## Monday, October 19, 2009

### Capital Protected Product - sold in 2002

A customer invested \$25,000 in the structured product sold by a local bank in early 2002. After waiting for 5 years, the customer received a return of \$25,528. The gain is \$528 (i.e 2.1% for 5 years, or 0.4% per year).

The formula used to compute this return is:

(a) 5% for 5 years or
(b) 45% of the smallest absolute performance of 1 stock out of 15 selected stocks.

Among the 15 selected stocks, at least 1 of them showed an absolute loss for the 5 years. So, formula (b) produced nothing.

The investor gets 5% for 5 years under formula (a), but after deducting the sales charge, the net return is only 2.1% for 5 years.

During these 5 years, the return from the 15 stocks is probably 30% or more. The customer gets 2.1%. If the customer had invested directly in the 15 stocks and taken the risk, the return would have been very attractive.

What is the logic of formula (b)? I cannot understand its logic. It seems to me, that it is designed to take advantage of the naive customers.

I cannot understand how the regulators can allow the unsavvy customers from buying into this type of product.

Tan Kin Lian

How the product works
 The bank invest about 85% of the money in a low risk bond that will give 100% of the capital guaranteed at the end of 5 years. It uses the remaining 15% for its marketing, purchase an option to give the 45% payout and for its profits. I have no clue how much is the option money, but it is likely to be less than 5%. At least 10% of the invested sum is wasted in expenses and profit for the bank. The chance of striking formula (b) is probably less than 5% anyway.

Advice: Never invest in a structured product that contains non-transparent charges and gambling outcomes where the odds are not disclosed to you.

Anonymous said...

People tell you it is risky to invest, so you shd let them take the risk for you and you just "earn" your "profit" risk free.
You trust them at your own risk.
It is the reverse, they take the profit and you take the risk.

It is quite easy for you to do so. You could also invest in stock and "take risk".
This is how people make money by exploiting your ignorance.

Anonymous said...

NTUC agents are claiming their single premium endwoment Growth is capital protected(the word is illegal now).Their poster shows that it can return 4.1% over 10 years.
Let me advise you that Growth will not NOT return 4.1% but below 4%, maybe 3.5% if history of this product is considered. All of the Growth tranches in the past returned at least 30% lower than projected.
So do you think this new Growth will return as projected?

Anonymous said...

I remember buying a product with similar features a few years back.

Of course "Event B" was marginally missed. A miss is a miss. Therefore I was paid principal + the guaranteed interest payment (quite miserable but above prevailing savings rate).

However, I did not feel sore or cheated in this episode. The RM that sold me the product explained to me in no uncertain term the merchanics of the product. She went through pages and pages of their bank's brochures highlighting the monies I would have gotten upon the occurence of events marked as "scenarios". The prices of the basket of stocks in play was posted to me. Any changes in the prices were also updated and sent me as depositor/investor. Every thing that I need to know was transparent. (Unlike the mini-bonds,....notes saga).

Why did I agree to purchase the product after detailed analysis by the RM?

Well, I played "ticam"; and I loss out. Simple as that. It's like playing jackpot. I did not bother to find out how much my opponent stand to gain? For xx years I was holding on to the slim chance that not ONE of the whole basket of portfolio woud under-performed (which I realised was naive thinking).

On hind-sight, I do marvel at the way they picked the stocks in question.

After this episode, I realised that it is just Stupidity to "bank" on the hope that our Bankers would make BIG money for retail investors like me. Best to pick and handle our own stocks from the stock market.

Anonymous said...

Comparison with 15 stocks may not be appropriate because in this case here, it is still technically principal protected. However, it is still a con job. Basically, getting the retail invetor to buy overpriced call options and arbitraging the gains. Unethical. It is a finding the suckers game.

Anonymous said...

If it was me, I would have gone up to the CEO, and given him the \$500+ so that he can completely distrubute the whole lot of the gains to his Staff.....How pathetic... and here we have our govererement, telling us to "open our eyes".... while they "rake it in".....

Anonymous said...

As long as Govt owns banks and banks sells structure product, suckers will continue to buy them and regulator will continue to turn the other way. Sounds like the Mafia days in Chicago....only this time it is happening in Singapore and the suckers are Singaporeans.

Another reality check. Minister draws millions and tell heartlanders that CBF is good for them. Funny that a \$200,000 a month Minister telling a \$1500 a month technician that CBF [Cheap, Better, Faster] is good for him but CABINET is not even leading by example. I bet that since we are out of recession, Minister pay raise is coming while heartlanders will continue to work hard on CBF...

Ghim Moh Resident said...

Hi, I observe nowadays people are more wary of what the bank is selling to retailers. I think this is one good thing to come out of this ongoing recession.

Anonymous said...

Wary is one thing, but don't buy it. Last month I go to UOB Bukit Batok with my colleague during lunch time. While I was waiting for him, an investment adviser came up to me and push for structured products, tag to some STI blue chips. After I read it, I relaized my gain is very small at 3% and the big chunk to to UOB. Now the market is in bull run, UOB really think S'porean are idiots or what? We can make 3% in a week easily if we time correctly, why get lock in for 5 years? Some more the girl dare to arrogantly tell me, absolutely no risk unless I believed S'pore government and UOB go bottom up. I ask the girl go fly kite. This kind of pushing by banks are like conning naive people but what to do? Complaint also no use ! Ask them to go fly kite is the best way when they approach you.

Anonymous said...

Recently, the management of ntuc were flying kites. Someone must have told them to fly kite and they did, not one but many. They fly kite to release stress from compl;aint, eh.

Anonymous said...

Flying kite? Not a refine way to keep a conversation. It hurts both parties.

Perhaps these staff needs further training before taking on front office posts. Nobody can swayed their loyalty from their Employer. However, certain attitudes cannot be condonned in our civilised society.

Has our education system went haywire? What caused these young adults to behave as though the whole world is at their beck and call.

A sibling of mine went to a bank to sign some product investments form. (The deal was recommended by his NOK). Before he attests his signatures on those forms, he ask one simple question: "Why the returns so low?"