Earlier this week, Second Minister for Manpower Josephine Teo announced changes to the CPF Investment Scheme (CPFIS). These changes will largely impact the sales of Investment-Linked Insurance Products (ILPs) through CPFIS.
CPFIS is an investment scheme that allows CPF members to invest their monies in a range of investments, including stocks, ETFs, unit trusts, endowment policies and ILPs.
What Were the Changes Announced?
A total of three changes were announced on Monday. Firstly, there will be 1) removal of sales charges for CPFIS products, 2) a reduction of the cap on annual wrap account fee and 3) all CPF members opening a CPFIS account will need to do a self-awareness questionnaire (SAQ).
Whether you are a consumer hoping to invest your CPF monies, or a financial advisor who focuses a lot on selling ILPs through CPFIS, it’s worth taking the time to fully understand the implications of these changes.
# 1 CPFIS ILPs Are (Somewhat) Different From Regular ILPs
The first thing to note is that ILPs that you can invest in using CPFIS monies are somewhat different from regular ILPs that you buy using cash. Here are some notable differences.
Single Premium Only: Only single premium plans are allowed under the CPFIS. This means you pay a lump sum amount to purchase units within the sub-funds in the ILPs, as opposed to a regular premium.
Minimal Insurance Coverage: ILPs that are purchased via CPFIS usually offers negligible insurance coverage. They are mainly for investment purposes.
One easy way of understanding the various sub-funds offered by ILPs through CPFIS is that they function more like unit trusts (i.e. mutual funds), as opposed to traditional ILPs. You can find the full list of CPFIS-eligible ILPs here.
# 2 Sales Charges To Be Removed
Prior to the change, funds sold through CPFIS, including ILPs, were allowed to levy a sales charge of up to 3% of the investment amount. For example, a CPF member who invest $20,000 in an ILP could pay a sales charge of up to $600.
This has led to potential conflict-of-interest situations, where some financial advisors push ILPs to CPF members in order to earn commissions, even if these products are not suitable for members.
Most of these online platforms offer 1) a wider selection of unit trusts for investors to choose from and 2) much lower or even zero sales charge for the purchase of unit trusts. Hence, it wouldn’t make a lot of sense for investors to be paying an extra 3% just because they are investing in funds through an ILP.
To be accurate about this, the removal of the 3% sales charge isn’t just aimed at ILPs but all other funds as well. However, as mentioned above, the actual on-the-ground situation is that most online unit trust platforms have already done away with sales charges anyway. Hence, they are not affected by this change.
Our friend Kyith, who runs InvestmentMoats, has written an excellent article that goes into detail about some of these fees. If you are keen to find out more, we recommend you read his article.
The removal of sales charge will take place in two stages. Firstly, it will be reduced from the current 3% to 1.5% from 1 October 2018, and then removed completely from 1 October 2019.
# 3 Wrap Account Fee To Be Reduced
A wrap account is investment account that is created by an investor, and managed by a financial advisor on the investor’s behalf.
In return for the services rendered, an annual wrap fee is charged by the financial advisor. This is typically a percentage of the total value of the wrap account.
Prior to the latest changes being announced, an annual wrap fee of up to 1% may be charged. Moving forward, this will be lowered to 0.7% from 1 October 2018, and further reduced to 0.4% from 1 October 2019.
# 4 Introduction Of The Self-Awareness Questionnaire
To help members assess whether CPFIS is a suitable investment option for them, a new questionnaire, called the Self-Awareness Questionnaire (SAQ), will be made available for all CPF members who wish to open a CPFIS account.
This will be a compulsory questionnaire that is required to be completed prior to the opening of the CPFIS account. Existing CPFIS members are also encouraged to take the SAQ, though it’s not compulsory.
Do note however that the results are not restrictive. For example, even if you fail the SAQ, you can still participate in CPFIS investments. As its name suggests, the test is meant for CPF members to understand how well (or how badly) their investment knowledge are, and whether or not they really should be investing their CPFIS monies, or to leave it untouched and to earn the risk-free rate.
How Will This Impact Us?
In our view, the changes introduced are not game-changers by themselves. If there are investments that a CPF member wishes to make, they can continue to do so. Nothing much has changed for them.
The group that will be most heavily impacted are the financial advisors, particularly those whose sales strategy is are heavily reliant on getting people to invest in ILPs using CPFIS. The removal of the sales charge and the reduction in the cap for wrap account annual fees mean that the financial incentives of selling an ILP through CPFIS is greatly reduced.
The irony of this reduction of cost is that existing CPF members who wish to invest in ILPs or have already done so will now have greater incentives to do so.
At the worst case, it’s status quo for most CPF members, while being a positive change for those who are already investing through ILPs. All in all, we think the changes are a good thing for CPF members moving forward.
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