Speaking fee

When a conference organiser in Singapore engages a speaker from overseas, they have to pay the travelling expenses and a speaker's fee. When they engage a local speaker, they pay nothing.

Recently, I have been invited to speak on a few occasions, and have declined. I am willing to speak only if they agree to make a modest donation to a non-profit organisation nominated by me.

I wish to encourage conference organisers, and our media companies, to be fair to local speakers and be willing to make a modest contribution. They should not expect local experts to speak for free, while overseas experts command a large fee. We have to be fair to our local people.

Many of these conference organisers or media company make a profit and can afford to make a modest donation or pay a modest fee. It will not create any significant dent in their profits.

It is easy to be cheated (8) - Your private banker

Wealthy people have private bankers. These private banks are welll trained to convince the customer to invest in exotic products that are created by the financial institutions. These products are quite complicated and are not well publicised. It is easy for the unsavvy investor to be conned into investing in products that have high profit and expense margins for the financial institution.

When the investor found out that the product made a big loss, there is nothing that they can do. The private banker will explain that the market has gone against them. But in reality, the products usually would not give a corresponding return when the market goes in their favour, as a large part of the profit would have been taken away by the financial institution.

The private banker may encourage the customer to invest in certain currencies, shares or other assets that are traded in the open market or exchanges. As the prices of these products move every second, it is not easy for the customer to know if they have been given the fair prices. It is possible for the prices to be inflated or deflated, to the detriment of the customer.

The customer has to rely on the honesty of the private banker or the financial institution in giving the correct price. But, in recent years, there is lack of honesty as financial institutions searched for higher profits.

When times are bad, and financial instituions make losses on their own portfolio, it is easy for them to find some way to push these losses to their unsuspecting customers. The customer does not know if the transactions are properly audited.

Many people have lost large sums of money by acting on the recommendations of the private bankers or wealth managers. They are not sure if the losses are just due to the market or to dishonest practices of these intermediaries.

Tan Kin Lian

A positive attitude

View this meaningful powerpoint.

Finding financial advice in an age of bad behaviour

Read this article. It shows that wealth managers and financial advisers cannot be trusted.

It is easy to be cheated (7) - Cashing out your financial product

Many investors bought the credit-linked notes without understanding the nature of the risks. When they found out later, and some of the underlying assets had turned bad, they wanted to cash out and take a loss. 

The only buyer of the product are the product issuers who quoted a very low price for the product. The investor is not able to assess what is the correct price of the product, as they do not have information about the underlying assets and the extent to which they are likely to default. 

The product issuer has the information, but they are acting with a conflict of interest and a monopolistic position. They can quote a price that is much lower than the underlying value and make a big profit.

What can the investor do? It is best to take the risk and ride it out. If the situation become worse, it is bad luck. But, it could turn out to be better. If the investor accept the low price now, it is likely to be much lower than the value of the underlying assets, and the investor is likely to take a much definiate loss now.

Is this fair to the investor, to be placed in a weak position against the financial institution that has the information and is taking advantage of the lack of information and desperation of the investor?

A similar situation applies in the case of the policyholder of a life insurance policy who wish to cash out. The cash value quoted by the insurance company is likely to be much lower than the actual underlying value. This allows the insurance company to make a profit on the terminated policy. The policyholder already suffered the large deductions to pay the commission to the agent, the cost of the life insurance cover and the high expenses. Why should the policyholder have to take another big penalty to give more profit to the insurance company?

The lesson: do not trust any financial institution that creates proprietary products where there is no free market for selling off the product at its fair value. You will be placed under the mercy of the financial institution, which will seek to maximise its profits at your expense.

It is easy to be cheated (6) - Currency linked notes

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

 

Logic Quiz 5-1 (Vol 4)

This is more difficult, as it involves 5 houses.

 There are five houses with different colours in a row. Each occupant plays a different sport, keeps a different pet and drinks a different beverage.

