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 but rather the greatest mistake will be not learning from it. These are some lessons to learn:

For Investors:

• 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.

For institutions:

• 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.

Six brokerages here to compensate ‘vulnerable’ Lehman investors

Wednesday  October 29, 2008
Cheow Xin Yi
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Source: http://www.todayonline.com/articles/284128.asp 

SIX brokerages have decided to compensate vulnerable investors of disastrous Lehman-linked structured products, leaving ABN Amro as the only financial institution yet to take concrete action.

In a joint statement issued yesterday by the Securities Association of Singapore (SAS), the brokers said they were prepared to buy over the investments at cost, from investors who are deemed vulnerable, with no admission of liability.

The six brokerages are CIMB-GK Securities, DMG and Partners, Kim Eng, OCBC Securities, Phillip Securities and UOB Kay Hian.

They define the vulnerable as those above the age of 62, who are less educated, with littleinvestment experience, among other factors. These points will be determined from interviews with an undisclosed number of investors who bought from the six brokers.

Their collective plan follows moves by DBS Bank, Hong Leong Finance and Maybank to compensate some of their customers.

“The brokers are sympathetic to the plight of the vulnerable. However, the brokers are of the view that investors should be prepared to bear some personal responsibility for their investment decisions,” said SAS chief executive Lim Eng Hai in the statement.

He echoes Prime Minister Lee Hsien Loong, who recently warned of the “moral hazard” of the Government stepping in because of political pressure, even though a bank has acted within the rules.If an investor is aggrieved, there are processes in place.

“Let people make their own choices and decisions, but within a proper system, and with appropriate safeguards,” he said. “It cannot be that if I invested and it turned out well, then I am happy, but if I invested and it turned out badly, then I am entitled to compensation.”

For those who fall outside the “vulnerable” category, SAS’ Mr Lim said the brokers would investigate and carry out a “fair review of all formal complaints” on a case-by-case basis.

SAS added it would work with independent financial advisors who referred such vulnerable investors to brokers, to arrive at “suitable solutions”. This may include sharing responsibility for compensation or in some cases, getting them to bear full responsibility.

Among the six, CIMB-GK Securities said it would pay out the original investment amount irrespective of interest earned.

It estimated that less than 2 per cent of its total sales of such products, amounting to $19 million, were made to vulnerable investors. CIMB-GK said the number of cases was under review.

As for UOB Kay Hian, it said it sold less than $250,000 of Lehman Minibonds and the Merrill Lynch Jubilee Series 3 to vulnerable investors.

The brokerage has also established “processes and committees” to handle and resolve fairly complaints of mis-selling directed at their trading representatives.

When contacted, ABN Amro said it was “still reviewing the cases”.

“ Should there be proven cases of mis-representation, we will take appropriate steps, regardless of clients’ profiles. We do not rule out compensation as an appropriate remedy. It will depend on the circumstances of each individual case,” said an ABN AMRO spokesperson.

About 10,000 investors here are affected by the collapse of Lehman Brothers in September.

The fallout led the Monetary Authority of Singapore’s managing director Heng Swee Keat to say MAS expects financial institutions to expedite the resolution of cases involving vulnerable investors. In cases of mis-selling, MAS also expects the financial institutions to take responsibility and work towards fair settlements, in part or in full.