current positions in underperforming unit trusts
8. Large single country risk - reduce or eliminate current positions in single country securities and consider a diversified portfolio instead.

Note: This required major overhaul and it could be costly. However, it will be a balance been continuing holding these assets and pay for the high on-going cost/risk or to quickly restructure to a proper asset allocation plan.

For protection of future creditors, I recommended an irrevocable trust with her children as beneficiaries. The client appoints herself as Trustee so that she can manage the underlying assets for the benefits of the beneficiaries although she has no more vested interest in the assets. In this way, her future creditors cannot attack this trust. Since this is an irrevocable trust, naturally she cannot place all her assets under this trust. She placed $800,000 into the irrevocable trust.  Since the assets of this trust are needed by the beneficiaries at the moment’s notice, it implied that the time horizon is unknown. The trust is setup under Singapore’s law. For safety, I recommended just cash deposits and plain vanilla foreign currencies. I also ensure that the cash deposits are insured 90% under an offshore regulations. It has to be offshore because Singapore’s own cash deposit is insured up to the first S$20,000 only.

For the remaining investment assets, I recommended that 40% be invested in fixed income, 30% in equities and 30% in cash or cash equivalent.

For fixed income assets, I recommended various index (passive) funds which invested in inflation protected treasuries.

For equities, I recommended various globally diversified index (passive) funds which invested in developing and emerging markets. I also ensure that there will be exposure both in large and small caps.

For the cash, I recommended AUD, NZD and Chinese Renminbi. Why AUD, it is because of its existing high interest. Due to its reaching 5 year high, only a small amount is allocated to AUD. For NZD, it is because of its high interest rate and the fact that it has corrected significantly for the past few months. As for Renminbi,  there is some consensus that the Chinese currencies is undervalued and is on its appreciation path.

The new portfolio is (i) Simple (ii) passive style using index funds (iii) highly liquid because I choose index funds with good liquidity (iv) the cash deposits are protected 90% instead of S$20,000. Together with the smaller amount earmarked to be protected against future creditors, she can sleep well knowing that her assets are well taken care off.

The fee that I charged her was $8,000 consisting of 40 hours of work in fact finding, research, report and discussion with her and various 3rd parties. The most important of all - she is under no obligation to execute the plan with us. Instead, she is free to source from other firms to execute the plan.