10 points to consider before parting with your money
With structured products back in the market, it is important for consumers to be better informed
By Michelle Tay
In the aftermath of the recent structured notes debacle, financial institutions here were found to have breached guidelines on the selling of complex products linked to the now-bankrupt United States investment bank Lehman Brothers.
Some of these breaches were flagrant – and resulted in stiff penalties being imposed by industry regulator, the Monetary Authority of Singapore (MAS).
Yet, the advice being dished out now by financial service professionals is that consumers themselves need to be more wary of what investments they make.
This is especially pertinent since banks have recently started to dip their toes into the structured-product market again, albeit with products that are of lower risk and are easier to understand.
POSB, for instance, has launched at least three structured deposits this year. One of them is a five-year, equity-linked structured deposit where investors will receive their principal back if the deposit is held to maturity.
OCBC Bank has also been selling structured deposits for the past six months and plans to launch more products, depending on demand.
MAS deputy chairman and Trade and Industry Minister Lim Hng Kiang said in Parliament last Monday that it was not the central bank’s role to judge the merits of products being sold.
Rather, its task is merely to ensure that financial institutions properly disclose the features and risks of the products, and do not publish false or misleading statements.
Currently, no independent body has taken on the role of educating the consumer, said Mr Leong Sze Hian, president of the Society of Financial Service Professionals.
He added: ‘It’s between relying on advice from those with vested interests and being told ‘caveat emptor’ and then left entirely on your own. Being responsible for your own investment decisions enables you to make a discerning decision.’
With the help of the MAS’ consumer portal MoneySENSE, here are 10 key points to look out for before you sign on the dotted line and part with your money.
michtay@sph.com.sg
1 Make sure you understand how the product works. Ask your financial adviser to explain this to you. Among the most important questions to ask is how the product is able to generate returns higher than interest rates offered on bank deposits.
2 Read the prospectus, and any contractual documents, to confirm your understanding of how the product works and to ensure that the information from your financial adviser is consistent. Do not rely on advertisements, product summaries or fact sheets alone, as these must be read in conjunction with the detailed product information.
3 Ask your financial adviser to explain his role to you. Is he able to provide you with financial advice and product recommendation, or is he taking on an ‘execution only” role where he would just carry out your instructions? Note that if your financial adviser is operating on an ‘execution only’ basis, he will not conduct a fact-finding or financial needs analysis as he will not be giving you advice or recommending a product to you.
4 Ask your financial adviser to explain the worst case scenario for your investment. The bottom line is: Is it possible that you could lose all your money? Ask him to explain all circumstances that may cause you to lose some or all of your investment.
5 Go through the prospectus and any contractual documents carefully to confirm your understanding of the risks involved. Pay particular attention to the section on risk factors in the prospectus. Look out for statements that specify whom this product is for, whether the product is simple or complex, and the degree of risks involved.
6 Know how much risk you can afford to take. Unless your adviser is taking on an ‘execution only’ role, he should ask you questions to help gauge if you are a conservative or aggressive investor. Always ask your adviser to explain the characteristics of your risk-profile category. Clarify immediately if you disagree.
7 Check the information in the fact-finding or financial needs analysis forms. Do not treat the completion of the fact-finding or financial needs analysis documents as a form-filling exercise only, as this information will form part of the basis for your adviser’s recommendation to you. Check that the documents accurately reflect your financial situation, and always ask for a copy of the fact-finding or financial needs analysis forms for your records.
8 Consider your adviser’s recommendation carefully. While your adviser must have a reasonable basis for his recommendation, you too have a responsibility to decide if the product is ultimately suitable for you.
9 You have the right to change your mind. Ask your adviser to explain what you can do if you later find that you are not satisfied with the product. Find out if there is a cooling-off period – which is typically a seven- to 14-day period after you sign on the dotted line. Depending on what the product is, you could get some of your investment back if you decide not to proceed with it. Ultimately, before you sign any document, read it carefully and make sure you understand it. Keep a copy of all documents relating to the product, as well as to the sale.
10 The bottom line: Check all documents before you sign or part with your money. Do not invest if you (I) do not understand the documents; (II) find the various risks too technical and difficult to understand; and (III) are not comfortable with or cannot accept that you may incur a loss.
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