Do I need to work with a financial professional for my own personal investment?

The financial markets can be daunting for both new and seasoned investors, here are 4 important questions to ask yourself before deciding if you should work with any financial professionals.

Question 1 – Should I invest?

It starts with you – “Do I see the benefits of investing?”

There are short term, low risk instruments that are able to generate higher returns with principal preservations over holding cash. Eg T-bills, Money Market investments, fixed deposits, to name a few.

There are also mid to long term investments that bring significantly higher potential returns over holding cash while taking on the risks of the financial markets. e.g. Stocks, bonds, REITs etc.

Here is an article – Why is investing important? on why we should always invest a part of our portfolio for the long term.

Question 2 – Where to invest? (Which geographical region/countries/industries?)

Your knowledge in the global investment landscape has a high correlation to the success of your investments. As investors, we should be aware of where we are investing in, how government policies and other considerations are going to affect the region in terms of economic growth, how current events may positively or negatively impact our investment decisions fundamentally in the long run.

Essentially, it comes down to your ability to identify opportunities and to know where and when to stay away.

Question 3 – How to invest? (which asset class to pick to capture opportunities and manage risk)

Understanding how each asset classes behaves in different market conditions will allow you to spot which asset classes can benefit from the current market condition and policies changes such as rising/falling interest rate, geopolitical issues, etc. This will allow you to capture opportunities that you have identified in question 2, and also manage risk and volatility of your investment portfolio.

It is crucial to understand how different assets react to different market conditions. So you are aware of both the upside and downsides scenario of your investment decisions.

Question 4 – What to invest?

This is the trickiest part of all, which requires on-going monitoring and effort to keep up to date on the progress of each of your investments if you are doing it on your own.

A common question that arises is – “what stocks or bonds should I buy?“

This requires investors to have an in-depth research and understanding of the companies and industries that you are going to invest in.

For Investment selection, what are the company’s business edge over competitors in the industry, and what are their financial numbers looking like? Do they have a business edge fundamentally that will contribute to long term growth and relevance which will result in higher stock prices in the years to come?

The list goes on.

The burning question – “Do I need to work with a financial professional?”

And the answer is… it depends.

We believe that investments should be an educated and informed decision, not gambling or speculating blindly. If your answer to question 1, 2, 3 and 4 sounds something like “yes I am aware of the implications and market outlook, I am familiar with the tools available and risks related to my investments” Then you may want to make your own decision on your investments.

The next question would then be ”Do I Have the time to actively read up and stay abreast of the market news and economic progress in the regions where I am invested in as well as the progress and updates of the companies that I am invested in?”  If the answer is yes to this as well, then you are all set to with the right ingredients to manage your own investments!

Many clients chose to work with us because they may not have the time to constantly monitor their investments and they rely on us to keep them updated on any opportunities and considerations on their investments. Some may not have sufficient information or expertise to understanding of the implications to make an informed decision, instead of speculating and gambling with their hard earned cash, they work with us to gain clarity on 2, 3 and 4.

Mistakes made in investments can be very costly especially when you are investing with a sizeable amount of money. An advisor should provide clarity, allowing more confidence in your investment journey.

Lastly, when choosing a professional to work with, it is also helpful to understand any potential conflicts of interest. Remuneration of financial advisors in Singapore. We hope this article is able to put things into perspective. We work to educate and guide our clients to reach their financial goals and have a positive investment experience through making decisions with data and statistics.

Reducing your taxes with CPF and SRS

For high earners in Singapore, the pursuit of financial excellence goes beyond amassing wealth; it’s about retaining a significant portion of what you earn.

This guide unravels three pivotal strategies for tax optimisation tailored to the Singaporean context: Understanding Singapore’s Progressive Tax System, Leveraging Central Provident Fund (CPF) Contributions, and Utilising the Supplementary Retirement Scheme (SRS).

Understanding Singapore’s Progressive Tax System: Navigating Income Brackets

At the heart of Singapore’s fiscal framework is a progressive tax system meticulously designed to ensure that individuals with higher incomes contribute proportionally more to taxes. As your income ascends, you traverse distinct tax brackets, each accompanied by its specific tax rate.

*Data is accurate as of 15th December 2023.

Source: IRAS

Suppose your annual income is $150,000. The first $20,000 will not be taxed. The next $10,000 is taxed at 2%, the subsequent $10,000 at 3.5%, the following $40,000 at 7%, and the remaining $70,000 at 11.5%. Your total tax payable would be the sum of these calculations.

For high earners, comprehending these tax brackets becomes a strategic imperative. By skilfully managing income to reside within a lower tax bracket, employing methods we’ll discuss shortly, high earners can optimise tax liabilities while adhering to Singapore’s progressive tax structure. This nuanced approach harmonises financial decisions with the inherently progressive nature of taxation, enabling informed choices for superior tax optimisation.

Leverage Central Provident Fund (CPF) Contributions:

Your Central Provident Fund (CPF) isn’t merely a retirement savings tool; it evolves into a potent instrument for tax planning. High earners, on a quest for financial acumen, strategically harness the power of CPF contributions for substantial tax savings. Maximising contributions to both the Ordinary and Special Accounts not only secures a robust retirement nest egg but also diminishes taxable income.

