Wednesday, June 16, 2010

Structured products

A structured product is a financial product that has been created by a financial institution for sale to the public. The terms of the structured product are determined by the issuer (i.e. the financial institution).

When the consumer buys a structured product, the consumer faces the following risk:

a) The issuer may have high margin for their profit or marketing expenses
b) The terms of the contract may not be transparent to the consumer
c) Lack of liquidity - the product can only be sold back to the issuer at a big discount.
d) The terms amy be written in favour of the financial institution and to the disadvantage of the consumer

A life insurance policy has features similar to a structured product. In fact, it is the fore-runner of the structured products that were created by the banks, such as the various types of linked notes.

Many decades ago, most large life insurance companies were organised as mutual companies (i.e. owned by the policyholders) and can be trusted to look after the interest of their policyholders. However, in recent years, this trust has eroded as many companies have become demutualised or have focused on making profits for shareholders.

Many life insurance products introduced in recent years have become less transparent, to give a larger margin to the agents and shareholders, at the expense of the policyholders. In some cases, there were deliberately designed to confuse and mislead the policyholder.

Many structured products issued by the banks have similar characteristics, i.e. lack of transparency and poor return to the consumer.

Generally, I advice consumers to avoid all types of structured products and to invest in exchange traded products. Read my book, Practical Guide on Financial Planning.

Tan Kin Lian


Anonymous said...

Dear Mr. Tan,

POSB has recently launch a structured product "Invest Equity Series 4" which is principal guarantee and interest for 1st 4 years is 6% i.e. 1.5% each year.

I have a family of 2 little children age 4 & 1. Should I invest in this or rather putting the $5,000 in the bank account

What is your opinion on such a product? Or any advise what should i invest?

Anonymous said...

Anon 9.02 am

If I were you, would rather leave the $5000 in savings account and try to save (if still working) to build up more. $5000 is too small an amount to think of interest gain even if rate is high.

It is also no good to lock up small amount for so long if that is about all one has.

Anonymous said...

This structured POSB product is meant for small people on the street, who do not have large savings to invest.
If 9.02 investor do not need the money for the next five years, why not invest in this product. Singapore has joined the league of no/low interest countries like Japan. Or else why do you think our Govt has waived taxes on deposit and savings interest earned. Our Govt has a policy of managing inflation through exchange rate, and not by increasing the domestic interest rate, so do not expect higher rate for your bank savings.

Anonymous said...

If structured products are bad, they should b banded.

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