Churning:unscrupulous financial advisers out to make quick bucks
Before i explain “churning”, a little background explanation is necessary for my non-Singaporean readers.
The CPF is a compulsory savings plan similar to the 401(k) pension plan in the US. Although CPF savings can only be withdrawn when you reach the age of 55, you may use it to buy investment products such as unit trusts (mutual finds).
I’m not here to discuss the merits/flaws of the CPF scheme. Instead i want to talk about a scheme used by some unscrupulous financial advisers to make quick bucks.
It’s called churning.
Churning: hey let me milk you of your hard-earned money!
Of cause your adviser won’t tell you that. Instead this is what happens:
A CPF member is asked by his financial adviser to sign blank transaction forms authorising the adviser to invest the former’s CPF savings on his behalf. The adviser then invests the savings in CPF-approved unit trusts or insurance-linked investment policies, earning a sales charge of between 2 and 3 per cent which is deducted from the principal amount invested. Part of this sales charge is then given back to the CPF member in the form of a ‘cash rebate’. The CPF member is happy because he gets the cash he needs, and the adviser also pockets part of the fee.
But they cry, “When the market is good, i make more money for my client!”
Dismantling the adviser’s claim: (A) when the market is good
Let’s scrutinise this claim. I extracted this example from a forum. It was posted by a guy (one of those advisers, i suspect) to justify churning:
CPF account balance = $50K
You buy $10K worth of unit trust and your agent gets say $300 as sales commission.
He will share 50% of $300 (i.e. $150) with you.
Your CPF account is now left with $40K.
If the market condition improves and your fund is now worth say $15K.
So your earnings = $15K – $10K + $150 = $5150.
Other than the $5000 profit ($15k – $10k), you receive additional “pocket money” of $150.
I quote the guy, “It is a WIN-WIN situation when the market condition is good.”
In other words if the fund happens to appreciate, your good adviser will tell you sagely that he made you more money than fools who didn’t trust him.
He won’t tell you that he has played no part in earning you the profit – the market took care of that.
He will also most definitely not tell you the real deal – that he has set himself up such that no matter what happens, he will make money out of yours.
Reminder: What’s the job of your financial adviser anyway?
Your financial adviser is supposed to improve your long-term financial health by prudently investing your savings.
The first rule of investing is to minimize expenses such as sales commission and fund switching fees. Expenses are losses you make regardless of whether your stock/fund appreciate at the end of the day. So any financial adviser who “advises” you to buy and sell your funds often, is breaking the first rule of investment. You should be suspicious.
Let me repeat this.
Financial advisers who engage in churning don’t care about you. They don’t care about market conditions. They don’t care which fund you buy. If they can sell you a cartload of cow dung and convince you that it’s the next hot stock, they will do so.
Why? They earn a sales commission on every transaction and their only wish is to milk as much commission as possible without getting caught.
Buy-sell, buy-sell, buy-sell, money, money, money! Can you see them rubbing their palms in glee?
Dismantling the adviser’s claim: (B) when the market goes down
The fine example continues…
So how about when the market condition deteriorates?
Now your fund is worth say $9850.
So your earnings will be = $9850 – $10K + $150 = 0
Your fund-related loss is $150 but alas your pocket money of $150 saves you from making any loss!
He exclaimed, “For those people who did not opt for getting the commission, you are actually making a loss.”
Well if you didn’t buy that fund in the first place, you won’t be making any loss!
What’s constant in the two scenarios i described? Answer: the adviser had pocketed $150 of your money in both scenarios.
These advisers just want to buy something with your money and pocket the commission knowing that as long as they keep sending you a steady stream of petty cash, you’re unlikely to question them. If shit hits the fan later, they can always use the same old excuse (“Sorry brother, the whole economy’s going to craps!”).
There is only one sure winner in churning: your financial adviser
In the long run, you may make some money or lose some money.
But there will only be one winner no matter how the market condition pans out: the adviser who did nothing more than sucked commissions out of your hard-earned savings.
Maybe some victims went in knowingly for the quick cash, like the guy in the example.
I’d like to remind these people that they are in effect paying 50% commission (My guess only. Actual % depending on how much “cash rebates” their generous advisers promise them) from their own money for every dollar siphoned out of their CPF account by these “service providers”.
Most people are probably unaware that they are in fact victims of a scam.
Send these slimes warning letters? I say shovel the whole lot into jail.
