Tan Kin Lian's Blog: Avoid complicated products

Saturday, September 20, 2008

Avoid complicated products

This blog was first posted on 17 July 2007

I have made an analysis of the recently launched structured products (i.e. Pinnacle Notes, Minibonds) based on their advertisements. The information is not sufficient to make an investment.

To understand the product, the investor has to read a detailed prospectus with supporting documents. It can come to more than 100 pages, and may take more than 10 hours to read.

After spending this time, the investor will still have more questions. There are still so much uncertainty.

If you ask the marketeer who sell the products, they will not be able to give you the correct answer. Some of them give misleading answers, similar to some of the anonymous postings in my blog.

For example, they will tell you that the risk of a credit event is small, that your investment is safe.

Is this correct? You are warned, in writing, that in when a "credit event" occurs, you may lose part or all of your investment.

What is a "credit event"? It is not clearly spelled out. It is not the same as "bankrupcy". It could mean "failure to make payment on time".

I am not prepared to spend a lot of time, and take an unspecified risk, to earn a small increase in yield (which is not commensurate with the risk). There is a large cost in designing, advertising and marketing the product, and a large profit margin for the product issuer, which have to be borne by the investors.

Lesson: Do not invest in complicated products, that you cannot understand.

If you want to understand how the structured product works, read this article. It is just 1 page (not 100 pages). And it is clear (not confusing).

4 comments:

Anonymous said...: Mr. Tan , the article by Larry applies to all financial products and it includes insurance products which are the worse in term of expense ratio and return. Insurance products are structured too and they getting more complicated these days. They need to be designed in such way that satisfy the issuers and the distributors, except the customers, in term of financial incentives.The agents need to be incentivized with high commission, otherwise they don't want to promote.
Other structured products are no different. They too have one goal in mind; profit for every one.And to be attractive the customers must be rewarded but need to take risk in order to get higher return. The return of structured notes are better than any conventional fixed
income products.They are not meant for everybody.; July 17, 2007 2:23 PM
Anonymous said...: I don't have a problem with finanical companies earning profits, and I can agree that ILPs are not necessarily the best pure investment devices.

There might be a role of "structured" mechanics in everyone's portfoilio, but my concern is about the transparency of costs and risks.

If these can be revealed and reasonably understood, then:

* Social responsibility to consumers is fulfilled

* Consumers can decide on basis of the match of real benefits with their objectives, the price, and the risk. And not hype.

(Since the product is meant for public, it's absurb if only financial analysts can understand it)

* Consumer expectations are managed

* Possibility of product comparison creates competition to drive down cost

Also, I would like to emphasize that there is no doubt about the having to take higher risk for higher returns. The issue is if amount risk is understood and priced fairly.; July 20, 2007 12:25 PM
Gilbert Tan said...: Hi Kim Lian

Congratulations! Retirees have been identified to receive their minibond investments from DBS Bank. It is indeed gratifying to learn of this on the internet news this morning.

We should continue to highlight such issues until all investors receive their investments from the banks whether they are retired or not. After all, banks should not be allowed to go around selling blank pieces of paper. I am not a minibond investor.

Kudos to you once again.; October 23, 2008 12:12 PM
Anonymous said...: Hopefully with pressures from the media, the investment bank can give the investors a satisfactory answer. Hey, do you think we (investor) will go your bank after losing money?; November 16, 2008 11:30 AM