CIMB-GK Securities, DMG and Partners, Kim Eng, OCBC Securities, Phillip Securities and UOB Kay Hian announced that they may be compensating the “vulnerable” group of investors who have lost their money in structured notes linked to the Lehman Brothers. This follows after similar move by DBS Bank, Hong Leong Finance and Maybank.
While many investors are happy about the outcome, there are many important lessons to learn. The mistake isn’t about investing in these dangerous products such as these Minibond but rather the greatest mistake will be not learning from it. These are some lessons to learn:
- Investment can be dangerous. Anyone who diverts attention away from you when renewing fixed deposits is recommending you an investment. After December 2010, fixed deposits itself is dangerous because it will no longer be guaranteed by Singapore government unless it is below S$20,000. When this happens, the uninsured fixed deposits take on the credit risk of the bank. To put it this way, there is no way to escape investment. But time is at your side since there are 2 more years to go and therefore plenty of time to learn.
- Do not trust financial advisers whom you do not know. At minimum you should check out the background of the financial adviser and what is his or her expertise.
- Brand name of the institution does not matter anymore. In this modern age, companies aim is to maximize shareholder value, not customers’ value.
- Be very wary of financial advisers who claim to give “free” advice. Moreover, be aware that many advisers could only earn through commissions. There is no commission when recommending a fixed deposits or participation in auction for Singapore Government Securities. Thus these non-commission paying investments will never be recommended. This is not in line with your interest.
- Do not be fool by salestalk. Very often, the good advisers who are knowledgeable cannot sell anything because they may not have high EQ. Ironically these will be those whom you are keen to talk to because you are more interested to tap their brains than their speaking skills.
- There have been reports that highly educated persons like doctors, accountants, professors, etc were fooled into buying high risk products without even knowing it. This shows that making good investment decisions is difficult regardless of a person’s education level. Thus, do not be complacent even if you are “well-educated.”
- Do not complain and complain and complain without trying to learn something out of this entire incident. Complain does not make a person wealthy and neither does it prevent a person from being con or making bad investment decisions.
- Maximize stakeholders’ value should be the aim of the company. Focusing on solely maximizing shareholders value increases liabilities and ironically decreases shareholders’ value. All compensation by banks and securities house would obviously come from shareholders’ funds. Directors of the firm may find themselves subjected to lawsuit by their own shareholders. Thus, it pays to treat all parties well.
- Do away with transactional relationship model. The phrase “financial advisory” has the word “advisory” which explicitly means relational. You can’t have a transactional-advisory relationship. Advisory requires fact finding since all situation is different. Fact finding can never be transactional.
- Be sensitive to the manner which advisers are compensated. Move to fee-based structure rather then commissions. This is more professional. Lobby your associations (e.g. LIA, ABS, AFA, etc) to do away with commissions and introduce advisory for fees. If everybody is doing this, then the playing field will be level. There will be no worries that your competitors will give “free” advice.
- There is a need to invest in manpower to investigate the creditability of the products sold. As no parties – not even MAS – could vouch for the legality of the prospectus of the product, the onus will lie on the institutions to figure this out. As it can be seen from this Lehman Brothers MiniBomb and similar structured products, the financial liabilities turn out to lie on financial institutions. Although MAS approved the product for sale, they do not share any liabilities at all. Ironically if MAS shares some liabilities, this could cause uproar among taxpayers. Hence, it will be politically unacceptable for MAS to compensate investors.
Source: Today newspaper 29 October 2008 by Cheow Xin Yi, Six brokerages here to compensate ‘vulnerable’ Lehman investors
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