It can be expensive to live in Singapore, with costs now rising more sharply this year than in recent times. Unfortunately, that hefty price tag also applies to investing.
A fresh Morningstar report showed that Singapore is ranked below average out of 26 markets in terms of fees and expenses. The benchmark median fees are “disappointingly” almost unchanged since the last 2019 study done by Morningstar on this topic.
Here are three reasons why Singapore continues to score poorly in this aspect:
Each mutual fund — better known as unit trusts in Singapore — have different tiers or classes. One such class is the institutional-share class. This class of funds has the lowest fees — known as the total expense ratio (TER) — of all the share classes available for a fund.
The reason why the fees are the lowest for this class of funds is that they exclude something called a retrocession fee, or a trailer fee. The trailer fee, which Morningstar reported to be half of the average TER of the retail class of funds available for sale in Singapore, is the recurring fee paid to fund distributors, such as fund platforms and banks.
These institutional-share classes of funds have traditionally been available only to private banking clients who park substantial assets with their private banks. This is even though such classes of funds are also available for sale to retail investors.
The Morningstar report highlights this market gap. It said that funds without retrocessions are technically registered for sale in Singapore but are not actually accessible to the average retail investor given that fund distribution is “dominated by intermediaries, notably banks”.
“It is possible but rare for investors to pay for advice other than through commissions or retrocessions. Most investors pay a financial adviser through retrocessions embedded in the expense ratio.”
Endowus has opened up access to institutional-share classes of funds that do not charge retrocessions, to our clients. If only the retail tranche of a fund is available, then Endowus returns the embedded trailer fees to clients. The amount of Cashback on trailer fees that Endowus has returned to customers since inception has now crossed $2 million.
Conflict of interest
As shown in the report, markets such as the Netherlands and many developed nations have lower median expense ratios, because any trailer-fee payment arranged between fund managers and distributors has been made illegal through a EU regulatory framework known as MiFID II (Markets in Financial Instruments Directive).
MiFID II was put in place to address a conflict of interest created from retrocession fees. The practice of earning retrocession or trailer fees leads to significant misalignment between the distributors and ordinary investors. Distributors are incentivised to push the products offering the highest trailer fees to the clients, when in reality, investors would benefit from lower cost products with zero or low trailer fees.
Endowus has run calculations to demonstrate the impact of trailer fees — it represents a looming opportunity cost for investors that has been kept hidden from view. If investors had invested between 1988 and 2021 and put that trailer fee to work in the markets instead of paying it to fund distributors, they would have earned another 290%. So $12,000 in 1998 should have snowballed to more than $100,000 by 2021 (or 780% in total returns).
As The Business Times reported, most funds distributed in Singapore are domiciled in Luxembourg or Dublin and must comply with MiFID II rules. But distributors and investors in Singapore are spared from the rules as these intermediaries are not based in Europe.
Unit-trust investors are also typically charged a one-time fee when buying a fund. This sales charge is known as a front-end load.
What contributes to the expensive investing options in Singapore is that fund distributors continue to charge upfront sales charges, the Morningstar report said.
To add, fund managers are often held hostage to the loaded fees that banks and fund platforms insist on adding on top of the fund management fees.
Morningstar said: “In the markets with higher asset-weighted medians, like Taiwan, Italy, Hong Kong, and Singapore, expensive offshore fund sales are a prevalent feature.”
Time to end trailer fees
The Singapore fund industry is an expensive market because it is still distributor-controlled, with intermediaries such as fund platforms, banks and financial advisors charging high fees when set in a global context.
Tackling the high costs of investing is one big reason why Endowus came into being.
It is possible for advisors and fund distributors to offer lower cost funds and to open up access to low-cost funds so that retail investors can enjoy a higher chance of success in building long-term wealth.
Endowus wants to move towards global standards in lowering investing expenses, by charging fair and transparent fees to stay aligned to retail customers’ interests.
By investing in a single fund through our Fund Smart solution, you will pay an all-in Endowus Fee of 0.3% per annum to Endowus, as well as the fund-level fees of 0.35% per annum to the fund manager, after any Cashback on trailer fees. Or find out more about our core Flagship Portfolios.
For fair and transparent fees that give you the best chance of success, invest with Endowus.
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