Tan Kin Lian's Blog: A view: Investors should bear bigger responsibility

Saturday, September 27, 2008

A view: Investors should bear bigger responsibility

Dear Kin Lian,

How's the going? I just heard you are leading the charge on the minibond issue. Its a good issue to take up.

However, there is a catch in this whole issue which I may draw your attention to. Although the instruments' name such as High Note or minibond are pretty misleading (well, even for an financial economics trained person like me got the wrong idea at the first look), but investors who are invited to invest in such instruments should be sophisticated enough to look beyond the high return without questioning the risks involved. Thus in my view, the investors should bear bigger responsibility for their investment decisions. I mean, when they are making money, they would not share with others right? They would not even bother about how complicated the instruments are. But when the instruments go bust, on what basis could they demand compensation?

Misselling? Hmm... there would be a big debate here. I believe the financial institutions that sold these instruments should have their backsides all covered by disclaimers and such.

The only direction to go is investor education as well as taking MAS to task. MAS as a regulator, should know the risks involved. It should, as a regulator, makes specific demand on the financial instituition to highlight the all risks and implications involved in all the marketing tools and documented agreements, in BOLD and not in fine prints.

Maybe it would be good for you to raise these few points along with your present direction of fighting for the investors' interests at hand.

Regards

MS

29 comments:

Anonymous said...: MS,
The return is small at 5.1%. If the return has been say at 18%, investors would be more aware that it is a high risk product with high return. Now we know minibond is a high risk product with low return!; September 27, 2008 6:07 PM
Wealth Journey said...: Yes, it takes two to tango. The investors might be at fault here as well.

However, we should not simply say that since it was sold on a willing buyer willing seller basis, the buyer should borne the bigger of the responsibility.

What I have so far seen in Mr Tan is his advocacy of Fair Dealing.

He have cited numerous examples in his blog of cases where ignorant consumers are convinced into buying a product that is unsuitable for their needs or paying a unjustifiably high premium for it(be it insurance, unit trust investment or foreign currency deposits).

So, I believe there is a role of both seller and buyer. The buyer should do his due diligence no doubt. But the seller should be bounded by a code of conduct that will give a FAIR GO for the buyers.

How can you justify that a consumer who wished to only look for a higher interest fixed deposit product is recommended and sold a product that does not have the characteristic of a fixed deposit (give you 5% but 100% potential loss). The argument on saying that it is highlighted that it is principal protected not principal guaranteed or disclaimers are added is going into semantics.

We just want the product manufacturer or intermediary to do their own due dilligence and create a fair dealing environment for the consumers.; September 27, 2008 6:08 PM
Anonymous said...: MS, I believe you are not familiar at all with the circumstances of what happened. It is not a case of investing in a stock and then the price of that stock plunges. Perhaps you'd do better to avail yourself with the facts from the Business Times, Straits Times, online sources, etc before you offer your comments.; September 27, 2008 6:15 PM
nhyone said...: Many people now claim that the "meager" returns of 5% shows that the investors are risk-averse.

I disagree that 5% is low return. Low return is 0.25% to 1%. 5% is incredibly high compared to savings and FD interest rates.

I do agree that risk-averse investors are attracted to just these kind of products... supposedly safe and decent returns.

We can't use what we know now to judge people's actions one or two years back. Why did no one sound the warning back then?

