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Wednesday, October 8, 2008

Justice Bao Gong: MAS speaks up- What investors need to beware

In today’s Straits Times newspaper, MAS said it will review the way complicated investments are marketed and sold to investors. That will include risk rating, clearer product labelling and stronger suitability requirements.

MP Cynthia Phua also suggested such financial products should be graded and offered to investors who can fully understand the underlying risks.

OK, the above is what that has been printed in the newspapers. So, what is behind the scenes that the ordinary man in the street need to take note of? In, we explain what the layman needs to know:

Firstly, financial institutions are there to make a PROFIT- their FIRST priority is to MAKE MONEY, everything else is secondary. Take their ‘customers first’ marketing with a pinch of salt. If you do not buy investments and insist on leaving money in fix deposits, you can be assured you won’t be their ‘first rate’ customers. If they tell the whole truth to customers, nobody would buy the products, and everyone will leave their money in fixed deposits or under their pillow.

So what these institutions will do is they will put in place a very good system of reporting to MAS that they have forms and brochures that clearly states the risk of each and every product (which comes in small print and SEVERAL pages), that they give AUDITED training to all their sales staff to ensure that they COMMUNICATE ALL RISKS to customers, and they make their sales staff acknowledge and SIGN on the training forms so that if there is any customer complaints, the institutions, by reasonable man’s standards, have certain immunity as they can prove that by way of the above systems, they have done a reasonable man’s standards in communicating the inherent risks to customers.

So this places the onus on the sales staff or bankers, who are given very high ‘revenue targets’ which they have to meet in order to keep their high paying jobs ( In banking, sales staff remuneration are tied to the products they sell - look out for Justice Bao Kong’s future blogs, his servants will elaborate in greater detail how the bankers’ remuneration works, and you will have a better idea why your bankers don’t tell you the whole truth). These poor bankers are coerced to sign on forms provided by their financial institutions which require them ‘to communicate the whole product risks, structure and other terms and conditions’ clearly to customers and they will be LIABLE for any customer complaints of misrepresentation. These poor souls are facing a dilemma: If they tell the whole truth to customers, it is likely they will not get the sale, and thus they do not achieve their targets and they get fired. So, what naturally happens is that bankers will tell selective truths and run through quickly on the ‘risks’ area and cover them up with the potential of returns, etc such that they did communicate the ‘inherent risks’ to customers, albeit not clearly, and customers get the impression of the ‘potential returns’ but not registering the full risks involved due to the clever presentation by the sales staff. Thus, the turnover rate of bankers are extremely high: The only way these institutions can maintain their high revenue targets is to ‘hire and fire’. Sales staff initially start off achieving their targets, and until a few months later, when their customers have no more money to buy investment products, they get fired and new bankers are hired and they bring in their portfolio of customers, sell products, no more money left to buy, bankers get fired, and the cycle goes on. Just ask any investor on the street how many bankers have they had within the same bank in the period of two years? 6 bankers? or 8? That explains it all.

In summary, when planning to do investments, always take responsibility to do research and speak to friends who have experience. The government can only do so much, the onus is on oneself to protect one’s assets and investments. This is the world of capitalism, every man for himself, profits come before compassion. And this is why we created, to help the man in the street understand more and not be taken advantage by hungry capitalistic corporations.

Your humble servant

source: Singapore Straits Times

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