As of late, I have been updating my personal financial plans, taking into account our move to Singapore. I’m updating my investment strategy to ensure full compliance with the Firm’s independence requirements. In summary, we as auditors and professional advisors must guard ourselves to ensure there is no tarnishing of our independent opinion, or that there is a perceived threat to our independence. This basically means we cannot be shareholders in the clients of the Firm.

I was quite pleased when one of our LegCo members brought up the topic of personal finances during the Monday session I attended. I think it would be quite Relevant to blog about personal financial planning while it is on the general Bruneian psyche, and I have some interesting facts to share with you all.

Because our LegCo member suggested that the Government should introduce authorised investment schemes for the public. Coincidentally – BIBD ran a roadshow this week to give investors a sneak peek at their BIBD Al-Kauthar Fund Series. Bearing in mind that TAP FY2009′s dividend was 0%, I thought I should share some of my current thoughts for personal financial planning.

DISCLAIMER: This blog post should not be construed as advice. All investments carry a certain risk profile. Investors are advised to fully understand the contents, terms, conditions and risks associated with their investments.

Financial Planning

I updated my financial planning spreadsheet and decided to create a generic template that can be used by other people.

My “20100208 – Financial Planning – Template v.0.2” spreadsheet is available on Google Docs for public use. I am licensing this under the same license as my blog: Cc-by-nc-sa. That means you are welcome to use it and share it provided that this is not on a commercial basis. For commercial use, please contact me directly and we can work out a licensing arrangement.

I’ve shared this template with a few other people and it seems to “pass muster”. I very much welcome any suggestions and feedback on improving the template, please email me at izamryan at relevancefound.com.

PS: For you 2010 CFA Level 1 Candidates, please refer to Example 21 on pages 213 to 216 of your Volume 1 study materials. The methodology used in the example is a little different, because the model in the spreadsheet uses two rates – one for inflation during the retirement period and one for the return on investment during the investment period.

Saving at $1,312/month, achieving a 10% return, to retire in 25 yrs on $5,000/month

The brutal truth is that – even at an optimistic (very optimistic!) estimate of 1% inflation through your retirement, you will need a $1.5m retirement fund in order to retire on $5,000/month.

An alternative way of looking at the retirement problem is this (and I learned this from one of the Financial Planners at BICB Capital): If you have no other savings or investments, look at your total (Employee’s + Employer’s) TAP contribution per month. For most of us, this is approximately 10% of your gross salary (5% Employee’s + 5% Employer’s contribution). If the TAP dividend is mostly cancelled out by the rate of inflation (more on this later! zomgash) then the implication is that upon retiring you will only have a retirement income that is approximately equivalent to 10% of your current gross salary.

Now, just imagine that. Can you get by with a 90% cut in your gross salary?

Using the TAP balance to settle current liabilities

So while I was researching material for this blog post, I was horrified … nay … petrified to read in Brudirect’s “Have Your Say” a suggestion to allow consumers to dip into their TAP savings to pay off their credit card bills.

In a situation where the general public don’t normally have a culture of saving or investing, do we want to encourage TAP beneficiaries to dip into their retirement funds to pay off their current spending? We can already demonstrate the seriousness of the situation with these two benchmarks above – $1.5m retirement fund and a 90% cut in gross salary.

FY2009 TAP dividend = 0%

And in the best of years you can rely on the TAP dividend to keep up with, and hopefully exceed the rate of inflation.

However, here is some food for thought:

In FY2009 Malaysia’s EPF declares a 5.65% dividend, up from 4.50% paid out in FY2008.  In Brunei, our TAP has generated a 0% dividend in FY2009 and 4.25% in FY2008.

From the BruneiFM Article: “For the fiscal year 2008/9, the board of the Employees Trust Fund has made the decision to not issue any dividends after taking into account the financial crisis and the global economy which has been in recession and has thoroughly affected the performance of TAP’s investments,”.

I am not sure if we can rely on TAP as a source for steady, consistent returns. Investors have to turn elsewhere for higher returns.

TAP = low returns. BIBD Al-Kauthar funds for higher returns?

This week, BIBD launched the Al-Kauthar Fund Series. “Al-Kauthar” refers to “a great abundance and multitude of virtue”, one of the many legendary rivers in Paradise. The Al-Kauthar funds strike me as promoting socially responsible investing, whilst being marketed as being competitive and on par with conventional investment products.

The Al-Kauthar Fund Series are domiciled in the Brunei International Financial Centre. As part of the BIFC Regulations, Mutual Funds registered in BIFC must offer foreign currency-denominated funds. The Al-Kauthar funds are therefore denominated in Singapore Dollars. For convenience, the Distributor (BIBD) accepts Brunei Dollars from local investors.

