Tuesday, August 30, 2011

Be aware of investment risks

A few people have approached me for assistance regarding their investment losses. They entrusted large sums of money to the wealth managers working for the banks. The investors claimed that they were not aware about how their money were invested and trusted that the wealth manager would take care of their investments. They end up with large losses.

In some cases, the investors were not able to read the portfolio statements, so it is likely that they were quite ignorant about the investments.

Some of the investments were in linked investments or leveraged investments, which carried high risks. These types of investments are speculative, and depend on the skill of the wealth manager to make the right timing decisions. It is almost impossible to acquire this type of skill. Some timing decisions is similar to gambling in a casino - a lot depends on luck.

It is likely that the wealth managers who contributed to these bad investments are also inexperienced in this field.

The more experienced wealth managers are likely to give more prudent advice - such as diversification of risk and selecting the right asset mix. In these cases, the potential return is likely to be modest, after deducting the fee payable to the manager. The investor should accept the lower yield, that commensurate with the lower risk. If the investor wants a higher yield, the wealth manager is likely to be forced to take a more risky approach - which can lead to disaster.

It is important that the investor should be aware of the risk and should select the knowledgeable wealth manager. If the investor is not aware about the risk of investments, it is better for the wealth manager to decline to take the client - so as to avoid these potential problems.

My advice: never invest in any investment that you do not understand. Invest in your education by attending the financial planning workshop organised by FISCA (www.easysearch.sg/fisca).

Tan Kin Lian

12 comments:

Anonymous said...

Sounds like the world best job is being a wealth manager. No accountability is needed. Make the commission and go.

Tan Kin Lian said...

Earlier this morning, I received a case of a Hong Kong resident who invested USD $1.5 million with a foreign bank based in Singapore. She trusted the reputation of Singapore and decided to invest here. She lost one third of the investment.
Last year, I received an e-mail from an Indonesian lady who faced the same situation. She also invested in Singapore, trusting our reputation.
I heard from my friend in Jakarta that many of his fiends had also trusted Singapore and are now having second thoughts - having suffered this type of losses.
I am worried that this could lead to a long term damage to Singapore's reputation.

Anonymous said...

Mr. Tan,
Due to the Banking situation n job loss in both the US n Europe, read somewhere that many will be heading to our shore as TALENT in this area of wealth management. What is Singapore becoming of? Even football club is trying to list here rather than in HongKong which has a tougher listing regulation. MAS should seriously look into such listing to protect local investors. What is your take for this?

Anonymous said...

Dear Mr Tan

Not sure if this is fair, but if a wealth manager is really that good, he would be running his own hedge fund right?

Key business sense questions might be:
How does a wealth manager make HIS money?
a)fixed monthly salary
b)commission on financial products sold?
c)value of assets under HIS management?
d)profits made by his clients' portfolio?

Ideally, the wealth manager's remuneration should be aligned with his clients' financial well being.

Question for Mr Tan KL:
Respectfully, I was wondering if you wish to share how you incentivized your investment managers to prudently grow INCOME's assets?

yujuan said...

Since the minibond case, foreign investors must have got wary investing in Singapore, which has acquired the wild,wild East cowboy reputation. Surprisingly, the foreign investors are still so daft about our country, just like our own citizens.
Even the NTUC Income Executive said, never hand over your money to your Private banker in any bank or Brokerage here, invest directly yourself.
Or, invest in Australia, or even Hongkong. Singapore as a safe haven to invest is a fallancy. Even Oei Hong Leong, a wily fox, got cheated in bank derivatives.

Tan Kin Lian said...

Reply to 1:43 pm
A good wealth manager can give appropriate advice to a client to diversify the investment (to reduce the risk) and to select the appropriate asset mix (based on the risk profile).
A bad wealth manager will give the wrong advice to the client, to speculate and churn the portfolio (to increase commission).
When I was running NTUC Income, the fund managers were paid a fixed salary. They may get a modest bonus based on performance, but the amount is rather small and will not encourage them to take excessive risk.

Tan Kin Lian said...

There was a comment insulting the financial consultants of NTUC Income - which I have deleted. I like to ask the commentator to respect other people.

Anonymous said...

Dear Mr Tan
Just a suggestion for your consideration.

Given that Singapore seems to have lots of money to invest overseas;
(Although I'd personally prefer we invest in our fellow Singaporeans e,g. education, schools, students, PMETs)

I really don't see why we can't make the whole overseas investment process simple.

Just buy into Berkshire Hathaway shares. It's a cheaper, better and faster way to invest.

a) We get the services of Warren Buffet without having to pay a management fee (BETTER)

b) We just need to set up a simple formula to determine WHEN we buy the shares (FASTER)

c) We just need to hire a few people to administer the buying process. (CHEAPER)

What do you think?

Anonymous said...

Dear Mr Tan,
reading what is written herein, i am respecting very much of what u are still doing!! providing advice just after the PE which have been rather 'bad' results for u! u lost money and time and surely your pride BUT here i am saluting u! for your selfless advise and contribution, some opinions which i have of u before must be swallowed myself and yes, God shall bless you and your kind doing...keep it up!

Anonymous said...

Banks and wealth managers earn their fees, bonus and/or commissions from the amount of investment invested from investors.

The more money they manage, the more they earn. Their earning is not aligned to the the performance of the portfolio/investment.

If investors let the wealth managers to manage their money, it is not in the interest of wealth managers or banks to make sure that portfolio/investment perform.
Wealth managers and banks continue to receive their fees, commissions and/or bonus regardless of performance of portfolio/investment.

The inexperienced wealth managers may use the investors money to experiment on investment strategies. If portfolio/investment do not perform, the money is not banks and wealth managers money, it is investors money. Wealth managers and banks can just find excuses like market is bad or market is in the bear. They are implying that "Please do not blame wealth managers and banks, please blame the market."

So, all investors have to take their own responsibilities of their own money. Forget about the banks and wealth managers. The banks and wealth managers work for themselves only.

Remember this:
Banks are fair weather friends.
Banks give you umbrella during fine days.
Banks take away your umbrella during rainy days.

Anonymous said...

Why worry when Tony Tan is not worried? Afterall, he is the president of Singapore and he should be the one who should be worried about Singapore's reputation. George Yeo has said that one needs to know ones position in society. You should be worried about your family and how they would face outsiders now that what they fear is coming true.

Anonymous said...

Dear Anon @ 2.15am
I assume you are being sarcastic.

Just as "Eternal vigilance is the price of liberty (Wendell Phillips)"

so it is equally true

"Eternal vigilance is the price of holding onto what little wealth we have".

Likewise;

"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it (Thomas Paine)"

it is equally true

"Those who expect to reap the blessings of MONEY must, like men, undergo the fatigue of PROTECTING it."

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