11 February 2006

Structured Deposits

Feb 11, 2006
What's gone wrong with our deposits?

WE HAD supported POSB even though its interest rate was lower than commercial banks'. In 200l, POSB promoted aggressively a new product called Structured Deposit. The aim was to get better returns than the saving account. The placement was for five or seven years and upon maturity, the principal sum would be returned in full.

I was induced to transfer about $94,000 from my saving account to invest in this. Upfront, the bank deducted $8,412.36 for managing my funds.

Every year when I enquired about its performance, the answer was always the same. The fund was below the par value after five years.

What I fail to understand, especially for 2005, is that while my other investments are making a return of 5-12 per cent, why is the DBS Swing 7.0/l still under water?

The fund managers owe us an explanation. We were not told how the funds were allotted or what they had invested in. The other POSB Swing funds also suffered the same fate and are all below the par value of $1.

The Monetary Authority of Singapore should scrutinise this type of transaction.

Meanwhile, we have to wait for seven years to get back our principal sum and forgo the interest that we would have been earned if the money had stayed in the saving account.

Chan Chong Fatt
I don't know the exact details of this particular structured deposit. But if DBS Swing 7.0/l works like many other structured deposits that I have seen, Chan Chong Fatt might possibly get back even less money than he put in.

The fellow at the bank tells you that this is a structured "deposit", and that the principal sum is guaranteed. So you plonk down your $94,000, thinking that in the worst case scenario, you will still get your $94,000 back after seven years.

Actually they deduct $8,412.36 (as fees) from your $94,000. So the principal sum you invested is $85,587.64. Which means that after seven years, all you may get back is $85,587.64 for the $94,000 you put in.

That's assuming that your structured deposit is 100% guaranteed (some types may only be 90% or 80% guaranteed).

Risk is all part & parcel of the investing game. If you want higher returns, you must take on the risk of greater loss. That's acceptable to some people, and not acceptable to others. The problem here is that when a bank offers a "structured deposit", the word "deposit" will fool some risk-adverse people into believing that hey, this is a very safe thing, something like a traditional fixed deposit - you will SURELY get back at what you put in, and more.

Well, it doesn't work that way, unfortunately. More later - Mr Wang needs to bring his kids to enrichment class now.


Anonymous said...

Well, I feel that the government shd step in and help those ppl out there who had been tricked and maybe punish the banks for making those difficult to understand terms and conditions. I thought the goverment is compasionate to the ppl?

Jolly Jester said...

Yes same here, my mum had a similar with POSB 'special hongbao deposit' around a few years ago. The 'returns'?

It was only around 1+% for like 4 years. So it works out to be like 0.25% p.a!!!! It was supposedly linked to the main stock indexes around the world, but looking at the formula and the way they calculate the stock markets all round the world have to do spectacularly well for you to get any decent returns at all.

The way they attract people into this sort of thing is they usually have a 'guaranteed' payout of say like 10%(relatively high) after like 1 yr, and they advertise this number strongly in their posters and sales pitch, making it seem like the projected rate of return. In actual fact the 'guaranteed payout' is from your capital sum and had nothing to do with returns whatsoever, thus collecting the payout reduces your principal with the bank.

For banks, I would rather stick to their traditional services, savings acc, fixed deposit, and at most forex fixed deposit. Structured deposits of banks are just out to eat your money in my opinion. You can get a higher risk free return via bonds.

Anonymous said...

anonymous must, like most other Singaporeans, stop depending on the government, and practise thinking for himself. Caveat emptor, because the cheng hu is also under pressure to make more money.
Isn't it 'because it's POSB so it's OK' mentality that got him into this situation in the first place.

Gilbert Koh aka Mr Wang said...

Sometime last year, the MAS passed certain new regulations, which essentially said that banks cannot call their products a "deposit" unless those products meet certain criteria.

This addresses the issue I mentioned - that many people may be deceived by the word "deposit" into believing that what they're putting their money into is a "safer" kind of vehicle.

