Thursday, October 16, 2008

Bank Relationship Managers

Bank Relationship Managers

Can you trust your Bank Relationship Manager with your savings?

Bank Relationship Managers credibility has taken a beating recently because of investments related to the failure of the Lehman Brothers (the fourth largest investment bank in the US). Structured products by other investment banks, not related to Lehman Brothers, have also dropped to a miniscule 9 to 12 percent of their original value because their underlying value is still pegged to the performance of a large number of companies, including Lehman Brothers.

Many Singapore retirees, uneducated, Chinese speaking, first-time investors and normally conservative investors were left holding what could be worthless / devalued papers that were once believed by investors to be as “safe” as fixed deposits. A number of them obviously did not know what they were investing in and referred the minibonds as "mini-bongs". One of them was reported to have lost as much as $600,000 of their lifetime savings (money meant for their golden years) by investing in these high risk investments.

Approximately 9,750 Singapore investors who have invested over $501 million into structured products linked to Lehman (such as Lehman Minibonds, Morgan Stanley Pinnacle Note 7 (sold by UOB, OCBC, Hong Leong Finance, Standard Chartered and Maybank, among others), DBS High Notes 5 and Merrill Lynch Jubilee Series 3 LinkEarner Notes).

Over 80 percent of investors buying the Minibond Series 2 & 3 and Merril Lynch Jubilee Series 3 noteholders invested up to $50,000. On the other hand, 28 percent bougth $10,000 or less, according to the Monetary Authority of Singapore (MAS).

In the case of DBS High Notes 5, more than 1,400 retail investors bought $103 million worth of notes. More than half of them invested $50,000 or less. According to DBS, 80 percent of their High Notes 5 customers are aged below 62 years.

Frankly, I think DBS should give us statistics about the affected customers below age 45. It is much too late for these people rebuild their nest eggs at the ripe old age of 62. Are they expecting these people to work until the age of 80? Who is going to employ them at the age of 62? This scene is played out not only in Singapore but also in Hong Kong, Taiwan and elsewhere.

Who is to blame for this state of affairs? Many point the blame on the Bank Relationship Managers. Others lay the blame on the banks selling these products. Based on my numerous dealings with Bank Relationship Managers in Singapore, I reckon that the blame lies equally between banks and their front line employees and the investors themselves who don’t realize that whenever there is slightly higher returns, it usually translates to an increase of risk to the product they invest in. In normal markets, the risk is low. In distressed markets like the current Credit Crisis, the risk will suddenly become extremely high particularly if there is a default or bankruptcy.

In my many close encounters with Bank Relationship Managers here, I’ve yet to meet one Bank Relationship Manager who would say that their investment product is risky and that your risk profile does not qualify you to buy the product. It is like expecting a car salesperson to tell a prospective buyer not to buy their company’s car because it not has as many safety features as a competitor’s car of the same price and quality.

Also do not expect the bank relationship manager to be an expert on the products and able to tell you all the risk features of the product. There is a high turnover of bank relationship managers, so you won’t expect to see them again after the sale.

Unlike insurance agents, you can't have a long term business relationship with your bank relationship manager. Insurance agents are paid for the sale of an insurance product over a period of lifetime of the product, and are therefore more motivated to promoting products that are more suitable to their clients needs so as to enable them to have a long term business relationship with their clients. Bank relationship managers, on the other hand, are paid a monthly salary or a one-time sales commission. This coupled with the focus on selling to meet their quarterly targets and rarely on the emphasis on ethical selling can lead to potential problems like what we see now. They continually switch portfolios / companies in the course of their career.

What you must realize is that the Bank Relationship Managers, like stock brokers, are not your friends. Nor are they your investment adviser. If you have not paid them a fee for professional investment advice, and they are not professional financial advisers (aka wealth planners), don’t expect independent investment advice from them. They are bank salespeople who make an income promoting the bank's investment products. You have to do your own homework, just like investing in the stock market.