 1. The tennis player lives in the red house.
 2. The pekingese owner drinks brandy.
 3. The soccer player lives right of the brown house.
 4. The rugby player drinks martini.
 5. Edward drinks vodka.
 6. The rum drinker lives in the green house.
 7. The cricket player lives left of the whiskey drinker.
 8. Daniel keeps pomeranian.
 9. Albert lives in the white house.
10. The poodle owner lives left of the collie owner.
11. Henry lives right of the yellow house.
12. Bobby plays basketball.
13. The brown house is the fourth house.
14. The white house is the second house.

 Question: Who keeps schnauzer?

Give your answer here. The correct answer will be displayed when you submit your entry.

Benchmark
1 to 10 mins: very good
10 to 15 min: good
15 to 20 mins: fair
more than 20 mins: need more practice! 

More of the quiz
It appears every Sunday in The New Paper.
You can buy my book at these bookstores:

It is easy to be cheated (5) - Equity linked notes

An equity linked note is created by a financial institution and usually takes the following form: the capital is linked to a specified share or basket of shares. If the share stay above a certain price during the specified , the investor gets a specified interest rate, which is higher than fixed deposit rate. 

If the share fall below a certain price, the investor has to take delivery of the share. The investor is told that they can keep the share until it recovers in value. The investor is happy to hold the share for the longer term, as it is from the shares of a reputable company.

This is how the investor can be cheated. If the share price goes up 10% during the period, the investor gets the specified interst rate, say 2%, and the remaining 8% goes to the product issuer.  If the share price drops by 10%, the investor has to bear the paper loss of 10%. 

There is no way for the retail investor to know if the terms of the transactions are fair, taking into account the relative probability of a gain or loss. 

Many people have lost a lot of money on these equity linked notes when the market gains against them. If the market goes in their favour, the only receive a part of the actual gain. 

To make the matter worse, the financial institution offer to lend money for the investor to take five times of the exposure. The investor is not aware that their risk has increased five times due to the leverage. If the share price drops 10%, they could lose 50% of their capital. They do not get a commensurate return if the share price moves in their favour! 

 Tan Kin Lian

 

Innovation through regulation

This article in the Economist stated that America's innovation in the technology market is achieved through regulation, rather than the free market.  

I believe that it is the duty of regulators to regulate and of government to govern.  Things cannot be left to the "free market" without proper regulation and safeguard.

Travel insurance does not cancel trip cancellation

A consumer bought travel insurance for her trip. She has to cancel the trip to North America  due to the H1N1 virus. The airline refused to refund the ticket fare, as the ticket was not refundable. The insurance company refused to pay for trip cancellation due to H1N1 virus under the travel policy, as it was not specifically covered. 

The response of the insurance company is unsatisfactory, for the following reason. A consumer buys travel insurance to protect against loss due to such unexpected events. The consumer is acting responsibly by cancelling the trip on the advice of the health authorities. It is unfair for the insurance company to refuse to meet this claim for reimbursement, by sticking to the narrow cover of the insurance policy.

Insurance companies make large profit on travel insurance, with claims amounting to less than 30% of the premuims paid. They pay high commission to travel agents to sell the insurance. They should act fairly by honouring legitimate claims, even though they are not within the tight legal defination of the cover.

If the insurance companies continue to think only of their profit, they will lose the trust of consumers.

It is easy to be cheated (4) - Participating policies

A participating life insurance policy offers a low guaranteed rate of return for the premiums paid over many years. The insurance company promised that, if the insurance fund earns a higher rate of return than the assumed rate (used to compute the premium), the additional return will be distributed in the from of non-guaranteed bonuses.

They project the bonus to show a fairly attractive return on the policy after it matures in many years time. The snag is that the bonuses are not guaranteed.

The consumer believed in the sales pitch by the insurance agent and buys the policy for the projected return. 

After the policy is issued, the insurance company may reduce the bonuses due to the low investment yield. However, the consumer cannot tell if the reduction is fair or is more than required. 

