The term churning refers to the excessive buying and selling of securities by your stock broker to generate commissions. It can also mean the excessive purchase and sale of unit trusts by your financial advisor for the same purpose.
Yet another kind is the “cashing out” of investment linked policies (ILPs) to lock in profits and then buying a new one with another fund (incurring sales charge). The same effect can be achieved with just a free switch.
As most (if not all) stock brokers are compensated based on commissions, they could have an inherent biasedness towards the client having more activity. If the client relies heavily on the recommendation of the stock broker or financial advisor but the latter has a less than honorable intention, it can be very detrimental to the health of the client’s portfolio.
The other day, I bumped into a ex-colleague (let’s call him Z) who wanted to liquidate his entire portfolio of unit trusts. His CPF investments of 80k+ had suffered a drop of more than twenty percent. His wife’s portfolio had suffered a similar fate and they were both advised by the same financial advisor.
I asked to take a look at his past transactions and this is what I saw.
I did not know whether to be angry or sad with what I saw. The CPF savings were Z’s lifelong savings.
There are two issues here. Incompetency and a lack of integrity.
Lack of integrity bacause
Financially, the advisor is doing very well with all the commissions he has generated. Perhaps he is even given incentives for his performance. What an irony.
The sad thing is that the problem of churning in the industry goes even further than this.
Have you ever seen advertisements in the newspapers offering cash loans? One of the methods they employ is that they use your CPF monies to purchase unit trusts, charge you a sales fee of 3% and rebate you with some of the money.
Many cash straped people have no choice but to take up the offer. They can’t touch their CPF money and they would rather have cash on hand to meet their needs.
The goverment has taken certain measures that helps to reduce churning. One is the imposing of a 3% sales charge cap for funds purchased using unit trusts. Another is to disallow completely the use of the first 20k in our CPF OA and SA for investments.
While these measures might help to reduce churning, unfortunately, it can never be eradicated.
When the market goes on a bull run, many people don’t really scruntinise their transactions as they are making money.
The individual would do well to take a personal interest in his own investments and check how his portfolio is being managed, be it bull or bear.