The Swiber Holdings is another lemon product sold to Accredited Investors. Here is another article on lemons.
As everybody already know by now that Swiber Holdings bonds have defaulted. It seems a lot of people bought its bonds. Who are these individuals? These individuals are rich people known as ‘accredited investors’.
According to the Straits Times report, “Swiber saga DBS says bond sales driven by demand” dated 6 August 2016:
- The Swiber Holdings bonds were sold to clients and were rolled out to ‘voracious demand’ (or another way of saying the sale was made through reverse enquiries).
- There was allegation that the Swiber Holdings bonds were pushed to clients who were not aware of the products’ risk profile. (i.e. there was insufficient disclosure).
- A rich man by name of Mr Jin said he invested $500,000 into two Swiber Holdings bonds after following the advice of his relationship manager who never told him much about the company. He invested because he thought a bank in Singapore will not recommend risky investments (i.e. he thought the bank was his adviser and hence he trusted the bank).
- Another rich investor, Laura and herself a banker, was asked to leverage 50% on the Swiber Holdings bonds. Now she has to cough up $250,000 to cover the margin to the same bank who sold her the bonds.
- DBS relationship managers are rewarded based on a balanced scorecard and there is no direct link between sales targets and remuneration (another way of saying is that there is an indirect relationship between sales targets and remuneration).
I would like to use this saga to point out how the financial industry works with regard to reverse enquiries, insufficient disclosure, advice and leverage.
Bonds are sold via Reverse Enquiries
What is reverse enquiries? I did a google search and here is what it says:
Reverse enquiry (also known as passive marketing or reverse solicitation) is where an investor, who has not had any previous contact with an investment manager/distributor, contacts that investment manager/distributor in respect of a potential investment in a fund.
In plain English, it means the investor was the one who call the bank to ask and buy the product.
Of course in reality, it is always relationship managers or the salespersons who contact potential investors. Many of these bonds are wholesale bonds. Wholesale bonds means they are not offered to retail investors. There is no advertisement to solicit investment interest. The only way investors get to know of such wholesale bonds is when relationship managers inform the existing bank clients of the availability of such bonds.
Unfortunately, the client usually signs a form to say that the purchase was done on a reverse enquiry. The salesperson’s liability virtually drops to zero once this form is signed.
Insufficient Disclosure for Swiber Holdings bonds?
Unlike retail bonds, there are usually insufficient documentation. The documentation are usually the term sheets but these term sheets are too generic.
But frankly speaking, even the documentations that comes with retail bonds are insufficient because they are just – ironically - too many documents: the prospectus, product highlight sheets and term sheets. 90% of the documents are copy and paste from others. These documents are prepared by lawyers to satisfy the regulator but it is not written for consumers. Usually the risk spells out in these documents are just copied wholesale from the finance textbook. The usual duration risk, call risk, political risk, currency risk, default risk, legal risk etc will be there. Because the documents just copied everything from the textbook, these documents are as good as no document.
So, where can an investor find the relevant documents? The relevant documents are the company’s financial statements. For listed companies, these financial statements are freely available on the internet. You just need to use google to find it. These financial statements will tell you a lot about the company. Unfortunately, you need to know how to do a financial statement analysis otherwise these statements will be just Greek. For non-listed companies, it is impossible to get any information. So you are as good as giving your money to a black hole.
Of course, the financial adviser can help you interpret the financial statements to explain it to you. I have done this before and it is not too difficult.
But most relationship managers working in the bank (and as well as IFAs. Insurance agents are not permitted to sell/advice bonds) only passed M6 and M6A which any tom-dick-harry can pass after studying for one day. The CMFAS was originally designed for individuals with only “O” levels. It was only last year that the minimum qualification was raised to diploma. Can you imagine a person who studied one day in finance with an “O” level can read financial statements and recommend financial products to high networth individuals? Apparently this is permissible because the financial industry’s standard is so low.
Anyway, under the reverse enquiries, it is assumed there was no advice given. This brings me to the next point…
Who is the financial adviser?
Mr. Jin thought that the relationship manager was his adviser. He trusted the bank and that is why he invested in the Swiber Holdings bonds. In reality, he has no financial adviser because (1) he is an accredited investor. There is no obligation to give financial advice to an accredited investor. See Why accredited investors are in for a raw deal. (2) His relationship manager's duty is to ensure his/her employer's interest is looked after. If Mr. Jin wanted to get financial advice, he has to pay for such an advice and such a service is not available from the bank.
