On 7th July, 10 Singapore Financial Instituions DBS, OCBC Securities, CIMB-GK Securities and Philip Securities were banned from selling structured products for a period between 6 months to a year. This is a direct result of the failed Lehman Brother’s Mini-Bond saga. This is considered just a slap on the wrist , as Hong Kong FIs were made to pay out at least 60% of the principal, amounting to HK$6.3 billion as compensation to various investors.
The shortcomings identified were made for shocking reading: risk profile questionnaires that were wrongly scored; risk profile scoring systems that did not allocate numerical scores; wrong classifications of products, and relationship managers (RMs) and representatives who refused to attend the pre-requisite training.
On top of that, there are underlying issues like product-based quotas that RMs have to meet, “short-stay” attitude of RMs and outright mis-selling practices.
Most people feel safe when they invest with big names, thinking that they are safe and reliable. Some let down their guard so much as to trust in the “Brand Name” completely and as a result have lost a lot of money.Not any more.
Of course, we should not play the blaming game and point fingers just at the Financial Institutions (FIs), but also look at the responsibility of the consumer about knowing their own financial situations and taking time to understand the products.
Consumers can learn some lessons from this episodes:
(1) Take responsibility to ask important relevant Questions When Dealing with a Financial Adviser
(2) Have trusted independent professionals to provide second opinions on various products
(3) Understand that Investing comes with Risk. When something has higher than Risk-Free returns (government or statutory board bonds), ask where does the risk come from
(4) Learn from great gurus like Warren Buffet: “Don’t Invest in things you Don’t Understand”
The relevance to Financial Advisers is multi-fold:
(1) The confidence of the public in trusting “professionals” has been severly impacted. There is a need to repair this image issue, through a combination of government regulation (tightening of selling practices made visible to consumers), self-regulation by FIs and higher standards of practice by financial advisers.
This means that Wealth Managers must up their game with a stronger focus on delivering needs-based solutions, rather than product-pushing. If the Financial-Needs-Analysis indicate a need for protection and retirement savings, and the company can provide products to meet those needs, you better know what combination gives the most cost-effective solution (not what gives most commissions).
(2) Consumers are likely to become more libelous (more likely to sue). Financial advisers have to bear in mind about regulations about disclosures and selling practices, in order to last in the long haul. Those involved in giving investment advice have to be very careful on what they say and how they manage clients’ money.
(3) Reputation damage to big names will actually give smaller players like Licensed Financial Advisers a great advantage. Without product quota pressures and ability to select products from different insurers and FIs, Licensed FAs are able to give objective advice to meet consumers financial needs.
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