This is similar to the equity linked notes. They are usually marketed as Dual Currency Investments or Dual Currency Deposits.
They are created by financial institutions and usually take the following form - the capital is invested in a certain foreign currency. If the currency rate stay above a certain price X during the specified , the investor gets a specified interest rate, which is higher than fixed deposit rate.
If the currency rate fall below a certain price Y, the investors have to take delivery of the specified currency. The investors are told that they can keep the currency until it recovers in value. The investor think that it is all right to keep the currency.
This is how the investor can be cheated. If the specified currency goes up 10% during the holding period, the investor gets a certain interst rate, which is lower than the actual gain. The product issurer keeps the balance of the gain. If the currency drops by 10%, the investor has to bear the full paper loss.
There is no way for the retail investor to know if the terms of the transactions are fair. As the terms are determined by the product issuer, it is likely that the terms are created to make a profit for the issuer, at the expense of the investor.
Many people have lost a large proportion of their capital when the currency market goes against them. If the market goes in their favour, the received a higher interest rate, but they were not aware that this is much lower than the actual gain.
To make the matter worse, some financial institutions lend money to take five times of the risk of the invested capital. The retail investors were not aware that their risk has increased five times due to the leverage. If the currency drops 20%, they could lose their entire capital. They do not get a commensurate return if the share price moves in their favour!
Is this fair? Can it be considered as cheating?
Tan Kin Lian
How can it be considered cheating?
ReplyDeleteAll the terms are there to see.
If it goes up, you collect your principal.
If it goes down, you get exercised into something else.
Anyone who has the ability to think will be able to see that the downside is unlimited.
No need for a bachelor's degree.
It's not rocket science.
However, when people outsource the thinking to someone else and then cry foul that the thinking is flawed...
Investors should do their own thinking.
If they can't do that, they should stick to things they are able to think and understand about like stocks, shares and fixed deposits.
The loss caused to CPF members' account by insurance agents runs into billions. The agents are NOT competent in investment and if they claim otherwise, that is cheating.
ReplyDeleteI have heard ntuc agents persuading their clients to invest their special account balance in single premium endowment Growth which earns lesser and carries high risk. This is cheating because their clients' ignorance was exploited. Even CPFOA isn't worth investing let alone CPFSA in this high risk product.
MAS should be concerned about this as this is playing with members' retirement account.It is not making their CPF balance working harder . CPF must also stop allowing insurance agents to handle members' money as they are not qualified.
To "June 05, 2009 8:36 PM",
ReplyDeleteFrankly speaking, MAS should disallow Temasek from making further investments. Everybody know that Temasek source of capital comes from CPF members monies. Temasek's lousy market timing skill is not better than insurance agents skill.
Anonymous June 05, 2009 8:36 PM,
ReplyDeleteit is idiotic to invest in Growth when CPF is giving higher risk free return.
Your first 20K in OA account is getting 3.5% risk free. If you wish for higher return transfer your excess OA to SA account up to the minimum sum. The first $30K is currently paying 4%+1%=5%.
Next year the first $30K will pay at least 2.5%+1%+1%=4.5% and the remaining amount pays MINIMUM 2.5%+1%=3.5% risk free based on the 10 year bond average yield and NO LOCK IN risk.
In fact,if one is young and has enough spare balance you should transfer up to SA minimum sum limit to compound for next 20 years to double the balance to quickly build your nest egg, eg $134K.And any excess earned will be be returned to OA account. This should be the correct advice and not invest in products like Growth which carries lock in risk, non guaranteed risk and other risks.
Consumers should consult a proper and qualified adviser to plan for their CPF balances and NOT insurance salesmen.
NB:July 1 the Minimum sum is $117K
imagine you compound $117K for next 20 years till your retirement at 4.5%(average).
Can someone explain "some financial institutions lend money to take five times of the risk of the invested capital"? How is this done?
ReplyDeleteUsing CPF SA to invest needs to be extra careful because now the government still pays quite high interest rate. Unless any investment can give a guarantee interest rate higher what I am getting from the government, I prefer to leave my CPF SA intact for old age.
ReplyDeleteFor DCI, a bank financial consultant did share with me: min 20k, choose SGD and another currency (eg AUD). If the exchange rate is not favourable to me, keep that currency and earn a higher interest rate. My problem is : what am I going to do with that foreign currency? Keep it for long term? For how long? Too many uncertainties, I better stay away.
starlight
There is this joke that I heard before regarding the president and LKY.
ReplyDeleteOne day LKY invited the president for dinner at his house. LKY had a giant fishtank with many goldfishes inside. Whenever LKY walked past the fishtank the goldfishes would stand on their tails and use their pectoral fin to salute him. The president was intrigued and asked LKY how he did that. LKY replied : It is simple, superior mind over inferior mind.
LKY walked into the kitchen to see whether the food is ready. When he came out of the kitchen, he saw the guy standing in full salute while facing the tank of goldfishes.
Is this cheating?
If this is cheating and a crime, it is not just the works of insurance agents alone in insurance companies, but supported by their "in-house" or other affiliated corporate legally trained persons / lawyers - setting a "legal trap" to entrap the ignorant commoners while pretending to be innocent, knowing jolly well if complications should cropped up later, the corporate legal trap and legal fight will overwhelmingly work against the limited monetary resource of the average investors.
ReplyDeleteThis is corporate aggression by using legally trained or affiliated lawyers.