By paying a low rate of bonus, the insurance company is able to use the additional profits to strengthen its financial position, but this is at the expense of the policyholder. 

The low bonuses results makes the policy unattractive. To increase the sales, the insurance company introduces a new series of policies that give a more attactive return than the old policies, and trains the agent to sell the new series.  

If the policyholders decide to terminate the policies, they will suffer a large penalty as the cash value may represent less than half of the premiums paid. 

The insurance agents tell the policyholders that the low cash values is due to the insurance coverage provided by the policy. The real cost of the insurance coverage is less than one-fifth of the amount taken away. Most of the premium are taken away to pay commissions and expenses. 

Recently, many insurance companies reduce their annual bonuses and increase the terminal bonuses on the maturity of the policies or on death.  They use the terminal bonuses to show an attractive payout. However, the terminal bonuses are not guaranteed and may be reduced or withdrawn close to the payout date. 

If the policies are surrendered, these terminal bonuses are usually not paid, or paid at a lower rate than what is fairly due to the policyholders. There is no way that the policyholders can find out if they have been give a fair payout. 

In some countries. there are stronger measures to protect the interests of the policyholders and ensure that they are fairly treated. In other countries, the level of protection of the policyholders are weak. 

Tan Kin Lian

The Standard:HKMA urges banks to act on allegations over structured products

"The Hong Kong Monetary Authority has asked banks selling complex structured products issued by Morgan Stanley to inform clients when such items become more risky.

It urged the banks to investigate allegations of mis-selling of these products.

The HKMA will also investigate those retail banks for any alleged marketing misconduct involving sales of credit-linked products, called Octave Notes, which have plunged in value, deputy chief executive Choi Yiu-kwan told a Legco panel yesterday.

"Distributors have to assess related transactions of products to see if there's been any mis-selling. If yes, they have to report to the HKMA," Choi told the Legco subcommitee probing the Lehman minibonds fiasco.

Choi said HKMA would not start issuing warnings when any structured products start to lose value. "It's inappropriate for regulators to warn against a specific product or a specific issuer when there's potential problems," Choi said. "When something happens, the issuer is responsible for minding investors."

Raymond Ho Chung-tai, chairman of the subcommittee, said the Securities and Futures Commission has so far declined to make public three reports on the minibonds fiasco. He said the subcommittee will continue to push for release of those reports.

Personal accident insurance

Dear Sir,

Thank you for your good work in educating common folks like us on Finance. I have a FA friend who recently looked for me to buy an accident policy. I like to understand more before deciding but could not find any information regarding  this.  Could you kindly advise on whether is it worth while to look into an accident policy.

 REPLY

Read this FAQ

http://www.tankinlian.com/faq/pa.html

Get quote from 3 companies and decide on which offer you the best rate and cover.

Excessive increase in motor insurance premium

Dear Mr. Tan

I read a report that an insurance company increased the premium for motor insurance by 400% on its renewal. The motorist is not able to get another insurance company to accept his risk. Is it fair for the premium to be increased by so much?

REPLY

The increase of 400% is excessive. The authority should set some reasonable cap on the increase in premium on its renewal. An increase of 100% is already too high. The customer should not be placed at the mercy of the insurance company.  The consumer should lodge a complaint with the Consumer Association (CASE) to take up this matter.

An alternative arrangement is for MAS to set up a residual market (or pool) for motorist who are not able to get insurance from the standard market. The premium rate for the residual market is higher, but cannot be excessive. The risk is the residual market is shared by the insurance companies in proportion to their share of the market.

State Funderal for Late Presidents - Learn from the South Koreans

MR   TAN KIN LIAN

Can you post this to your blog.

I refer to the news on 25 May 2009 “State Funeral for Roh” from Straits Times internet news.  It was reported that “South Korea is planning a state funeral for former president Roh Moo Hyun as thousands of people gathered in the nation's capital and his hometown to mourn him. Mr Roh jumped off a cliff near his rural home on Saturday after being hounded for weeks in a widening corruption scandal involving his family members.

