By Larry Haverkamp

CAN you spot a good investment? How about a bad one?

Try this: A trusted bank advertises a 5per cent return.

Its expenses are zero so your return of 5percent plus 0 per cent for expenses equals 5 per cent total return.

It's good. A 5 per cent total return is high enough to be attractive but not so high as to be risky. Even if you add 1 per cent for sales charges, it is still good.

Is there a hitch? Yes.

Your money gets invested in risky bonds and derivatives. It means total returns are much higher, like 13 per cent or more. But all you see is your safe-looking 5 per cent return.

The difference of 13 - 5 = 8 per cent goes to the deal-maker while you must take all the risks. If the bonds default, you lose.

Of course, the higher the bonds' risks, the more the deal-makers earn. This conflict of interest is not disclosed.

Billions invested

You may have guessed: I am talking about structured notes. We invested billions in these because they looked safe.

Now, a large amount - $686 million - has defaulted. Over 10,000 people stand to lose their money.

The Monetary Authority of Singapore has taken the unprecedented step of banning four banks and six stockbrokers from selling more of this product for six to 24 months. One bank - DBS - structured the notes as well as distributed them.

Did the deal-makers really tell investors that structured notes had low expenses, resulting in low total yields and low risks?

You be the judge. Please see report at right.

Reading ... reading

Finished? Good. Here is a quick quiz: 'How much are investors charged for fees and expenses?'

Did you say, 'Zero'? I did too.

The last sentence makes it almost too easy. It says: 'Accordingly, no fees and expenses are expected to be paid out of the cash flows of the issuer or from the underlying securities.'

As explained earlier, it is not correct. Expenses are not zero.

They are actually quite high, which means total returns are high, and risks are too. Unfortunately, the deal-makers didn't disclose this in the prospectus, brochures or anywhere else.

Worse still, many notes put 'risks on steroids' with clauses that said if only 10 per cent of the bonds defaulted, the other 90 per cent must be forfeited to the deal-maker.

Three BIG questions:

1. Were even the banks and brokers who distributed structured notes misled by the prospectus?

2. If so, should the deal-makers - rather than distributors - be the ones to pay refunds to investors?

3. Since ALL investors are affected by the prospectus, should refunds be 100 per cent of investments rather than the 16 per cent paid so far?

'No fees and expenses'?

THE following is taken from the 'Fees and Expenses' section of the Minibonds prospectus. All structured notes prospectuses have this section and all use nearly the same wording.

The issuer will enter into a disbursement agreement with the Arranger or an affiliate of the Arranger for the Arranger or affiliate to pay all the fees and expenses incurred in connection with the Programme, such as the fees of the Trustee, the Issuing and Paying Agent, the Custodian's fees, administrative fees, the legal fees, the Registrar's fees and also including expenses incurred in connection with the selection and acquisition of exposure to the Reference Entities for each Series of Notes.

As all the fees and expenses will be borne by the Arranger or an affiliate, no fees or expenses are expected to be deducted from the proceeds of any issue of Notes or be borne by the Noteholders, unless indicated otherwise in the relevant Pricing Statement.

Accordingly, no fees and expenses are expected to be paid out of the cash flows of the Issuer or from the Underlying Securities.

• Issuers and arrangers are also called deal-makers, underwriters and investment bankers. Examples are Lehman Brothers, Morgan Stanley, Merrill Lynch and DBS.

This article was first published in The New Paper.