If the governance by Authorities is deliberately left weak and indirectly supports such corporate aggression, it becomes a political sin; than just remaining as a simple case of cheating a layman.
A country's law and its legal system is a reflection of its (citizens & leaders) values of right & wrong.
ReplyDeleteIn some countries, the legal thinking is "vendors be fair".
The onus is on the vendors to be fair and equitable.
In other countries it is "buyers
beware". The onus is on the buyers to be the "experts". Too bad if you are born poor, stupid, helpless or trusting.
That is why some countries are worth dying for.
If the world does not owe you a living, why do you owe the world a living? Loyalty is a 2-way street.
Insurance agents are still selling annuities using the minimum sum. They all know that their annuities
ReplyDeletecannot beat the CPFLife or their annuities cannot be better than leaving in the CPF. These agents prey on unwary and clueless old folks. These greedy and unscrupulous agents must be brought to justice and be punished for cheating.
It is cheating when they should or must know that NO annuity is better then CPF.
MAS must investigate. And all consumers who bought annuities with CPF money must re-examine the product to see if they can get out of it and sue the agents.
I am a ashamed.
MAS is dragging its feet or is behaving like an ostricth. It is not interested in overhauling the system. It has been proven that the financial failures were due to systemic failures and lack of regulations. MAS still beleives in Caveat Emptor.
ReplyDeleteCome on , MAS, if consumers can make informed decision and MoneySense can help them make this decision, there is no need for advisers and insurance agents anymore. Consumers can buy from online supermarket whatever they want, without having to pay hefty commission.
Having a human being like insurance agent in between is very far dangerous if the human is dishonest and incompetent. It is like having a thief to advise you. Or like having a plumber to advise on financial matters. Because of dishonesty and incompetence all investments and insurance products went sour because of these human beings in between who twist and distort truths. So, MAS must control these human beings to make sure they are fit and proper.
Fit and proper means the human beings must be honest and competent, put others' interest first, follow the rules like section 27 of the FAA and be held responsible and accountable for advice and recommendation. These MUST be the traits of good human advisers and insurance agents, otherwise it is better not to have them. They create havoc and ruin others' life. Examples are like annuities and the growth product.These agents will screw up the retirees. These retirees are NOT given the best advice.
This applies to humans running the FIs too. Make sure no greedy ceo and senior managers are there to reward themselves and pretend they are after the interest of the public. MAS must act and clean up the industry to start afresh.
Justice must be done!!!!
No one in authority will ever classify this as cheating. They will just tell you 'buyers beware'. I will just be bold and say it is 'legalise cheating'
ReplyDeleteThe Government has a vested interest in banking and insurance in the first place, so do investors think that the Government will go all out to protect investors' interest over their own by banning such products? Turning a blind eye is the most they will do.
Secondly, the big banks and insurance companies pay hugh taxes when they make a lot of money. Investors don't pay any taxes on their capital gains? Whose interest do you think the Government will protect? Keeping one eye closed is the most they will do.
Lost Citizen
I am a ashamed.
ReplyDeleteJune 06, 2009 1:02 PM,
If not for my intervention my uncle would have been conned into buying the annuity by a unscrupulous agent from you know which company.
My uncle is diabetic and I don't think he would live to 95 years old to benefit from this for life annuity.I told him to leave his money in the CPF to earn higher return and higher payouts, even for 20 years it is verry good.
I share this to show how incompetent and unethical insurance agents are. They don't care whether their clients can benefit or not. They only think of the commission. That is why MAS must look into this to remove commission and come out with a correct compensation plan that rewards expertise and good advice. Those who are product pushers or salesmen must not be rewarded much
for they are not adding values to the clients.
Another warning to consumers about private annuity.
Currently private annuity CANNOT beat the CPFLIFE or even to leave with CPF.
The Watchman
Someone asked, how does the bank lend money to leverage up to five times of the invested sum?
ReplyDeleteIt is quite simple. The wealth manager will ask you to sign certain forms. The bank will lend up for the four times of your capital to invest in the dual currenty cinvestment. They will earn five times of the normal commisison, while you take five times of the risk.
A few investors were advised to make this investment to earn five times of the interest rate. They did not know the xtent of the risk. Last September, when the currency moved by 10% in a few days, the investor lost 50% of the original investment.
They were asked have to top up their deposit. If there were unable to, their contract is closed immediately and they lose 50% of the capital.
If the currency move 20% against them, they will lose their entire capital.
Two invsetors who lost more than 50% of their principal approached me for advice. This is how I learned about this very risky investment.
Mr Tan, thanks for the explanation!
ReplyDeleteThis is a derivative product. It is writing an option and is suitable for some (note, i said, 'SOME') investors who have an appetite for risk.
ReplyDeleteLike all currency linked pdts, you may lose some or all of your capital.
It is a flawed argument that if this instrument is 'risky' and hence given a blanket 'no go' by Tan Kin Lian. You need to do a proper Fact Find first before making these sort of statements.
Dual Curreny Investments are usually not bought by sophiscated investors but people who do not know FOREX and options trading.
ReplyDeleteBank staff earn high and non-transparent commissions for selling such products. MAS has issued a notice a few years back, warning banks not to mis-inform customers that its a higher yield deposit product.
The name Dual Currency Investment is a misnomer. Its essence is speculation. Its also a dumb way to speculate with little on high side gain and all the downside risk.