Recently I saw a presentation which showed that nearly 50% of the fund investments in Singapore is through Investment-Linked policies. Therefore, the ILPs market is very huge. We can say it is selling like hot cakes. But I say that people who buy these ILPs are holding a hot-potato.
As a fee-based financial planner, I have to do the asset allocation for my clients. Quite often, the amount of ILPs my clients hold represent nearly 99% of their liquid assets. Thus, I find it quite an irony that although I have never sold a single regular premium investment linked policies, I do find myself providing on-going advice for them on it. Typically the ILPs must be held for 25 years otherwise the surrender charges will be very high. It would not be ethical for me to tell them to terminate. Thus, I have to help them do the asset allocation. But what is so painful is that the ILPs funds are so lousy. I've seen many forms of ILPs. Some have not even being sold in Singapore (because my clients bought it overseas) but the underlying funds are very common funds which can be purchase from online portals like fundsupermart or dollarDEX. There is nothing very fascinating about these funds. Many advisers like to hype it saying these ILPs funds are so good but they are just another normal fund except it is under performing.
Consider the chart below. Fund C is an ILP fund. It is compared with Fund B which is EXACTLY the same fund but can be purchased directly. Fund A is an ETF tracking the index to which both funds are benchmark against. As it can be seen, Fund C performed worst than Fund B despite them being identical. Why? Because of the additional management fees if bought through an ILP structure and this has not even count in the administration and mortality charges. Of course, Fund A - being a passive fund - is the winner in this case. So why nobody sells Fund B? Because the commission can only buy one chicken rice while Fund C's commission can buy 10,000 chicken rices. How about Fund A? Not only Fund A cannot buy a single chicken rice for the adviser but the adviser must buy chicken rices for the client!
What should you do if you already have an ILP? Well, it is like getting married. Once you get married, you are committed for life. I know there is such thing as divorce but like all divorcees will tell you, getting a divorce would cause immeasurable pain and suffering which will scar you for life. So, do not 'divorce' your ILP. Stick with it - for life.
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