There is hardly any FAs in Singapore that uses ETFs as part of their clients’ portfolio. FAs usually like to use ILPs (the number one choice) and unit trusts. Obviously this is due to super high commissions from ILP and moderately so-so commissions from unit trusts. For high networth clients, FAs like to recommend structured notes, hedge funds, dual currency and all these hot “toxic waste”. The reason is also due to high commissions. In all of these recommendations, clients’ interest is irrelevant. The persons who can achieve their financial goals are financial advisers. ETFs pay no commission and hence nobody recommends it. It does not enrich the adviser – in fact it only makes him poorer. In Singapore, I only know of extremely handful of financial advisers who use ETFs as part of clients’ portfolio. And this is what I found - only three firms use ETFs extensively as part of the clients’ portfolios:

For two firms, what they did was to create a Trust fund to hold the ETFs assets. This Trust is created as a Collective Investment Scheme (CIS). These FA firms will register themselves a Exempt Fund Manager as well. As an exempt fund manager, they could only permit Accredited Investors to invest in these trust funds. These trust funds are actually like unit trusts but it is discretionarily managed by the FA firm. Under such an arrangement, unlimited number of Accredited Investors can invest in the trust fund. The question is this – why only target Accredited Investor? From my understanding, as Exempt Fund Manager, they are under regulation to permit Accredited Investors only. Of course I find this the most ridiculous. What is so “high-class” about ETFs that it can only be made available to the rich? But of course it is not the ETFs, but it has to do for being an Exempt Fund Manager.

Another firm that recommends ETFs is Promiseland Independent. But I must say that actually only two practitioners are using ETFs and one of them is me. Other than two of us, all other practitioners still use unit trusts and ILPs. How two of us do it was to place the assets under an insurance wrapper. The insurance wrapper has no mortality charges but it does have minimum administrative charges which only make the wrapper worth while for large investment amount. The disadvantage is that it is only available for Accredited Investors. Again, silly regulation is the culprit. The advantage is that the insurance wrapper is not a “trust fund” and hence each client’s portfolio can be customized. Moreover, estate duty and probate issues are also addressed.

Since June last year, I have seriously started to look into using ETFs for not-so-rich clients. I have started experimenting with an online broker that has access to many stock exchanges in the world. The available ETFs are sufficient to construct a portfolio. Charges are also reasonable although not the cheapest of the cheapskates. The only issue is that the interface is too complex for simple task. The B2B is basic – actually the B2B support is just having a human representative to answer my queries. There is no advanced B2B technology like iFast can give. There is no GIRO allowed and putting money into it requires cheque payment or Telegraphic Transfer. Internet Banking is a hassle unlike Internet banking payment that can be done easily via iFast. There is no support for SRS and obviously CPF not allowed. But this is to be expected since I am one of the rare breed on planet earth doing ETFs for clients. I have already started recommending this platform for new clients. This will be part of an overall financial planning of which investment is part of it. With some careful planning (possible under a comprehensive financial plan) and placement of the assets via selected exchanges, there will be little or minimal estate duty to pay. Probate issues can be mitigated through careful planning too and not having a too large of an investment.  My job is to advice and the client’s job is to take the advice or otherwise. They will need to execute the advice by themselves. By separating the advice and execution, there is no longer a need to be “stuck” with official product providers on board. It is also not necessary to be an exempt fund manager (and thus restricted to a accredited investors) in this case.  How do I earn anything from doing this? The fees are charged separately.

New clients have been highly enthusiastic as they have never heard of financial advisers recommending ETFs. I have tried to migrate existing clients with unit trusts to ETFs. This has not been met with much success. There are a few reasons. One is still insistence with sticking with money losing funds. Due to the market situation, many portfolios are in the red. Due to a behavioral finance science called prospect theory, there is a tendency to hold on to “losers” for longer than usual. So they wouldn’t want to sell their money losing funds. Actually there is no such thing as paper lost and realized lost but most people don’t understand that. Another reason is due to small portfolios which make the migration too troublesome. Thirdly but more importantly some clients wondered why I didn’t recommend ETFs right from the start. It is only necessary to read my blog to know that being alone in the entire market to do this is like the fight between David vs Goliath. To be the only person among thousands of practitioners doing what others aren’t doing is a pretty lonely affair. There is no precedent, no processes and nobody to ask. I had once wrote a letter to MAS with regard to certain legal matters about ETFs but their reply was ambiguously drafted and it ended with a disclaimer indicating that I should consult my own lawyer. Frankly speaking I really wonder whether the regulator know their legal stuff or not. Fortunately with much encouragement and positive support from Promiseland’s management, I had been given a great leeway to experiment with different business models and processes. This has taken a number of years to develop. At the same time, two other FA firms have also emerged to use ETFs as their portfolios but they have taken the route of exempt fund manager which I am unsure whether this business model is viable on a long run. I think this business model of being an exempt fund manager is a significant business risk on a long term because they will be restricted only to Accredited Investors. By my observations, these high networth individuals are constantly being prospected by private banks. Perhaps at this time when banks are in the limelight of being the center of problems, there should be little prospecting activities now. But when market rebound, private banks will start recruiting on a massive scale. With banks’ unlimited budget for marketing and recruitment, private banks will soon again become an impossible force for FA firms to fight against. What this means is that many high networth will once again bank with their private banks to purchase exotics and too-good-to-be-true-products. Due to human forgetfulness and greed, they will forget that it was the same bank that sold them their toxic waste previously. What this means is by using the business model as exempt fund manager, these FAs firms run the risk of not able to compete for their intended market share. Having considered this, I don’t think I am keen to explore this route unless someone else can enlighten me (usually there is nobody out there).

Once again, I am left alone to employ a unique business model and exploring and inventing new ideas. To me, investments and financial planning are not cast hard in stones. Whenever there are new ways of doing this, I will change accordingly. That is why financial practitioners can still earn a decent living afterall clients pay their practitioners to do exactly this.  

For existing practitioners out there: Don’t think there is a big deal of being an “Independent” FA right now. As more and more tied-agents joint the IFA industry, very soon most practitioners will be an IFA. Very soon, all practitioners are also licensed by MAS. It is no point telling your client that you can sell lots of products compared with the tied-agents since there will not be many left. It is time to move to the next phase. I am alone in the next phase, is there anybody out there?