Consider the scenario of a high earner contributing the maximum allowable amount to their CPF accounts. The intricacies of CPF contributions become a pivotal facet of the high earner’s tax optimisation strategy. Every dollar strategically allocated serves not only the goal of retirement security but tax benefits. 

To understand more on using CPF contributions for tax relief, please go to CPF’s FAQ.

Utilise SRS (Supplementary Retirement Scheme):

The Supplementary Retirement Scheme (SRS), an initiative by the Singapore government, stands as a voluntary savings scheme encouraging individuals to secure their retirement while relishing tax benefits. Operating as a long-term savings tool, the SRS empowers contributors to earmark a portion of their income for retirement, coupled with specific tax advantages.

Key Features of SRS:

Voluntary Contributions

Flexibility defines SRS contributions, offering contributors the autonomy to decide their annual contribution amount. While a contribution cap exists and is subject to periodic review, this flexibility allows contributors to tailor their savings strategy based on evolving financial circumstances.

Tax deductions

One of SRS’s paramount benefits lies in the tax relief it bestows. Contributions made to the SRS qualify for tax deductions, enabling individuals to claim these contributions as deductions from their assessable income. This not only reduces their taxable income but also translates into immediate tax savings—a tangible advantage for contributors.

Tax on withdrawals

While withdrawals from the SRS are subject to tax, the tax treatment is favorable. Only 50% of the withdrawn amount faces taxation, with the remaining 50% considered tax-free. This mechanism of tax deferral and partial exclusion proves advantageous during retirement, especially if the individual’s income tax rate is lower in their retirement years.

Investment opportunities

SRS contributions aren’t relegated to idleness; contributors wield the flexibility to invest their SRS funds across various financial instruments, encompassing stocks, bonds, and unit trusts. This affords contributors the potential for long-term growth in their retirement savings.

Age for withdrawals

Withdrawals from the SRS can commence upon reaching the statutory age (currently 63). However, contributors enjoy the flexibility to plan withdrawals based on their retirement needs and tax considerations, eliminating immediate obligations. Do take note that you will need to withdraw all your SRS monies within 10 years once you have started.

Contribution cap

Table Placeholder here

To decide if this is suitable for you, read our article <link to article 8. Navigating the Supplementary Retirement Scheme> for 3 key considerations before contributing to SRS.

How SRS Works in Practice

Contributions

Consider contributing $15,000 to your SRS account in a given year.

Tax Deduction

This $15,000 contribution becomes eligible for tax deduction, reducing your overall tax liability for the year.

Investment Growth

The contributed amount can then be invested in chosen SRS instruments, potentially growing over the years and bolstering your retirement savings.

Withdrawals

Upon reaching the age of 63, withdrawals commence. If your SRS account has grown to $200,000*, only 50% of the withdrawn amount is taxable. Say you withdraw $40,000 in each year, the taxable income would be $20,000. 

*Source: IRAS

By strategically employing the SRS, high earners can capitalise on immediate tax relief, the prospect of long-term investment growth, and a tax-efficient withdrawal structure during retirement. It emerges as a powerful tool aligned with the government’s goal of empowering individuals to shape their retirement destiny while enjoying tax advantages along the way.

In essence, mastering the intricacies of financial management for high earners in Singapore requires a strategic blend of maneuvers: comprehending the progressive tax system, optimising CPF contributions, and utilising the Supplementary Retirement Scheme (SRS). Each element plays a distinctive role in fostering a comprehensive approach to financial control.

If the intricacies of implementing these strategies seem daunting, or if you seek personalised guidance, we’re here to help.

Remuneration of financial advisors in Singapore

Have you ever wondered how financial advisors get paid?

What are some of the implications in the way they get paid?

Let’s take a closer look into the financial industry, understanding how the remuneration structures may affect the advisory you receive. Let’s explore the 4 most common sectors:

• Banks
• Insurance Agencies
• Fee-Based Advisory
• Robo-Advisory

Each sector presents a unique structure of compensation, reflecting the intricate interplay between services and advice rendered and how the remuneration structure may influence their advisory.

Banks

Bankers are often compensated through a transactional model, with earnings closely tied to the volume and frequency of transactions facilitated for clients which comes with a processing or upfront fee.

Banks often come with their own database of clients, this model encourages a focus on the volume of transactions, underscoring the significance of client engagement and the promotion of financial products within the bank’s portfolio.

Bankers’ remunerations often come with a fixed salary and a percentage of commission from the revenue earned via transactions. With monthly or quarterly revenue KPI to hit, the nature of the pay structure drives bankers to conduct as many transactions as possible within the stipulated time frame to hit the KPI.

The compensation models in the bank do not give the bankers incentive for continuously reviewing your portfolio, providing advice to ensure you are on the right track because it takes time away from them to hunt for new businesses, very often the reviews that bankers conduct come with transactions involved which contribute to their KPI.

