Dec 27, 2009

Don’t fall for the lure

Some people are letting financial advisers ‘churn’ their CPF savings to pocket cash rebates – a risky and illegal practice

The lure of getting their hands on some quick cash from their Central Provident Fund (CPF) savings is leading Singaporeans into a minefield of legal and financial risks.

And if you are found guilty of violating CPF rules, you may find yourself poorer by as much as $10,000 or more.

The experience of Mr George Low (not his real name) illustrates the dangers.

He rang a mobile phone number found on an advertisement aimed at people who needed money fast. A financial adviser asked for his CPF statement, which indicated that Mr Low had $100,000 available for investments.

The adviser began to invest Mr Low’s $100,000 in a unit trust under the CPF Investment Scheme (CPFIS).

The sales charge for each transaction was 3 per cent of the investment sum, with the adviser getting a cut. In turn, he gave Mr Low a cash rebate of 1 per cent of the sum invested. In this case it was $1,000.

Over the next few months, the adviser used Mr Low’s CPF funds to repeatedly buy and sell CPFIS products, even when the transactions resulted in losses for Mr Low.

Each transaction earned Mr Low 1 per cent of the investment sum and also reaped a fee for the adviser.

The practice is called churning. It occurs in most developed economies but still entraps smart investors.

It often takes some months before people like Mr Low realise that they are getting the short end of the stick.

When their CPF cash is used to buy and sell products over and over again, the transaction costs eat into their retirement funds.

In a down market, it might take about half a year for $100,000 to dwindle to half the original amount, assuming three churning transactions every two months.

Yet it seems that some investors are taking a short-term view of their diminishing CPF savings and do not appear to care as churning provides them quick access to cash. Many appear to work in cahoots with their advisers, signing blank forms which authorise the advisers to transact on their behalf. In return, the investors receive a steady stream of cash rebates.

The CPF Board is sharing information and monitoring transaction data with stakeholders like the Life Insurance Association and the Investment Management Association of Singapore in a bid to stamp out the practice.

A CPF spokesman said: ‘We require all rebates given for CPFIS products, whether in cash or equivalent bonus units, to be credited to members’ CPF accounts.

‘CPF members found guilty of working with errant financial advisers to pocket cash rebates which amount to premature withdrawals of CPF monies may be fined up to $2,500. For second or subsequent conviction, the fine may be up to $10,000.’

He added that members who suspect their accounts have been churned can report it to the CPF, which can block the accounts from further CPFIS transactions.

Members should go to the police if they suspect there have been unauthorised transactions or forged signatures.

The Monetary Authority of Singapore (MAS) has said it will act against financial institutions engaging in improper switching or churning activities.

Penalties can include removing licences, issuing warning letters to agents or suspending them. Some could even be kicked out of the industry for good.

MAS urges customers to check their transaction statements carefully and to seek clarification when in doubt.

But it is difficult to catch the culprits because in many cases, CPF members are in cahoots with the advisers and deny pocketing the cash rebates.

Despite the complexity of the churning issue, one simple rule still holds: Never invest based on promises of fast and attractive returns alone.

This is especially so with CPF savings, which are for your old age needs.

The CPF Board said: ‘You should thus invest your CPF with a view to growing your nest egg instead of taking risky decisions to earn a quick profit or receive gifts.’

Here are some tips from the CPF Board on how to avoid being lured into such scams and what you should do before investing your retirement funds.