Telling me Lehman Brothers would go under is like telling me DBS would go under. It's impossible to imagine so in 2006/2007.; September 27, 2008 6:59 PM
zhummmeng said...: Read section 27 of the Financial Advisory Act(FAA). It is NOT about making or losing money. It is about whether the instrument should have been recommended considering the financial circumstances and the needs of the investors.In other words was the recommendation on a reasonable basis.
Considering all this information issues like mis-selling and misrepresentation or conflict of interest can be uncovered and established.
Take a simple example:
An investor bought a Growth POlicy from NTUC using his CPFOA and 4 years down the road he employed a financial planner to review his portfolio of assets and insurance and after examining the KYC and all the information given, his needs, his risk tolerance and financial circumstances it was found that the single premium Growth was an inappropriate recommendation.The investor has NOT 'lost'in face value but in real term he lost
but this is not the issue. The issue is the recommendation was NOT suitable and inappropriate to meet his long term needs.It was not on a REASONABLE BASIS.It was found that the adviser was incompetent, failed to disclose material facts and conflict of interest.The investor can sue the company and the adviser for loss of opportunities and time after 4 years and the quantum of loss to be determined by the product or vehicle that should have been the appropriate one.
To cut the story short, this is how section 27 of FAA will apply and be interpreted.
Yes it is agreeable that it is unfair if the product makes money no one will complain and complain if there is a loss. But the law states very clearly that it is the adviser's DUTY of care and COMPETENCE to ensure a reasonable basis recommendation relative to his needs and circumstances. If it is found that the adviser's recommendation meets section 27 he or she is absolved from all blames and liabilities even the investment suffers an enormous loss.
I hope consumers are aware of this and that product pushing and selling is highly dangerous for both parties.
Consumers must know of their rights to responsible and competent financial advice.; September 27, 2008 7:05 PM
Anonymous said...: Even for NTUC Income share, the dividend is usually more thn 5% per yer, and the principal not only intact, it keep on increasing!!
To a poor, even a difference of $5 per month is a big sum!
You call these down-to-earth people greedy? It is not very kind.; September 27, 2008 7:10 PM
zhummmeng said...: MS,
buyer beware (Caveat Emptor) is unfair and dangerous to consumers. CE assumes consumers have all information and can make informed decision.But you mustn't forget unlike consumer products, financial products are far more complicated and they are intangible.
Consumers cannot touch, feel, trial test, or test drive, hear, and see.There is no warranty for defects or replacement or money back guarantee, only 7 day free look.If the buyer consults another person who is an expert within the 7 days chances are that it will be canceled. But buyers have pride. They don't want to look silly or to be known making poor judgement or buy. This is the pride hard to overcome like many who bought whole life insurance products they will NOT listen.
Consumers rely on the words of the advisers and the marketing brochures and prospectus which is NOY EASY to understand for MOST people especailly for the old folks.For them they cannot make decision.The responsibility of making decision must be made with the help of the adviser.Is it good for me or not? The adviser should know and answer whether it is good for that person after examining all personal information of the client and needs and should be able to help the client making the decision. This is responsible advice.
But alas, that was NOT the intention of the adviser or consultant. Their intention was to make a sale and not help. It was wrong from the start. Old or young the salespeople just go for the kill and all hell breaks loose now. The advisers and the banks have to pay for this wrong approach and non compliance.
Caveat Emtpor is unfair to the consumers. All consumers are assumed to be clueless. The EXPERTS are the salespeople or advisers.
(doctors cannot claim caveat emptor if something goes wrong with his patient after taking the medicine prescribed by him, can he?); September 27, 2008 8:04 PM
Anonymous said...: I agree MS is not familiar with the case. If the FI has been fair in indicating these products' high risk level, investor would not be seeking redress now. The issue is these were sold as low risk, hence the outcry of injustice.

Also, can one consider 4-5% over 4-5 yrs term a high return product?; September 27, 2008 9:04 PM
Anonymous said...: Yes, I think the comments of MS are not fair. These highly complex structured products have been sold to thousand of small investors many of them are not aggressive investors who want to speculate in risky investments for quick and hefty gain. Look at this,for example, the High Notes 2 is paying only 4%p.a. and investors must lock in their capital for 5 years! This is no big deal really in terms of return. So these investors really want some long term investments that are safe and stable. Many of them are elderly people with little knowledge of comlicated products and depend very much on the supposedly professional advice of the financial advisers and this is how they get into this trouble. MS, have a heart for these unfortunate investors. Do you know that there is a paragraph in the pricing statement of the HN2 saying that such notes are not suitable for inexperienced investors. So in the first place the FAs should know that they should not sell such products to gullible elderly people some of them can't even understand simple English. But FAs have high target to meet and they are also eager to earn commission by selling more. Afterall they switch bank frequently. Do you think they f..care about who they sell to? Mustn't the bank exercise more stringent control to ensure that inexperienced investors are kept out of this dager zone.
Please do not pour cold water over What Mr. Tan KL is trying to do to help people. If you are not involed, please stand aside.; September 27, 2008 9:51 PM
Anonymous said...: What happened at the branch that fateful day.

