I read with delight that Monetary Authority of Singapore will be introducing a new investment product unheard of in the financial world. It is called the Singapore Saving Bonds also known as Free Lunch (term is coined by Wilfred Ling). The Free Lunch Singapore Saving Bonds is an investment product that has all the features of a Free Lunch. Features of this Free Lunch are:
- Principal guaranteed by Singapore Government. In other words, risk free.
- Denominated in SGD – no currency risk.
- If you hold to maturity of 10 years, you get the total return similar to a 10 years Singapore Government Securities (SGS).
- If you do not hold to maturity, you get the total return similar to an equivalent holding period of a SGS. I.e. If you hold for 2 years, your total return is similar to a 2-years SGS.
- You do not need to decide how long to hold from the onset.
- You can liquidate every month (i.e. monthly dealing) and sell it back to MAS without penalty. You even get back your accrued interest. i.e. MAS is the market maker.
- If you liquidate, you get back your principal. (i.e. no price risk unlike like selling a SGS). Put it this way, there is no duration risk.
- Low entry level: Minimum $500 and a subsequent multiple of $500.
- Singapore Saving Bonds has a cap as to the amount you can buy as individual.
- You cannot sell it in the secondary market. i.e. non-tradable to anyone else other than to the government.
- Singapore Saving Bonds is only available to individuals. Institutions are not permitted to buy.
My comments: There is a need for a cap otherwise all the banks will suddenly find all their depositors withdrawing from their accounts and this will result in a surge of interest rate. This is equivalent to MAS setting interest rates. But as we all know, our monetary policy is to manage the strength of our Singapore dollar currency against a basket of currencies. Conventional economics tell us that it is not possible to set interest rates and manage the country’s currency.
The Singapore Saving Bonds is most suitable for those who are risk adverse. Instead of buying bond unit trusts or endowment, they can use this instrument after all the total return if held to maturity is likely to be higher than an endowment.
Why is the Singapore Saving Bonds free lunch?
Reason 1: The Singapore Saving Bonds can be viewed as long bond and long put whose strike price is the par value of the bond. Normally there is a credit risk for the put option. In this case, the counterparty is an AAA credit worthy Singapore government. The only counterparty risk I see is political risk because it depends on the political stability of the government. But this political risk is not relevant in ascertaining the credit risk of Singapore Saving Bonds because a corrupt or incompetent government could cause chaos in the financial system resulting in the cash in the bank to disappear too.
Reason 2: The investor does not need to pay for the option premium. The total return is not lower if held to maturity as compared to a conventional 10 years SGS which implies the option premium is free. Actually the option premium is funded by taxpayer since there is no such thing as free in this world.
Reason 3: There is likely no commission. I just assume this is the case as it is only available from MAS. No product salesman can sell it. The administrative cost is funded by taxpayers' money since there is nothing free in this world.
Reason 4: The Singapore Saving Bonds is 100% guaranteed by government. On the other hand, cash deposits in the banks are insured up to $50,000 by the Deposit Insurance Scheme.
If the Free Lunch is as good as what the factsheet says, I would probably use it as part of my clients’ financial planning especially for clients whose risk tolerance is very low. It will also be a good diversifier in the investment portfolio.
Why some financial advisers' livelihood may get affected?
In the meantime, reasons why some financial advisers' livelihood may get affected are:
- The new Singapore Saving Bonds to be introduced later this year provides people with an option to get a higher return at no risk and with only one-month lock-in. Who wants to commit to an endowment policy with only similar returns with long lock-in period? In other words, financial advisers cannot sell endowment products.
- Effective from 1 January 2015, the Balance Score Card aims to penalize advisers who fail the meet their KPIs. But there is no reward for those who surpass their KPIs. The only occupation in Singapore which deducts your income as punishment but does not provide bonuses as incentives is the occupation call “financial adviser”.
- The government is going to provide FREE one-on-one retirement planning service to all CPF Members turning 55. This is like competing with what a financial adviser should be doing.
- The option for CPF members to increase their CPF Retirement account to a much higher amount (known as Enhanced Retirement Sum) means less money for advisers’ clients to buy products.
- All financial advisers know that the CPF Life returns are much higher than what insurers can offer. In other words, the government is competing with financial advisers.
- The direct insurance channel to be launch soon aims to remove the middleman. In other words, the insurance companies will be competing directly with their own agents and advisers.
- The RBC2 to be introduce in 2016 is likely to result in insurers cutting revisionary bonuses. New par products which were introduced recently that are compliance with RBC2 are terrible : No revisionary bonus but only got a huge non-guaranteed terminal bonuses. Who would want to buy this kind of par product? It sounds like ILP to me. In fact, an ILP is much more transparent. In other words, RBC2 may see the end of whole life products because no consumer will dare to buy it. Financial advisers who sell par products are going to be affected. They could, however, sell ILPs.
Don’t get me wrong. Everything the government is doing above is beneficial for the end customers. Consumers should rejoice (except the last point on advisers needing to sell ILPs because par products are going to look like opaque ILPs). For many financial advisers who rely on selling products to earn commissions may find their livelihood affected.
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