What you can do to prevent making investment mistakes when talking to Bank Relationship Managers

When talking to Bank Relationship Managers, you have to be careful what you say to them. Their role is to find out your hot buttons. They will sell you a product based on your responses. Some of the questions you could ask your bank relationship manager are:

  1. What is the worst-case scenario for this investment if the market turns really bad?
  2. Is this product something like the Lehman Brothers Minibonds or the DBS High Notes?
  3. Please show me relevant clauses in the sales contract which mentions the risks to this investment. (This is usually found in the section on “Risk To Investor” or similar worded heading)
  4. I don’t understand this clause. Please explain these clauses to me in layman terms. Terms like “first-to-default”, reference entities”, “credit event”, and "credit derivative”. If you don’t understand any of these clauses, then maybe this is not the investment product for you. As the well-known investor, Warren Buffet once said: “If you don’t understand how the investment works, don’t invest in it”.
  5. If I need to exit early from this investment, what are my options?
  6. If things turn really bad, what are my options to exit the investment? How much money can I get back?

When your bank relationship manager does the mandatory Customer Needs Analysis at the end of their sales presentation, they will have to ask you what your "Risk Profile" is. Tell them that you are “very conservative” irrespective of your investment profile previously. The rationale for this declaration is if you are promised something as safe as fixed deposit, that for all intents and purpose, you are making a conservative investment, and therefore for this case, you are a “conservative investor”. This will help you later on if you want to make a complaint of mis-selling.

You can also ask to put a note in the Customer Needs Analysis that you are buying this product because it is as safe as fixed deposit / savings deposits. Normally, they won't agree to this. When the bank relationship manager tells you it is not necessary, ask to see the bank manager to get confirmation on this. This gives you an opportunity to re-evaluate your decision to invest in the product.

If your Bank Relationship Manager tells you that the product or investment amount is “guaranteed” “safe’, ask them to show you where in the sales prospectus, this is mentioned. Make sure you take away a copy of the prospectus and keep it until the maturity of your investment.

What’s Next for Bank Relationship Managers?

In its strongest worded statement to the financial institutions to date, MAS has asked the banks to "do the right thing", that they "should not take an "overly legalistic" approach in dealing with such cases" (Straits Times, 18 Oct 2008). MAS said that the "financial institutions should reach a fair settlement in full or in part. "We are focusing on cases of mis-selling to vulnerable customers and on cases where the product were clearly inappropriate for them given the circumstances, said Heng Swee Keat, MAS managing director.

MAS said it has directed the financial institutions concerned to interview each customer within 2 days of receipt of the complaint. Following which, these institutions have to complete a review of the complaints and update the customers within 4 weeks of the interview.

Investors who are not satisfied with the outcome may refer their complaints to the Financial Industry Disputes Resolution Centre (FIDRC) for mediation or adjudication. The FIDRC mediation process is free of charge and if the case goes to arbitration, the cost to the customer is just $50. FIDRC usually deals with claims not exceeding $50,000. But in the case of structured products, the centre has agreed to hear all "deserving cases".

With former NTUC Income CEO, Tan Kin Lian taking up their cause, investors are asking a return of 50-70 percent of their money. If they hire lawyers, the money they get back eventually may be even less.

It is good to hear that Hong Leong Finance, which distributed Lehman Minibonds, said it "will focus special attention on those above 55 years old, less educated and first time investors in structured products.

Maybank said that it has to date, contacted 50 percent of customers with complaints to schedule interviews. It told The Straits Times that it is also dealing with "vulnerable customers" first.

Many people are also unhappy and are demanding an overhaul on how banks sell high risk investments like structured products. They also want to see stricter guidelines on the way such investments are marketed right down to printed materials and even who should buy them. They also hope that the qualifications and training of the bank relationship managers be looked into and proper checks and balances are instituted by the banks to ensure that these bank relationship managers put the clients' interest first before the banks interests.

MAS confirmed that they have been conducting formal inquiries into allegation of breaches of the law, inadequate internal controls by the financial institutions, or poor sales practices by their bank representatives.

If there is no change in the way such risky investments are marketed, more people are likely to suffer the same fate of those who invested in these risky notes. For many of the affected people, this is as good as having experienced the Great Depression if they don't get a major part of their money back. Who could have foreseen they would have lost so much of their hard earned cash in one fateful week in September 2008. Yeah, sure, many people knew that there was a Sub-Prime Crisis in the US. But who could have predicted the magnitude of its effects in Singapore.

The lesson to be learned from this Credit Crisis? Don't put all your eggs in one basket, don't buy everything at one go and don't take everything at face value. Believe in your own fallibility. Don't be so eager to sign up if don't understand what you are investing in. Do your homework or get outside help. Certainly don't think your bank relationship managers are financial gurus who are going to make you rich. As they say in investment circles: "There's no such thing as a free lunch". Even if a free lunch is provided, there always is a price to pay.

© - bank relationship managers

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