Here’s a quick poll: The fees involved in trading stocks using CPF money is the same as if we’re trading in cash. True or False?
If you answered True, you’re right.
If you answered False, you are also right.
Trading stocks with CPF money, under CPF Investment Scheme (CPFIS), involves the same brokerage fees incurred when we trade stocks with cash. On top of that, we also incur fees from the agent bank that manages our CPF Investment Account, and a mandatory CDP settlement fee.
Fees Charged By Agent Banks For CPF Investment Scheme (CPFIS)
The summary of fees charged by DBS, UOB and OCBC is as follows:
| Charges | DBS Vickers | OCBC Securities | UOB Kay Hian |
|---|---|---|---|
| Quarterly Service Charge (per Counter) | $2.00 | $2.00 | $2.00 |
| Minimum Quarterly Service Charge | $5.00 | $0.00 | $0.00 |
| CDP Settlement Fee (per transaction) | $0.35 | $0.35 | $0.35 |
| Bank Charge (per 1,000 shares) | $2.50 | $2.50 | $2.00 |
| Maximum Bank Charge | $25.00 | $25.00 | $20.00 |
By now, you may have a big question mark over your head. What bank fee? Didn’t we pay “fees” to the brokerage firms in the form of commissions?
To fully understand why there’s a bank transaction fee, we have to understand how the system works.
REFRESH: If you have read the previous article “Invest in Stocks with CPF”, you would recall the role that banks played in CPFIS.
Behind The Scenes of CPF Investment Scheme (CPFIS)
As mentioned in the previous article, we have to open a CPF Investment Account (CPFIA) with one of the big 3 banks in Singapore: DBS, UOB and OCBC. They would, in a sense, be the fund manager for our CPFIS stocks.
In order to start trading stocks with our CPF savings, we then have to link our CPFIA to any of the brokerage firms in Singapore. If you only use one brokerage firm (B1), you will see all the stocks bought with your CPF money at either location: the user portal at the bank (Bank) and at your brokerage B1’s portal.
If, for example, you decide to use another brokerage, you can link your CPFIA to a new brokerage (B2) and start trading CPFIS stocks with B2. At the same time, there is no need for you to sell off the CPF stocks you transacted and held with B1.
However, you can’t see the CPFIS stocks you bought and held at B2 from the portal of B1 and vice versa. You can only see ALL the CPFIS stocks you have with B1 and B2 from the user portal of the Bank that you opened your CPFIA with.
In summary, the brokerage handles the transactions of your stocks, while the bank that you opened the CPFIA with manages (or store) your CPF stocks.
Bank Fees Explained
Now that we have sorted out the relationships between the banks, CPFIA and the brokerage, the schedule of fees by the 3 banks (CPF calls them “agent banks”) becomes clear. It also explains why only the 3 big banks of Singapore are listed in the Table 1 above.
Transaction Fee
As opposed to brokerage’s charges based on the value of stocks, this fee is based on the number of shares transacted. Luckily, all the banks capped this transaction fee at 100 lots (or 10,000 shares). So one does not incur more transaction fee if they transact more than 100 lots of shares.
REFRESH: Fees charged by brokerages in Singapore
CDP Settlement Fee
This is also a fee based on the number of transactions. Like the SGX clearing fee that was collected by the brokerage on behalf of SGX, CDP Settlement Fee is collected by the bank on behalf of CDP.
Quarterly Service Fee
This is based on the number of counters held in the portfolio and is deducted from CPF on a quarterly basis.
Practical Note On CPFIS Agent Banks
Free To Use Any Brokerage Firms
Initially, Mr Salty was confused at the arrangement. It made him think that he cannot trade stocks with his CPF money using the brokerage firms not related to the big 3 banks. However, this is not the case.
The banks charge the fees whether the brokerage is related to the bank or not. For example, DBS will still deduct the bank fees from CPF, even if we transact with DBS Vickers and our CPFIA is with DBS.
Freedom To Transfer CPFIA To Another Bank
Likewise, even though Mr Salty opened his CPFIA with DBS, he can always transfer his CPFIA to OCBC. However, the fees involved made it financially unwise to do so. The transfer will also mean a downtime in trading with stocks, translating to missed opportunities.
Factor In Additional Cost
In Mr Salty’s previous post on calculating the actual profit of stocks, he put the total cost at about $65 per stock. With the bank charges involved for CPFIS stocks, the total cost can be $71 – $116. This in turns increases the Minimum Selling Price:
Minimum Selling Price = [(Buying Price * Number of Shares) + $71] / Number of Shares
How To Factor In Additional Running Cost
The Quarterly Service Charge, at per counter per quarter basis, adds on a running cost for holding onto the stock.
We can calculate the total cost by adding in the total Quarterly Service Charge incurred throughout the whole period of holding onto the stock. Then we apply the formula for calculating stock profit:
Profit = [(Sell Price – Buy Price) * Number of Shares] – Administrative Fees – Bank Charges – Total Quarterly Service Charge
The downside of using this method is that the actual profit can only be finalised after the stock is sold and one must keep track of the Buy date and Sell Date. We still have to take the profit and divide it by the number of years the stock was held, so as to derive the annual rate of return. This is how we can know if we beat the annual interest rate of 2.5% by CPF.
Keeping Track Quarterly
A lazy way of knowing whether we have “beaten” the CPF interest rate and total cost, would be to ensure 2 things happen every quarter:
- Dividend received by that stock covers the Quarterly Service Charge ($2)
- Dividend accounts for more than 0.625% of Contract Value
- Dividend covers fixed cost
Since many companies pay dividends on a quarterly basis, it becomes easier for us to check, on a quarterly basis, whether the investment is bringing back good returns.
The third component is the tricky one. The fixed costs depend on how many shares you buy. It is $71 if you only buy 1,000 shares, and $116 if you buy 10,000 shares and more.
Whatever the amount is, decide how long you intend for the dividend to pay for the fixed cost. Assuming you want the fixed cost to be paid for within a year, you divide your fixed cost by 4 quarters. Your quarterly dividend should then be able to cover that number also.
Example
Assuming a Contract Value of $5,000, incurring fixed cost of $71, and an objective to let the dividends pay for the fixed cost in a year.
As such, in the first year, my quarterly dividend has to meet the following amount:
| Dividend received by that stock covers the Quarterly Service Charge | = $2 |
| Dividend accounts for more than 0.625% of Contract Value | = $32.5 |
| Dividend covers fixed cost | = $71 / 4 = $17.75 |
| Total | $52.25 |
Therefore, as long as the company pays a quarterly dividend of more than $52.25 in the first year, we should be able to recover all cost by the end of the year.
Parting Words
The journey to start investing with our CPF is not a straightforward process. However, once the initial set up is completed, the trading process is identical to that of trading with cash. The only thing we should look out for is the additional bank charges that investing with CPFIS would incur.
These charges can be significant if we’re not careful. That being said, if we take these additional costs into our consideration during our stock analysis, it is still possible to earn decent returns on our CPFIS stocks.
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Sources of Information Used
DBS
https://www.dbs.com.sg/Resources/personal/docs/investments/cpfinvestment/cpf_schedule_charges.pdf
OCBC
https://www.ocbc.com/assets/pdf/investment/cpfia_schedule_of_charges_201112.pdf
UOB
https://www.uob.com.sg/web-resources/personal/pdf/personal/invest/financial/cpf-investment-account/CPFIS-charges.pdf