His suicide came just 15 months after he left office and just when prosecutors were to announce if they would seek his arrest. Investigations centred on a payment of US$1 million (S$1.44 million) to his wife from a wealthy shoe manufacturer, and another of US$5 million by the same man to the husband of one of Mr Roh's nieces.”

I think we should learn from the South Korean that takes the people’s feeling and grants state funeral to ex-President Roh, although he is being investigated currently.

I know this may be old issue that President Ong Teng Cheong and President Devan Nair were not granted state funeral when they passed away.  Singapore should treasure the few good leaders we have.  Granting state funerals to true sons of Singapore is not only for the benefit of these respected pioneers, but more for the people of Singapore and generations to come.  Singaporeans need to have our very own hero and role model. 

I hope it is not too late to grant state funeral to President Ong Teng Cheong and President Devan Nair.   Even in communist China, Deng Xiao Peng also paid respect to those who died during cultural revolution, when the event settled down eventually. People need closure to events of life journey.  In essence, we are all pilgrim in each of our journey of life, some are greater but others are no-smaller. We are all little sparkles in the expanse of time and space.   Can somebody help us to make this petition to President Nathan?

CASHEW NUT

2 JUNE 2009

Tan Kin Lian's Magazine

This magazine contains the articles and FAQs written over the past two years. 

Invest in land banking

Dear Mr Tan,

Recently I have been approach by a friend to invest in land in the US. In your opinion, how safe is this kind of investment?

 REPLY

My views on land banking are set out in various articles in my blog. See below.

http://tankinlian.blogspot.com/search?q=land+banking

I do not like this type of investment. All the best!

The Standard:Octave Notes spark concerns

The Hong Kong Association of Banks said it is monitoring developments involving Octave Notes, credit-linked notes issued by Morgan Stanley that have plunged in value, while lawmakers said the issue could threaten Hong Kong's financial sector.

The association has not yet discussed the issue but will keep in touch with banking and securities regulators, chairman Peter Wong Tung-shun said. The issue is very complex, Wong added.

Democratic Party legislator Kam Nai-wai yesterday called on the 16 local distributing banks to buy back the Octave Notes at their full value. A special meeting of the financial affairs panel will discuss the issue on June 11.

``This is really a time bomb,'' Kam said.

Eight thousand Hongkongers invested a total of about HK$2 billion in Octave Notes, which invested in synthetic collateralized debt obligations.

``There has been mis-selling,'' said Peter Chan Kwong-yue, chairman of the Alliance of Lehman Brothers Victims. The product's name in Chinese is ``Smart Bond.''

``The translation is intentionally misleading,'' Chan said. ``They promoted Octave Notes very much the same as minibonds.''

Octave Notes Series 10, 11 and 12 used Lehman Brothers as a reference entity and are now worthless.

Some other series used bonds issued by collapsed institutions like Icelandic banks and Canadian papermaker Abitibi-Consolidated as a reference and are now worth less than 1 percent of their original value.

Dah Sing Banking Group managing director Derek Wong Hon-hing said Dah Sing Bank sold a ``very small amount'' of Octave Notes and has received ``very few complaints.''

The bank has kept in touch with those customers and will follow up on a case-by-case basis, Wong said.

A 54-year-old housewife, who gave her name as Chan, said she walked into her bank to update her passbook and before she left had been convinced to buy Octave Notes Series 11.

Chan said she lost HK$400,000 of her husband's money on the investment, which is now worth nothing, and is afraid to tell him lest he divorce her.

She said she has been seeking mental help because she is so distressed about the issue.

``I didn't think the bank would cheat me,'' she said. ``I hate the bank; I hate the government.''

