Sunday, September 21, 2008

Have you bought Lehman Mini Bonds and DBS High Notes?

Today’s Sunday Times ran a feature on the credit crisis, summarizing the events that had unfolded over the year, particularly the market crash and spectacular recovery this week.

I was particularly interested on a small column that reported the loss by many investors who were market DBS High Notes as an alternative fixed deposit (FD) by personal bankers and relationship managers.

Many, enticed by the high coupon payout structure of the investment have invested between $50,000 to $125,000.

It was the same case for Lehman Mini Bonds, marketed by foreign banks.

These structured deposits are likely to pay nothing to investors even if they were to be held till maturity.

Many blamed the bankers for marketing such “high risk” products to low risk threshold investors when many wanted just plain vanilla FDs in the first place!

Yesterday, I met up with a few bankers and enquired the status of the structured deposits. I confidently told them that Lehman mini bonds investors should get back some money as bondholders have priority claim on assets as compared to ordinary and preference shareholders when a company goes belly up.

Below are their replies:

Banker A: Huh, is it? Bondsholders have higher priority to claim debts?

Me: Yup, if not a bond is not a bond when it carries a higher risk exposure to ordinary shareholders and receiving lesser dividend (coupon) payout.

Banker A: Oh I see.

Banker B: Actually I do not think those who invested in mini bonds will get anything back afterall.

Me: How come? Lehman has sold its assets and surely it can receive something back to pay back bondholders right?

Banker B: Mini bonds are not bonds lah. It is just a marketing name for the structured product. We can call it super bonds, high yield saver, or golden bonds. But the underlying product is very complex one. I also don’t know what it is. We just market it when conservative people who want to put FDs walk in and don’t want to invest in unit trusts or equity link notes.

Me: What?! You mean the banks sell bonds that are not bonds and fooling people it is as safe as bonds?

Banker C: Their bank not that bad, sell until mini bond series 2 only. Mine sell till series 8!

Me: So are your sales affected?

Banker A, B, C: Actually it is business as usual. We just concentrate on insurance now. Long term investment mah. But we do not sell UTs or structured products anymore. Currencies market are more welcome by investors also. We have got many products to market.

From the above conversation, I feel that the local bankers have really poor knowledge of simple finance. They do not even know the difference between bonds and shares to begin with. How do you expect them to sell complex products in the first place? And mind you, these banker friends have been in the industry for 2-3 years!

If I am not wrong, DBS High Notes and mini bonds have invested in different underlying assets through options. Derivatives are highly volatile investment instruments and always leveraged to create higher returns (and risk).

Such sophisticated instruments are definitely not suitable for a retiree or a housewife who might not even know how to open a securities account. Derivatives are zero sum games, where one gain’s is due to another’s loss.

Sometimes, these structured deposits are marketed with shopping vouchers and labeled as capital protection products.

However, capital protection does not share the same status as capital guaranteed products. Only the latter has an insurance bought by the bank from a third party to insure the investors’ invested amount.

Should the bankers be blamed?

In a way the bankers are doing their jobs to market aggressively the banks’ products, bringing revenue for their company. Regardless whether they are paid a handsome commission, they are obligated to market the products by the bank. If they are not paid a single cent of commission, but just a salaried worker, should they still be blamed?

There are accusations that the bankers are not doing their jobs and are guilty of mis-selling.

Actually, I feel the banks are the one that should be fully responsible. They should have a system to educate the bankers. Sales should not be commission based as it would lead to unethical selling. Bankers have heavy responsibility. Pay them well so that they can have a high level of integrity. There should be other KPIs to assess them instead of sales figures. They should really be well versed in finance and not just salesmen trying to exceed sales quota.

However, the investors should also share the blame, in my opinion. How can they invest in something that they do not understand?

A coupon rate of 5% is rather high and there should be a fair amount of risk that comes along.

Investors should seek to understand the kind of risks involved before buying any investment products. There are always risks involved. Even FDs have risk. If the banks in Singapore collapse, only the first $20,000 is insured. You can lose the rest.

We can summarise several lessons for the low risk investor:

Do not believe what the banker says at face value. Question him thoroughly. Ask him questions like: What is the risk involved? If he says there is no risk, only gain, leave. All financial products and investment comes with risk.

Ask the banker to explain how the products work exactly. Ask him if there are derivatives or options involved in the product. If there is, leave. Derivatives are only for sophisticated investors.

