Thursday, September 15, 2011

Loss of $100,000 within a few days

Two years ago, a retired couple approached me for help. They trusted  $200,000 from a retirement gratuity to a relationship manager of a local bank. The RM told the couple that the bank would lend them $800,000 and the total of $1 million would be invested in certain currencies to earn a higher rate of return, compared to the interest payable on fixed deposits.

The RM invested the money in A$ which fell by 10% within a few days during the global financial crisis. As the total investment was $1 million (including the $800,000 lent by the bank), the investor suffered a loss of $100,000 within a few days. As they were not able to top up the loss, the bank closed their position and they realized a loss of $100,000.

They could not lodge a complaint with the bank as they had signed documents that absolved the bank from responsibility for the investment loss. Their mistake was to trust the RM who was not really experienced in managing this type of investment. The RM had to meet certain sales targets to sell the investment products. It was also a mistake to invest with borrowed money (i.e the $800,000).

There is also another bad aspect of this type of investment. If the A$ had gained 10%, the investor would NOT have earned $100,000. At most, the investor would have earned a slightly higher interest rate, due to the unfair nature of these "dual currency investments". If there is a gain, a major portion would be pocketed by the bank that issued the financial product - which may not be the same bank that sold the product. If there is a loss, the investor takes the full loss.

Tan Kin Lian


Anonymous said...

This reminds me of another story I heard around 2004.

A very experienced insurance agent (broker actually) and friend told me this story.

A certain local bank involved in selling insurance back then was sending out sms to its RMs to sell a certain number of policies by close of business day 3pm Friday!

Looks to me like the operating model is no different from that of a factory or a time-share telemarketing approach!

My old-time agent/friend was dumbfounded.

If anybody out there thinks 0.2% interest on your savings account is bad; then try negative rates of return from inexperienced investment advisors.

Anonymous said...

It is very sad to lose money this way. Even sadder if this is the bulk of their money.

But maybe these people are a small minority of voters, say 5%.

Because I believe majority are sensible people who are not easily fooled by RMs.

yujuan said...

Avoid bank RMs and dual currency A/Cs, when the foreign currency depreciates against S$ within a few basis points, Bank will close your account without informing you, and you will lose part of your principal.
Betting on currency is highly dangerous - Euro was selling at 2.14 - 2.15 before collapse. Now against S$ at 1.70, it has depreciated by 20%. The bank is making use of your money to gamble, and RMs have a sales quota
to meet. So avoid them like the plague.

Anonymous said...

Avoid insurance agents too.They are salesmen and no financial consultants. They are NOT qualified to advise on financial matters, whether it is insurance planning, investment planning or retirement planning. They only peddle products purportedly to address your problem s in these areas.How could these salesmen with tikam tikam certs help you plan your future? It is a big joke.MAS should wake up too. Is MAS still taking the stance that the emperor is NOT NAKED? It is a sickening industry where consumers are being raped at the lift landing, the staircase, in the void deck and everywhere.It is scandalous.

Sureesh said...

But I thought these insurance agents have to take a course on financial planning before they can become insurance agents

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