It is easy to be cheated (3) - Credit linked notes

Many retail investors have lost large sums of money by investing in the credit linked notes, such as the minibonds, pinnacle notes, high notes and the jubilee notes. 

Several financial institutions sold these credit-linked notes to their customers. The customers were told that their monies were invested in a basket of bonds issued by highed rated companies. The chance of failure of any of these reference entities was small, and even if it materialises, their loss will only be a proportion of the invested capital, due to the diversification of the risk.

This turned out to be an incorrect description of the actual nature of the notes. The invested capital was actually used to provide the security for credit default swaps on the reference entities. If any of these entities failed, the entire capital would be lost. Instead of diversifying the risk of failure, they are taking six to eight times of the risk of failure of any single entity.

The capital was actually invested in other assets that carry their own credit risk. This adds to the total risk of loss of the capital.

The actual structure of these notes were contained in several hundred of pages of a prospectus and pricing statments. The documentation was not clear, even to knowledgeable financial experts who spent many hours to read them. Many people feel that these documents are written to conceal the real nature of the structured products.

The actual return received by the product issuer was considerably higher (due to the extremely high risk) than the yield of 5% given to the retail investors. These excess gain was earned by the issuers but was not disclosed in any documentation. There were several devices created to hide or siphon off these profits.

Due to the global recession, many credit linked notes failed, causing severe losses to the retail investors. The dishonest act was in the creation of these products, attempts made to hide the true nature of the risks and to siphon off the excess return to the product issuer.

Most distributors of these products were not aware about the true nature of the products and had negligently misrepresent the products as being safe for retail investors. They were only focused on generating large volume of sales to earn an attractive rate of commission. 

To avoid being cheated, it is important for retail investors to avoid all types of structured products, especially in an regulatory environment that is weak in protecting retail investors. 

Tan Kin Lian

Logic Quiz 4-2 (Vol 4)

There are four houses with different colours in a row. Each occupant plays a different instrument and keeps a different pet.

 1. The grey house is left of the red house.
 2. The salesman lives left of the teacher.
 3. The manager keeps maltese.
 4. The bass player lives in the red house.
 5. The brown house is the first house.
 6. The drum player keeps maltese.
 7. The flute player lives in the third house.
 8. The schnauzer owner lives in the yellow house.
 9. The teacher keeps pekingese.
10. The lawyer plays guitar.

Question: Who keeps pomeranian?

Give your answer here. The correct answer will be displayed when you submit your entry.

Benchmark
1 to 5 mins: very good
5 to 10 min: good
10 to 15 mins: fair
more than 15 mins: need more practice! 

More of the quiz
It appears every Sunday in The New Paper.
You can buy my book at these bookstores:

After submitting your answer, you will be given the link to a webpage that teaches the method to solve this puzzle. 

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

 

Benchmark premium rates

Some readers ask if it is possible to get $100,000 of cover in a term insurance policy and if it depends on age? 

You can refer to the benchmark rates here. Some insurance companies should be able to offer premium rates that meet these benchmark. You can call their hotline. 

Different Types of Life Insurance Policies

Dear Mr. Tan,

If you find the time, can you explain the different types of life insurance policies, such as whole life, endowment, term, ILP. I am quite confused about them.

REPLY

You can read this explanation. Please tell your friends to read it as well.

Try this test.

Preparing your case in FIDREC

Dear Mr. Tan,

I have just received a rejection letter from the bank that sold the minibond to me. I am devastated. What can I do now? Shall I go to FIDREC? What about the class action?

REPLY

Over the past five months, many investors have recieved a rejection letter or a low offer that they cannot accept.  The best course of action is through FIDREC. I have updated this guide on how to use FIDREC. I have found a lawyer who is willing to provide legal assistance to help the investor in the FIDREC process for a flat fee of $500. 

Various groups of investors have approached several lawyers to organise a class action. I understand that most of these efforts have stalled. The class actions required at least 500 participants to contribute $2,000 or more. They were not able to get an sufficient number of participants.