Monday, June 01, 2009

It is easy to be cheated (2) - Capital Protected Products

During the past ten years, many financial institutions introduced structured products, such as the capital guaranteed or capital protected products. They are designed to attract investors who do now wish to take investment risk, and wanted a better return than paid on fixed deposits. 
These structured products are usually issued for a term of 5 years. The capital is protected or guaranteed. The investors were told that the capital is protected and they can earn a higher rate of return.  
To provide the capital protection, about 80% of the money is invested in a low risk bond to produce the capital return on the maturity date. Of the remaining 20%, about 10% is taken away as expenses, distribution cost and profit for the issuer. The remaining 10% is used to buy an option that has a small chance of earning a high return, but a larger chance of returning nothing. 
Most investors of these products got back only their capital after five years, with little or no gain. 
If the investors had bought the low risk bond, they would have received a return of 20%  for the 5 year period. The financial institutions did not want to sell the low risk bonds as they earned a small fee compared to the structured products (which paid a higher commission). 
To be fair, some distributors were not aware that the products were bad products. They were only concerned about earning the high commissions for distributing the products. They failed in their duty in giving the proper financial advise to their customers. 
During the period that these products were sold, the retail customers must have invested several billions of dollars and lost several hundred millions in the return that they would have obtained by investing in low risk bonds. Unfortunately, the financial institutions were not held accountable for selling these bad products. 
Tan Kin Lian


hongjun said...

I thought since the title of this post is on Captial Protected, then we should not mix them with Capital Guaranteed. They are different.


zhummmeng said...

A commonly used modus operandi is comparing to the bank interest rate if the product return is marginally higher to make it look good.
I found it being used by most insurance agents, although correct, it misrepresents the return and risk.
Sometime ago , an ntuc agent at a roadshow was trying to sell me the revosave, told me how the return of the product was better than the bank rate.It was true that revosave's return was higher than the bank BUT how long is the LOCK IN RISK, the return risk, the loss of liquidity or liquidity risk, the inflation risk. Many clueless and unwary consumers would fall for the trick, especially old folks and aunties who are familiar with bank rates . But this is an unethical way of product pushing giving untruths and half truths. The revosave can return less than 1.5% ONLY by holding it or paying for 25 years whereas the bank rate is on year to year basis.If you consider liquidity and discount the cashflows the bank rates are better than revosave except it has no insurance. But who wants insurance if you are saving. One is to maximise accumulation and assuming one has already insurance plan in place.
From this scenerio , the consumers are in danger of falling prey to untruthful agents. How can you trust the product pushers. They hardly tell you the whole truth and nothing but the whole truth.
They apply the Cs to push their products.
(Convince, Confuse, Con, and Cheat)

Anonymous said...

Take for example is DBS Honey Account, which is the Captial Protected Product, now worth less then Capital.

Anonymous said...

Are capital guaranteed products 101% confirmed can get back the capital at the end of the term? What happens if the banks or insurers who guarantee the products go belly up?

What sort of protection do consumers have when buying capital guaranteed products?


Retail Investor Not said...

Mr Tan

It's not fair to insinuate that the Banks deliberately structured these products to lure not so clever investors.

Yes, it's true investors may strip apart a structured product, and buy the component pieces individually.

But, it bears highlighting that many of these component pieces are not available to retail investors, as minimum sizes are required before they can be bought/sold.

It is fair to say these products are better as stand alone.

But it's not fair to say these products are structured to lure unsuspecting, less savvy investors because, unless these are structured, retail investors have NO way of gaining access to them.

So it's either retail investors stick with their retail products like shares and fixed deposits, or if they're game enough to step into the institutional investors world, then they are welcome to participate on their grounds.

Thank you.
Retail investor not

zhummmeng said...

In the future the phrase " capital protected" cannot be used. It is not to be confused with "capital guaranteed". Therefore , it is either guaranteed or not guaranteed.
The guarantor can be the issuer or another bank. In theory, there is no such thing as guarantee because whosoever guarantees can collapse too, unless guaranteed by the government who can print money.

David said...

Don't even expect decent or indecent returns from such investments, only indecent losses!

The only way your money can grow decently or indecently is as follows:

1. Speculate in stocks and property, etc. But expect indecent losses too.

2. Be in business. Risky too but may not be as bad as #1 above.

3. Have a super paying job. Have risks too but you don't lose what you have already gained.

4. Have a super paying job as part of the ruling elite. The best of all and very safe and recession proof too. How safe? As safe as the PAP has 90 over % seats in Parliament! Proven time and again!

Anonymous said...

I think a reason why "capital protected" and "capital guaranteed" funds are so alluring is because some people don't want to dabble directly in stocks and bonds, whose prices can move up and down. An alternative is mutual funds, but their front end loading is typically 2% to 5%, so before your money is invested quite a significant amount is already deducted upfront. Of course, low cost products are hardly marketed at all...

- A Singaporean

Anonymous said...

Retail Investor Not said...

"So it's either retail investors stick with their retail products like shares and fixed deposits, or if they're game enough to step into the institutional investors world, then they are welcome to participate on their grounds."

The problem is not that retail investors voluntarily or knowingly step into this arena, they were lured into it by unscrupulous salesmen with attractive 'return without risk".. This is the untruth and the incomplete disclosure that constitute cheating.

Anonymous said...

For me, no more investments with banks or insurance companies. I learnt many costly lessons. Never trust them. It's always 'heads they win, tails you loose.

Do it yourself is still the safest. In bad times you can just hang on until the tide turns. What comes down must also go up.

Lost Citizen

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