Relationship mother asks my mum to take a survey to analyse her risk. The survey clearly indicates that my mum is a very low risk-tolerant investor. And my mum still possesses this survey.

Relationship manager proceeds to persuade my mum to buy Pinnacles Notes based on the "low-risk" result of the survey.

Surely, something is wrong here?; September 27, 2008 10:41 PM
Anonymous said...: Dear MS,

When a junk product packaged as a low risk product sell under reputable, highly respected, branded FIs,as a ordinary investor would you fall into the trap. It is just like PAP lead by MMLee, GCK ,LHL would you doubt their integrity?; September 27, 2008 11:40 PM
Anonymous said...: MS,

You may be right that investor should bear the resposibility by willing investing into the bonds or even not reading the fine prints. But before commenting, please do consider that some of the investor are actually 'aunties' or 'uncles' with minimum amount of education being mislead, that it is actually FD with a higher interest rate. Comparing to actual stocks or share,the returns are consider lesser,hence not realising that it is actually an investment.'Mis-selling' are to those who know little about the investment unlike those who are in the industries i.e all the financial advisor.So by commenting on buyer should bear more responsibilty or equal responsiblity,seems a little unfair to those elderly who had put in their life saving.; September 27, 2008 11:48 PM
Anonymous said...: Bone of contention: How do we measure risk ?

If we base risk assessment qualitatively, Lehman Bro. actually has a better S&P,Fitch rating than our local bank,at the point of sale ie. So does it imply placing investment with Lehman then carried less risk than placing FD with our local bank?

Over the months,(S&P+Fitch+Moody)'s ratings on Lehman began to slide.Is it the responsibility of our financial advisor to alert investors that their investment have run into higher risks ? (I thought of this because a RM rang to get me to consider selling my unit trust holding when the price "got too high" and the chances of a price plunge is approaching)

Secondly, how do we describe the role of a financial advisor ?
(1)A vending machine - "Just give me what I want" OR
(2)a professional like a doctor or pharmacist -"I will only sell drug X to you after I have determined your suitability to this drug.

I think MAS need to re-define an FA's role because there are those who were not courted by RMs but who responded to newspaper advertisements or word-of-mouth (forums/friends/colleagues)aka gossip.; September 28, 2008 2:29 AM
Anonymous said...: The collapse of Lehman Brothers is really an unfortunate event that triggers this whole saga. Just a month ago, it was really unthinkable that the 156-year old investment bank can be folded up. So when investors bought minibonds and/or high notes, nobody would have thought this would happen at all (remember LB has a high credit rating then). Thus, I feel it is correct for the Relationship Manager to say that this was a low risk product, given the circumstances then. But LOW RISK does not mean NO risk.

So I agreed with MC that investors cannot now turn and bite the Relationship Manager back now. They have to bear certain responsibilities themselves.; September 28, 2008 10:17 AM
Anonymous said...: Nhyone,
5% to tie up your money for 5 years are low return. You can not compared short term with medium term investment. Last year Chartered bank even offered 4.25% FD though it was called after 3 months.; September 28, 2008 10:20 AM
Anonymous said...: I disagree with 10.17am. You might be speaking about yourself.You are talking like a CFA or one with Master in Applied Finance and you are telling the Ah Peks and Ah Mnn that they should understand derivatives like CDOs or CDS or who is Lehaman or Morgan Stanley and so forth.
These old folks and many others who have to rely entirely on the word of the adviser.
Even people who can read and write are NOT able to understand the jargons.For these people they needed help to make the decision.
Now they are badly lynched and you say they should be responsible for their actions.You think you are savvy to understand the financial engineering?; September 28, 2008 1:13 PM
Anonymous said...: Even pref shares of local banks pay more than 5% interest per year, so how can you call these CLNs "High risk high return products"?
When so many "lousy products" flood the market, and good ones may be excluded from retail investors, it is very hard for them to choose & decide.
Furthermore, sales staff (call "advisers" or "consultants")like to push "lousy products", because of higher commissions.
So is it fair to ask buyers to bear more resp. ???; September 28, 2008 1:28 PM
Anonymous said...: I also disagree with 10.17am.

