TELL us clearly and simply about the risks involved in buying complex investment products.
That topped the wish list for retail investors yesterday after the Monetary Authority of Singapore (MAS) announced a review of the way structured products are marketed and sold here.
Banks selling these products also agreed that transparency was vital.
The review comes as thousands of investors here face potentially major losses after buying structured products linked to now-bankrupt Lehman Brothers.
Relationship managers at banks here have been accused of being overly aggressive in pushing these products.
Some customers say they have downplayed the risks and misled them into thinking the structured products were actually issued - not merely marketed - by banking names they trusted.
These investors are now calling for greater transparency, including better disclosure of risks, and a proper explanation of how low or high a return they are likely to get from the investment.
Structured products is a class of investments involving the use of complex financial derivatives to deliver a steady annual return above traditional fixed deposits.
Returns are tied to the performance of a group of firms and stock markets, but investors could end up losing all their money should just one of these firms fail.
But, as savvy investors know, there is a reason the yield on any product is much higher than a deposit: The risk is higher.
MAS said it will look into implementing stronger suitability requirements for certain types of products, as well as clearer product labelling and risk rating. This could mean investors here will see simpler descriptions of product features and risks.
Still, some investment advisers warn of the risk of leaving important details out - which could cause more problems.
Mr Barnaby Matthews, head of derivatives at Macquarie Capital Securities Singapore, said: 'When you summarise, you leave things out, and people will complain. But when you provide too much detail, people tend not to read the fine print. It's a bit of a double-edged sword.'
Banks here say their financial consultants undergo rigorous training before selling these products. They are also required to take customers through a financial needs analysis to generate recommended solutions and relevant products to meet their needs.
Ms Koh Ching Ching, OCBC Bank's head of corporate communications, said: 'At the end of the selling process, our personal financial consultants have to go through a checklist to confirm that they have presented potential customers with the relevant product fact sheets and prospectus for their understanding.'
But Mr Joseph Chong, chief executive of financial advisory firm New Independent, called for better enforcement.
'People got around it. We need to ensure it's done before the sale, not after.'
A relationship manager at a local bank, who declined to be named, confirmed to The Straits Times that such lapses occur regularly. She also noted many customers do not know the difference between 'principal guaranteed' and 'principal protected' - because many relationship managers do not bother telling it to them.
'Principal guaranteed' means that even if a product fails, you will get back the full sum you invested. 'Principal protected' means the bank or investment institution that is managing your money is 'taking steps to invest your money to ensure you get returns' - but if the product fails, you will lose part or all of your principal sum.
Most structured products are merely principal protected.
Mr Tan Kin Lian, former chief executive of NTUC Income, suggested that the charges for marketing and profit margin should be disclosed, and that MAS should appoint two independent experts to make credibility assessments of each product.
These experts, he said, should investigate things like the charges taken away from investors.
Suggestions for improvement
How can the sale and marketing of structured products be improved? Here are some suggestions from consumers and advisers.
Making it fair for consumers
The structured product must be designed to be fair to consumers, said former chief executive of NTUC Income Tan Kin Lian.
'A product is fair if the cost of marketing/profit margin is at a level that is similar to other investment products. For example, if the investor buys government bonds or shares, the commission payable is 0.3 per cent. If a structured product takes away 5 per cent or more, then the charges are excessive.'
Elaborating on the risks too
Financial advisers need to pay more attention to explaining the risks and not merely extol the high rates of return.
'The recent collapse of Lehman Brothers finally brought home the point that financial products like structured deposits and unit trusts are not as risk-free as they were presented to be,' said Mr Regi Wong, general secretary of the Air-transport Executive Staff Union (AESU).
Conducting a financial needs analysis
Financial advisers must complete a customer's financial needs analysis before selling a structured product, not the other way around.
'The analysis is currently done after the sale because if the customer is not interested in buying the product in the first place, there is no need to do the research and explain the risks,' said a relationship manager at a local bank, who declined to be named.
Putting the biggest risks up front
Draw up a template that pushes the biggest risks up front, suggested Mr Barnaby Matthews, head of derivatives at Macquarie Capital Securities Singapore.
For example, something that says: 'Top 10 risks associated with this product'.
But don't sacrifice the detailed fine print for brevity, either.
'Investors need to understand that when they're buying these products, they're taking a credit risk with the issuer - that is not the local bank they're buying the product through,' said Mr Matthews.
This article was first published in The Straits Times on October 4, 2008.
