This is an article on the fees charged by the Public Trustee and Special Needs Trust Company. Although fees are public information but people often asked whether are these fees worth paying.
In examining fees, it is important to differentiate between value and price. Price is what you pay but value is what you get. Given two items: X and Y and it cost $5 and $50 respectively. Which is cheaper? On the surface, X is cheaper. But if I tell you X is an apple and Y is a 1kg pure gold bar, your perception of which is cheap and expensive becomes reversed. Whether an item is cheap or expensive depends on what you are really getting. Therefore, it is important to always ask what you are really getting. If the price is lower than the value you are getting, it is considered cheap. Otherwise it is expensive.
There are two sets of fees when setting up a trust with SNTC. The first set of fees are charged by SNTC and another set by PT. These two fees should be examined separately.
Analysis of charges by SNTC
SNTC currently charges $1,500 setup fee and $250 annual pre-activation fee. For post-activation it is $400 annually. Is this cheap or expensive? We must determine the value the settlor is getting. Value can be determined quantitatively or qualitatively. We shall approach from both angles. In terms of quantitative approach, we look at what commercial private trust companies are charging. Typically a commercial trust company charges a setup fee of $3000 to $5000 depending on the complexity of the trust deed. It is also common that commercial trust company charges an annual trustee fee of at least $2000 annually or a percentage of the trust assets whichever is higher. For qualitatively angle, SNTC specializes in beneficiaries who have special needs. This is a niche market which no other commercial trust company can claim to be specialized with. Thus, I consider SNTC fees to be cheap because the value the settlor is getting is higher than the price he is paying.
Analysis of charges by the investment manager
SNTC currently invests all its assets with the PT. SNTC does not engage other fund managers in managing its assets. Therefore, the role of the PT is solely related to investments. Thus, we can consider PT’s fees to be that of investment fees. The PT charges an upfront fee based on the cumulated capital invested. PT also charges a percentage on the interest earned. This percentage deceases based on the cumulated interest earned.
I must admit that PT fees are too complicated and makes comparisons to other equivalent investments to be difficult. To make comparison equivalent to other investments, I will use the expense ratio method. Under the expense ratio, I shall determine the average annual percentage that are taken away through fees charged by the PT. The equivalent investments I will compare with are fixed income unit trusts approved by CPFIS.
The following is a table illustrating the fees taken away by the PT based on a small capital of just $5000. I assumed the interest rate declared by PT is 3% per annum over the entire period of 20 years.
Over the period of 20 years, the rate of return after net of PT’s charges is (8237.21/5000)1/20 – 1 = 2.53% per annum. The expense ratio is 3%- 2.53% = 0.47% per annum. How does this compared with other investments?
According to the end December 2011 as shown by the table below, the expense ratios of fixed income funds approved for CPF investment ranges from 0.40% to 1.16% per annum. The average expense ratio of these fixed income funds is 0.80% per annum.
It is important to note that the fixed income funds mentioned above does not provide any form of capital guarantee unlike investments with PT which is capital guaranteed by the Singapore government. Despite the dissimilarity in investment risks, the charges imposed by the PT of 0.47% is actually lower than the CPFIS approved fixed income funds which has the average expense ratio of 0.80%.
Why 20 years period?
I used a 20 years period because there were questions asked regarding whether is it worth setting up the trust now or wait later. If a young settlor setup the trust now, the trust may not be activated for decades. There is a concerned that during these ‘inactive’ years, the trust assets are being eroded by fees. That is why I looked at 20 years horizon in determining the expense ratio of the investments. It turns out that the longer the time horizon, the lower the expense ratio.
Another reason why a settlor should setup the trust now for their PSN is because the settlor cannot be sure when will he be incapacitated or die. In fact, research has shown that family members tend to play a significant role in the patients’ last days even to the extent of denying the dying the right to settle their own personal affairs. How and why do families do this? I actually wrote an article on this entitled Patients’ Last Days in Ignorance that explains and demonstrates the evidence why the dying tend to be denied of the knowledge of their condition.
The fees charged by SNTC is cheap. The fees charged by the PT is significantly lower than the average equivalent investments over a 20 years period.
Disclosure: I do not have any commercial relationship with SNTC and PT.
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