Do not be enticed by high coupon payout products. The higher the payout, the higher the risk involved. The high coupon payout is commonly known as the risk premium. As the term suggest, you will have to take a lot of risk to earn higher (risk) premium (interest).

Do not buy a structured product because it is the bank’s flavour/theme of the month.

Do not buy a product because there are free gifts. You are actually the one paying for the free gifts from the sales charge.

Do not buy anything you do not understand! Will you buy a washing machine that is so complex that neither you nor the salesman knows how to operate?

Financial literacy is everyone’s responsibility. Pointing fingers at people when things turn sour will not change things. After a few years, you will still make the same mistake. Take charge of your own finances and be accountable for your own investments. If there is anyone to blame, we can only blame ourselves to be too gullible!

12 comments:

la papillion said...

Hi sbc,

How true how true. But I am rather disgusted by the lack of knowledge of bankers who crumble at a more careful probe of the products they are peddling.

Caveat emptor. For those who are willing to buy, there are people willing to sell. Of course, perhaps people are misrepresented. Sigh... you're right, there are many people who are not financially savvy.

Sgbluechip said...

Hi LP, even for myself, at a scale of 1-10, I grade myself only 4 in terms of financial savvy knowledge.

The short fall should be in the derivatives section where one could make money by shorting the market, trading US futures etc.

I have little experience and knowledge about property, which is also part of the finance market.

Those who bought the toxic products probably have a score of 2 and below!

financial freedom said...

Is your story about what the bankers said really true? That is totally totally unethical.

I guess it is not about financial savvy knowledge but if people see something being marketed by reputable companies, they will somehow trust it. Hope not too many ppl got burnt by this experience.

nhyone said...

I won't expect too much of the bankers, even if they are highly paid.

I'm sure you know the knowledge of our salesman, whether computer, camera, car, and perhaps even property.

I was interested in one of the Minibond series and I asked for the prospectus to read. That's the minimum one must do for structured products.

Sgbluechip said...

Hi financial freedom, the story is definitely true. In fact, sometimes my bankers friend call me to enquire about the fundamentals of some stocks which was enquired by their clients.

Sometimes I feel I should be in banking industry instead!

Anonymous said...

I share my experience here with you. About five years ago, I bought a financial bond product from this bank for $10k on 20global stocks, all based in America. Now was my fifth year investment with the bank, and there was no payout except the min. 5.3% payout after six months placement.
It is called Capital Protected Fund and I was told by another bank that only Capital Guaranteed Fund returns the full capital. Isn't it very, very confused.
Anyway, I have the brochure of the fund with me and the chart shows that the 100% capital would be returned to investor if the worst senario happened.
Imagine besides me, others might park their money, mininum $5k or more with the bank for nearly 6 years, waiting for maturity of the fund.
It is indeed not what it seems to be as simple as I thought.

Anonymous said...

The bank teller saw that I had slightly more than $10k in my savings account and got her standby bank financial advisor to recommend this Fund to me. That's how I invested thinking that he should be financially savvy than me. Besides, the bank is our Singapore Bank and that could be trusted.

Sgbluechip said...

Hi, I am sorry to hear your loss. Actually the first payout was your money in the first place. In 2003, your investment was bought at market low.

There should be better returns!

The bank teller earns about $10 when she makes a successful investment referral. The banker earns more. Most of your returns has been earned by the bank and the banker.

Avoid structured products. DIY is still the best strategy for most people.

Anonymous said...

Hi sbc,
I am new in this but I like to know what will happen to my dad savings as he has just bought mini bonds from Hong leong and only today when he went to the bank that they told him this is the Leehman minbond and told him to wait for new by frisday?

Sgbluechip said...

Hi, I think it might be possible to get back say 30% of your invested sum.

Hong Leong will provide the answers some as it takes 2-3 weeks for the product to unwind and to be cashed out.

Hope it helps!

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Wham said...

Hi everyone,

I bought an investment-link product as it provides some level of insurance coverage and at the same time, allowing me to park some money in mutual funds to ride the stock market's ups and downs. Is this a good long-term growth strategy for my retirement nest?
I also read that ETFs are better alternatives to mutual funds. In my case, is my investment-link product the same as a mutual fund (with the extra cost of insurance) or should I stick to ETFs instead to avoid high commission/administrative charges?