At the initial roadshow, BIBD gave us a sneak peek at their three funds: The Al-Kauthar Europe Fund (fund advised by SEI Investments, USA), the Al-Kauthar Americas Fund (fund advised by Wellington Management Company, LLP, USA) and the Al-Kauthar Asia-Pacific Fund (fund advised by Lion Global Investors Ltd., Singapore). The management fee of “up to 1.75% per annum” which is imputed into the NAV of the fund is roughly in line with industry practice.

I asked a question to the Asia-Pacific fund managers regarding currency risk – as the fund is denominated in Singapore dollars, but is investing in foreign-currency denominated investments across the Asia-Pacific economies. Lion Global does not practice currency hedging, so investors should be sensitive to the forex risk (appreciation and depreciation of foreign currencies may impact on securities within the portfolio) in this fund.

I sat through the SEI Investment presentation but had to give the Wellington presentation a miss (school run). I was extremely impressed with the speakers and the firm’s methodology of tracking fund manager performance.

My assessment is that BIBD are taking a “best of breed” approach in developing these three investment products – picking the best fund manager for a particular geography. The downside is that the Bank is proposing to charge investors a 3% switching fee for investors seeking to rebalance their portfolios within the Fund series.

On top of the 3% switching fee is a proposed 3% up-front sales fee. This results in a “total” 6% in fees, and is one of the down-sides of cherry-picking fund managers in a “best of breed” approach. Because the funds are managed by three separate managers, it seems that BIBD was unable to offer us the “zero switching fees” that most sophisticated investors in Brunei may have gotten used to.

I managed to corner Javed Ahmad on the “competitiveness with conventional banking products”. The SEI presentation emphasised that investors participating in the Al-Kauthar fund series can expect a performance that is on par with conventional banking products. One key drag on performance is up-front sales fees. I asked Javed “So what does competitive mean? I guess you mean up-front sales fees of 0%, 1% and 2%”. To which Javed chuckled “If it were, we’d be running a charity.”

Low 0%, 1%, 2% up-front sales fees

Well, with HSBC Singapore, if I have a total relationship balance (i.e. total of savings and investments in unit trusts) of $20k, or sign up for a $250 regular savings plan (w/ $1,000 initial investment), I qualify for the HSBC Infinity service: 25% discount on initial sales charge on funds, 5-yr credit card annual fee waiver, discounts on insurance, home loans, personal loans and a PowerVantage account without additional service fees.

For their initial sales charges of some 4% to 5% banks typically charge – discounted by 25% this takes it down to 3.00% to 3.75% initial sales charge. And some of their funds have returned some great returns in the last 1-yr, 3-yr and 5-yrs.

And DBS in Singapore is offering a 1% sales charge, with a 14-day review period. Earlier this year this was a 0% sales charge ~.^

The competition from the online discount brokers is also killer: Fundsupermart charges up to 2% front-ended charge for equity funds and 1.5% for bond funds. They discount the equity fund sales charge to 1.75% and 1.5% sales charges for portfolios of $75k and $250k.

Dollardex (seems to be more for the advanced investors) offer some “alternative investments” – hedge fund investments and derivatives to qualified investors. They charge up to 2%, and offer discounts to 1.5% and 1% for portfolios of $50k and $250k.

The Bottom Line

The BIBD Al-Kauthar Funds may be of interest to some wealthy private individuals and sophisticated investors who are primarily concerned with socially responsible investing, maintaining syariah compliance and staying on par with the performance of conventional products. However, in this Flat world of borderless transactions, sophisticated investors may want to avail themselves of low-cost investment opportunities or high-risk and high-return investments elsewhere either from internet discount brokers or through their normal private banking services. Because a 3% initial sales charge will take a serious bite into your returns, and the 3% switching fee (which will be on your initial investment + whatever profits/losses made) will take a second bite into your returns.

I anticipate that there will be good initial uptake from the Brunei public, especially if BIBD can offer a good financial planning service, and continues with roadshows to publicise the availability of these investment products.

I suspect however that BIBD’s internet banking facility may not integrate with the Al-Kauthar funds, and I also suspect that BIBD’s financial planning service will be mostly manually done, offline and non-interactive.

And this line of reasoning has brought me to a new idea – that IT is actually a “core competence” in the financial services industry. Why? Because banks, insurance companies, investment managers and the other players in the financial services industry are actually IT companies with some financial services tacked on. Outsourcing of IT in the financial services industry is risky because IT is the source of competitive advantage for the financial services industry in this flat world. And it is IT that helps financial services players to truly differentiate themselves from the crowd.

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