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CPF INVESTMENTS

FAs braced for CPFIS fee caps, may be spurred to sell higher cost funds

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"Advisers will be less motivated to use low-cost instruments for their clients ... The industry will be motivated to sell higher expense funds," says Providend's Mr Tan.

Singapore

FINANCIAL advisers and fund distributors are braced for new caps on fund sales charges and portfolio wrap fees under the CPF Investment Scheme (CPFIS), a development that may well have unintended consequences.

The new rules - fund sales charges slashed to zero and portfolio wrap fees capped at 0.4 per cent per annum - take effect on Oct 1 after a year's postponement. Currently CPFIS-included funds carry sales charges of up to 1.5 per cent, and portfolio wrap fees of up to 0.7 per cent.

Financial advisory (FA) firms contacted by BT are taking the fee reductions in stride, despite the expected hit to their revenues. But some have expressed concern that the caps may spur advisers to sell higher cost funds, which pay higher trail fees. Trail fees are the portion of fund annual management fees paid to distributors.

Some platform service providers such as iFast Financial are expected to reduce annual platform charges. They are, however, also reportedly negotiating with fund firms to take a higher share of funds' trail fees. Equity funds may already pay up to 60 per cent of the annual management fee to distributors.

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A fund manager who declined to be named said the firm has agreed to pay iFast a trail fee of 60 per cent, up from 50 per cent currently, subject to an annual review.

As for bank distribution, which generates the lion's share of fund sales, industry sources said some banks have indicated their reluctance to market funds for CPF savings, now that they cannot receive any sales charge. They still do receive trail fees.

This, however, is disputed by some banks. DBS Singapore's Brandon Lam, country head for financial solutions management group, said: "We are committed to keeping fees on investment solutions as low as possible for our customers, where a little goes a long way in preserving their investment returns." He said clients are increasingly coming forward to invest their CPF savings or via the Supplementary Retirement Scheme.

Kelvin Goh, OCBC head of wealth advisory, said CPFIS currently comprises around 5 per cent of clients' investments. CPF's interest rates for the Ordinary and Special Accounts at 2.5 and 4 per cent, respectively, are "no slouch'' in today's low-rate environment, he said.

"Unlike cash, which attracts significantly lower interest rates in a deposit account, the risk-free rates for CPF accounts are much higher, which would mean a higher opportunity cost if the investment goes south."

The bank has been educating clients on ways to maximise the CPF for a comfortable retirement. "Many of our customers are more inclined towards retaining their CPF funds rather than deploying them for other purposes, as the CPF interest rates are attractive."

Among some FAs there is concern that the pressure for a greater share of trail fees might drive advisers and platforms to recommend funds with higher trails. Trail fee sharing arrangements are typically not transparent to investors. They can be found in funds' product highlight sheets, but may be reported as a range.

Christopher Tan of Providend said: "Advisers will be less motivated to use low-cost instruments for their clients … The industry will be motivated to sell higher expense funds and this does not augur well for the industry and definitely not towards growing the industry in the right direction."

Chuin Ting Weber, MoneyOwl chief executive, said: "On the wrap fee cap, while there were good intentions behind the policy to lower the costs of investing for the benefit of the end-investor, the investor might actually end up worse off. This is because the policy inadvertently favours high-cost, trailer-paying funds over low-cost, non-trailer paying funds; and favours commission-based advice over fee-based advice.

"This came about because the policy did not take into account the whole ecosystem of fees and interactions between different players and ended up targeting only the charges/fees directly paid to advisers."

Alfred Chia, SingCapital chief executive and president of the Financial Planning Association of Singapore (FPAS), said: "We're prepared for the fee reductions; it's part and parcel of the industry's evolution. Because of competition in the marketplace, the cost of investment has been coming down which is a very healthy sign. Lower fees increase investment returns."

Endowus has offered portfolio services for CPFIS savings at 0.4 per cent all-in fee since last October. Unlike most FA firms, Endowus does not receive sales or transaction fees, and rebates all trail fees to its clients to ensure alignment of interests. "The 0.4 per cent cap is a painful but necessary exercise to help the wider industry do better for its customers, but investors should still be wary of the trailer fees, and how they may still incentivise misaligned behaviour by the adviser or even by the low-cost fund platform,'' said founding partner and chief operating officer Gregory Van.

Endowus is gearing up to launch an expanded wealth platform shortly, allowing access to significantly more funds offering institutional share classes which pay no trails, or provide for 100 per cent trail-fee rebates.

As part of administrative services for FA firms, platform services such as iFast also collect trail fees from fund managers. They retain a portion for themselves and pass on the balance to FA firms.

An iFast spokesperson said there is a "tripartite" relationship between iFast, fund managers and FA firms. "There have been plans to reduce the sharing of fees (between) fund management companies and iFast, and to redistribute more of the fees to the FA companies. iFast has seen this as an opportunity to collaborate with the FA companies and fund management companies to continue growing the CPF business."

As at end-June, iFast Corp's group assets under administration (AUA) rose 23 per cent year-on-year to a new record high of S$11.15 billion. CPFIS unit trust AUA from the B2B platform comprises about 15 per cent of the group's total AUA. "Considering the growth rates we have seen in AUA across all products in 1H2020, the impact of the (CPFIS) changes is manageable … We have always been committed to growing CPF investments by looking at the merits of longer term investing, keeping the cost low and ensuring the CPF flow is smooth for investors.'' He said platform fees are currently at 0.10 to 0.28 per cent, but will be lowered as greater digital adoption raises cost efficiency.

Kwok Keng Han, chief executive of Navigator Investment Services, said there are no changes to its platform fee. CPFIS savings account for 40 per cent of its AUA. "We do not expect the lowering of the CPFIS fees to negatively impact this (AUA) significantly. We believe advisers will continue to see CPFIS - where suitable - as a key part of holistic financial planning for their clients, complementing other investment vehicles."

At PhillipCapital, executive director Lisa Lee says there is no online sales charge for all unit trusts on its platform, and it also does not charge any platform fee "as we strongly believe such fees may erode investment returns".

She said: "We are constantly engaged in discussion with fund management firms to ensure that fees are palatable for the volume of business we have under custody. As a client-centric company, ultimately we still place our clients' interests and suitability first before recommending them the products."

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