‘Financial Adviser Representative’ is a legal word referring to an individual who is authorised by MAS to sell certain financial products. The word has nothing to do whether financial advice will be given to his clients.
In Singapore, there a few advisory models:
- Insurance tied-agents. These are self-employed individuals who can only sell products from one insurer. (They are not allowed to give advice on securities.) Due to the agent/agency contract, tied agents have to look after their insurer’s interest. In fact, it is impossible to ensure their clients’ interest are always looked after since a tied-agent must sell his or her insurer products regardless how bad they are.
- Licensed Financial Advisory Firm (LFA) owned by individuals. This used to be the default model. These LFAs can carry many products. Unfortunately, if the contract between the representatives and LFA is one of agent/agency, these representatives are not allowed to put their clients’ interest first. In fact, if the contract between the representatives and their LFA is an agent/agency, these representatives are prohibited by the law of agency to put their customers’ interest first.
- Licensed Financial Advisory Firm (LFA) 100% owned by insurance companies. This is a new phenomenon in recent years. For example, Manulife, Great Eastern and Aviva each owns a licensed financial advisory firm. In fact, Aviva owns two LFAs! Are representatives from these LFAs tied-agents? The law is unclear because what was thought to be not allowed is now allowed without any apparent change in legislature. What is for sure is that if the individual representatives can only sell products from their major shareholders, it implies they are also limited just like tied agents.
- Employees working for the banks can only sell what their banks tell them to do so. As employees, they have to put their employers first. Banks do not have the tradition of doing financial planning. Financial planning to be done are minimum – sufficient to comply with regulation such as the Balance Scorecard. Hence, anyone who buy products from the banks are expected to receive minimum financial advice.
- Independent Financial Adviser. This refers to firms which do not receive commissions. They are duty bound to provide objective and unbiased advice. Unfortunately, there is no such firms in Singapore because all firms receive commissions. I consider the wrap fee for investments as commissions because these wrap fees are deducted and paid to advisers by a third party. Payment from third parties are commissions.
In all cases above, accredited investors cannot demand to receive financial advice. They have no legal recourse except to resort to civil legal suit.
50% leverage on junk bonds
In the same newspaper report, DBS was quoted as saying:
"DBS does lend against all eligible and acceptable market securities, and investment leverage is offered to wealth customers based on prudent underwriting standards. This includes imposing criteria on the credit quality and duration of fixed income securities as well as requiring the underlying investments of each customer to be diversified."
It is common for the banks to lend money to investors to gear up their investments. The problem is that lending money is not regulated under the Financial Advisers Act. Borrowers have no idea to know whether the loan is suitable.
While it is true that the bank will not anyhow lend money to tom, dick and harry, the bank must make sure that the borrower can pay up the loan. This means the above mentioned ‘prudent underwriting standards’ refers to whether is the borrower a suitable customer to the bank. There is no requirement for the bank to ensure that the loan is suitable to the borrower. What is meant by suitability? Take a simple example: say you want to buy a house next year and you expect to get a mortgage. Under this scenario, it is not suitable to borrow money from the bank to leverage on your investments as doing so will affect the loan quantum for the mortgage to be taken up next year.
By the way, Singapore’s law on loan is too generous. The Total-Debt-Service-Ratio (TDSR) is set at 60% while the prudent ratio should be just 35%. I consider anyone who is at 60% TDSR to be financially bankrupt. You can borrow money to the maximum allowed by law but you bankrupt yourself financially.
For those who wants to read more about leveraging investments and leveraging universal life, you may wish to read: Why high networths have no asset allocation skills?
Ordinary folks also classified as Accredited Investors
What many people do not realized is that they may be classified as Accredited Investors although they are not so rich. For example, you may have bought a property for $500,000 long time ago but the property value has risen to say $1.8 million. You will be classified as an Accredited Investor after taking into consideration of your CPF balances, CPF Life and insurance cash values. Apparently, there are a lot of such individuals who got themselves burned as Accredited Investors without even knowing. See How Singapore’s Not-Really-Rich Have Been Burned by Swiber Bonds.
Accredited investors are always at the raw end of the stick. They are made to sign papers stating they are the ones who initiate and buy the bonds, lack of sufficient disclosure, have no financial adviser and encouraged to leverage without knowing whether is it suitable. I pity rich people in Singapore. Unfortunately such rich people will not pay for advice. This is my experience.
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