But of course the regulations come too late to help people who bought structured deposits years ago, and whose money is still trapped in these older structured deposits.

Anonymous said...

Aiyah, what to do, most aunties don't read prospectus ma. You who are the sons and daughters, kindly educate them if you can read legal mumbo jumbo.

For example, have a go at UOB's Internet Fund, Healthcare Fund, and etc. Have fun with those!

There are many new plans which have so many interesting names... Savings Plan la.. Deposit Plan la... really, ask them exactly what is being done.

If you want to do investing, do it yourself. Educate yourself.

Okay la, in spite of what I just said, one thing about caveat emptor... If the buyer always has to beware, we wouldn't employ valuators and brokers, or even PC repair technicians. The issue is one of trust, you see, trust in the executor of requested actions. A line has to be drawn somewhere la.

Gilbert Koh aka Mr Wang said...

Problem is that structured deposits are much less transparent than funds like those you mentioned. Retail funds at least have a highly detailed prospectus (i.e, there is plenty of detailed information provided, if only people could understand them). Whereas the info provided by the banks on structured deposits usually amounts to no more than a lousy brochure or a two-page term sheet.

Anonymous said...

Buyers beware???What is this? Shdn't there be anything to help the consumer? I thought there is some "seek the mp session" asking our dear MP to help us? Can we voice out and denounce the bank in our friendly newspaper? I wonder if PAPa lost all contested seats, will it help the ppl; will the government be more friendlier instead of some buyer beware sht?

singaporean said...

Structured deposits are not as simple as unit trusts. Only some finance professionals can fully appreciate what is going on.

The best financial advice can come from the most unexpected places: Dr Money of the New Paper recently wrote an article on structured products. Beware of structured products

An excerpt:

Funds - like unit trusts - tell us this. They disclose the initial commission, management fee and the net return. This tells us how much goes to the bank selling the fund, the fund manager and the investor.

Unfortunately, structured products reveal none of this. Until they do, I suggest you stick with more transparent alternatives like funds and shares.

PC said...

Having sold these products in the past, I can say that more often than not, these products are crap (big sweeping statement, I know).

The trick is to analyse the chances of winning... and really just work out the numbers. Many clients I know do not really appreciate the mechanics of such funds.. and have their eyes set on the prize; the higher yields.

However, I have had the good fortune of seeing some good structured deposits.. there the clients really had good opportunities to make money.. not all of such products are bad.

Many times though, it's up to the integrity of the sales person. For instance, I had purposely resisted selling the products I thought to be very bad for clients, actually turning them away... only to find out that when they stepped into another branch, some salesperson had convinced them to plonk their hard earned funds into these "sure-wins"


Anonymous said...

Can anyone comment on the POSB offer for the Hong bao deposit? I mean the annual return is slightly more than Fixed deposit rate annually, plus capital protected with a possibility of a greater gain if there is a upside on the underlying stocks.

A zero risk investment... if u looking for low risk... is it not?

Anonymous said...

Of course caveat emptor. It's your money and your decision to invest. You can complain all you want when you lose money but at the end of the day, it's still your loss.

I think a better analogy is look both ways before you cross the road. No point complaining when you're dead.

Financial institutions can churn out new products as fast as you can churn out new regulations. It's a game of one uppance.

Gilbert Koh aka Mr Wang said...

I think that the caveat emptor may work, say, for sophisticated investors, but it doesn't make sense for the retail public.

There is a reason why certain industries are regulated. Imagine you go see a doctor, and he is actually a really incompetent doctor, and he prescribes you a useless drug - no, not only useless, but harmful - and after taking the drug, you die. Would it be fair to say, "Caveat emptor - you chose to eat those pills"?

Anonymous said...

The difference, imo, is 'risk' and 'choice'.

I do not have to invest. If I choose to take risk in order to make more money, hence caveat emptor.

I do not have such choice when I fall sick. Therefore, I think the analogy is not quite a fair comparison.