There are 3 issues involved.
1) The misrepresentation in the sales brochures and prospectus. Please get a copy and read them.
2) The selling process of not taking into consideration investor risk profile, not highlighting risk, not providing all relevant materials, rushing clients to close deals, not providing professional advice and RM lack of product knowledge. These are from what I have read so far from various investors feedback in the blog. So read them before giving your comment.
3) High risk products that should have been restricted to high income group and should not have been distributed to retail investors who have no clue on the complex product. I have a economics degree and I have read them many times and my impression is still an investment in the referenced entities bond like investment. How can you expect the uncles and aunties to understand?; September 28, 2008 1:50 PM
Anonymous said...: It is pointless to argue now that uncles and aunties who invested in minibond/high notes don't know what they were investing. These uncles and aunties can be high net-worthed individuals!

This is not the first time people got burnt from investment and then claimed ignorance and blamed the sellers. Have we all forgotten so many investors got burnt from the last Asian Financial Crisis? During that time, a lot of investors also claimed that they were not told the risks... But at the end what did we get after complaining to MAS?

Ultimately, it is the MAS which approved these types of investment products. As MC mentioned, the selling banks have their butts all covered already, eventually we have to treat this as another expensive lesson... and the cycle continues...; September 28, 2008 2:32 PM
Anonymous said...: From what I have read, many uncles and aunties are retirees and not high networth and invested with their life savings!

Agreed that probably nothing can be done and it is an expensive lessons for all but it is not right to state that sellers are not to be blamed unless you are one of those sellers!; September 28, 2008 2:54 PM
Anonymous said...: Mr Tan,
Could you round up how many percentage of elderly bought these investments? How many housewives bought these? and other working adults? From this statistic, it might reveal some light of how these products were being sold by our local banks.
As for those who bought from the brokers' firms, I believe those who bought from them are more financial savvy. I won't be surprised not many elderly folks bought from them unless they play stocks in the market and these people should be considered high-risk investors.
This is just my opinion that case-study is needed and compensation by the distributors must be meted out accordingly.; September 28, 2008 5:02 PM
Everlearning said...: Mr Tan,
Just a bit more to add to my earlier comment. There might be some who are afraid to come to join this petition so the statistic can also prove incomplete in the findings.
Maybe, the banks and brokers must provide this statistic so that a clearer and accurate picture is projected to the public!; September 28, 2008 5:25 PM
Anonymous said...: According to the latest Edge magazine, unless MAS is willing to support us, the retail investors, it is almost impossible to win against the sellers. Based on past experience, it is highly unlikely that MAS is going to help the retail investors. Therefore we must be mentally prepared to write-off our investment and treat it as an expensive lesson. sigh...; September 28, 2008 6:34 PM
Anonymous said...: 5.02pm, you can not make that assumption that all those who bought from the brokers are financially savvy. My sister who invest a mall amount in the stock market is not financially savvy. She invested because she believed that it is a low risk product so she invested a large sum compared with stock.; September 28, 2008 7:07 PM
Anonymous said...: 7.07pm, i agree with you.

5.02pm For high risk investors who bought these products, it's for diversification into some low risk portion of their portfolio. They understand stocks are risky and wanted some low yield yet safe investments in case their stocks turn sour. Hence, their buying into such products doesn't mean they intended to take high risks.; September 29, 2008 12:44 AM
Anonymous said...: For DBS HN 5 investors, we have a very clear target. We should get united together and go after DBS.
So what DBS is a big giant and we are small flies. DBS has an international reputation to take care.; September 29, 2008 12:45 AM
Everlearning said...: I agree with you 7:07PM that your sister is not financially savvy because she apparently trusted the bank or broker with her large sum of money. Who would want to lose all their hard-earned money?
We must learn from now on not to trust these banks when come to investments that lock or loot your savings at your expense.
I also have to learn that not all investments suit me or make the extra money for me because I lost some too.; September 29, 2008 8:01 AM
Anonymous said...: http://luxelassstory.blogspot.com/2008/09/outrage-cries-and-anger.html

an RM's perspective of who's right and who's wrong.
what do you think?; September 29, 2008 1:29 PM
Anonymous said...: 5% =high returns????
Cannot touch the money for 5yrs+ some more.

Compare to
Inflation = 6%
GST=7%
Electricity up > 21%

5% is peanuts.; September 30, 2008 4:24 PM

Saturday, September 27, 2008

A view: Investors should bear bigger responsibility

29 comments:

Blog Archive