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!