If a banker does not hit their KPI, they will be asked to leave as it is not commercially viable for the bank to keep the banker. Which begs the questions –

• • “Can I trust my banker’s advice?”

  • “Is this transaction truly the best way to approach my portfolio?”

  • “Is this product the most cost effective way to manage my portfolio?”

Insurance Agencies

Operating as a self-employed individual, insurance agents typically operate on a commission-based structure, earning a percentage of the premiums paid by clients for insurance policies.

This framework incentivised agents to sell products that come with a higher premium. (e.g whole life policies, endowment, and investment-linked policies (ILP)) over cost-efficient products such as term policies, or exchange-traded funds (ETF) to address your wealth planning needs.

The arsenal of products within their advisory scope will likely exclude many other cost efficient instruments such as corporate bonds, government bonds and direct unit trusts because it does not give them the same remuneration over selling an insurance product.

For some newer agent’s in the industry, remuneration comes with a “monthly basic pay” with a clause requiring them to hit their sales target. If the target is not met, they may have to repay a portion of the “basic pay” at the end of the agreement.

This model forces the agents to focus on driving product sales with the highest premium, possibly introducing some conflict of interest.

Fee-Based Advisory

Fee-based advisors stand out in their approach, charging a flat fee or a percentage of the total assets under administration. This remuneration model aligns the advisor’s success with the growth and performance of the client’s portfolio, emphasising a shared interest in achieving long-term financial goals and sustained asset appreciation.

However, fee-based advisors may come with a flat fee even if there are no transactions done, because their services are charged based on time spent on preparation to ensure that the advice you receive are of quality and also to the best of your interest.

Any portfolio rebalancing with fee-based advisors usually does not come with any additional switching fees (brokerage fees may still apply) and over the long term, it is more likely that you will be working with an advisor who is on your side, providing quality advice to help you achieve your financial goals.

Robo-Advisory

The emergence of robo-advisors has revolutionised the financial landscape, introducing a technology-driven approach to investment management.

Robo-advisors offer automated template portfolio management, catering to individuals seeking a streamlined and cost-effective investment solution.

The challenges that come with a robo-advisor is the lack of human touch and inability to address any personal concerns you may have as a client.

It is mainly an execution platform suitable for individuals who want to DIY their investment plan, but comes with the downside that there is no advisory given when there is volatility in the financial markets.

Navigating through different market conditions with actionable plans is a critical aspect of the investment journey that can be provided by a human advisor. It involves adapting a client’s investment approach to align with their ever-changing life stages, whether it be mitigating risks in their portfolio or incorporating factors like the arrival of a new-born child or changes in financial capacity.

As an individual with a clear understanding of the remuneration structure and incentives driving each sector, you as a client can then make an informed decision on which aligns best with your goals and which you should engage to be your partner in your financial journey.

Why is investing important?

In today’s world, working professionals often find themselves treading a delicate balance between financial stability and uncertainty.

As you navigate through the various stages of life, the challenges related to your hard-earned money take on different shapes, from the initial hurdles of securing a comfortable lifestyle to the later demands of planning for retirement and unforeseen emergencies.

The road ahead is lined with potential financial pitfalls, and it is important that you plan your finances and put your money to work in the right ways so that the very fabric of your financial security does not remain at the mercy of an unpredictable future.

Here are the reasons why investing is of paramount importance to you:

Flourish with the Economy:

Investing provides a viable pathway for you to build wealth over time by growing in pace with the economy, allowing your assets to grow and outpace inflation in the long run. Your investments also fuel innovation and technological progress across various sectors. Participation in the investment landscape not only contributes to societal progress but also allows individuals to capitalise on the growth of the economy.

Goal Achievement:

By strategically investing in diverse asset classes, you can align your investment portfolios with specific life goals, whether it’s purchasing a home, funding your children’s education, or planning for a comfortable retirement. Investments act as a tool in realising these aspirations, offering a sense of financial security and accomplishment.

A Means to Financial Freedom:

Certain investment vehicles, such as dividend-yielding stocks, bonds, and rental properties, offer the potential for generating passive income. This additional income stream can provide you with a reliable source of funds, enabling you to supplement your regular earnings and achieve a greater degree of financial independence. When your passive income outpaces your expenses, that is when you have some level of financial freedom.

Ingredients of successful investing

In order to achieve financial stability, it is important that you are invested in the right instruments and markets suitable for your objectives. Keep abreast of market trends, economic developments, and investment opportunities to adapt your strategies in response to changing market dynamics. These are key to making informed investment decisions.

While empirical data is important, having the right investment temperament, practicing patience, and discipline are crucial virtues for successful investing to achieve financial stability. It is important to remain focused and well-informed on your investment plan, avoid impulsive decisions driven by short-term market fluctuations, and adhere to a disciplined investment strategy even during periods of market volatility.

What does it mean if I don’t invest?

Abstaining from investment might provide a temporary sense of financial security, but it carries the hidden cost of missed opportunities, compromised long-term financial growth, and eroding value due to inflation.

So, are you doing what is necessary to preserve and adequately grow your wealth without taking on excessive risk? Are you equipped with the necessary knowledge and time to handle this essential aspect of your life?