Is the financial product really guaranteed?

Dear Mr Tan,

I visit your blog quite regularly. A recent negative experience encountered by a relative at a local bank prompted me to share some basics in evaluating an investment product.

I have appended my article below for your perusal to see if you would like to publish it on your blog or use it to educate the elderly at the Centre for Seniors.

Liu I-Chun

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The unprofessional selling of investment products by many bank staff upsets me.
What's disturbing is not just their aggressiveness, but their unethical sales
tactics.

I have written to the press (The Business Times, The Straits Times and Today) about it in December 2004, but have yet to see any marked improvement. As such, I always tell my parents NOT to invest their money without first telling me about the product in question.

Bank staff, in their eagerness to meet high sales targets and earn commissions, tend to make empty promises like telling customers that the return is "guaranteed" when it is NOT. They also fail to highlight the risks and relevant fees involved.

In Singapore, only two main types of financial instruments have guaranteed returns: bank fixed deposits (provided that the bank is reliable!) and AAA-rated Singapore government securities SGS (treasury bills and bonds), provided that the SGS are
held to maturity and coupon payments (if any) are reinvested at the same coupon rate.

As of April 12, banks pay about 2.6% p.a. for fixed deposits. The 90-day Singapore government treasury bill gives a yield of 2.3% p.a., and the longest 20-year bond yields about 3.2% p.a.

When a financial product offers a guaranteed return (for example a guaranteed return single premium endowment plan), the guarantee is made using bonds in which they invest with your money. If bonds only give 3.2% p.a. now, the financial institution should not be expected to guarantee an investor more than 3% p.a. return since it has to make a profit.

Any product that offers a return of above 3% p.a. will carry some risk, and is likely to include equities (stocks/shares), and/or Real Estate Investment Trusts REITs (a REIT is a hybrid between a stock and a bond as it pays dividends but its price can move up or down), and/or other financial instruments.

The return from equities and REITs can NEVER be guaranteed. So be careful when anyone tells you that a product promises to give a guaranteed return of more than 3% p.a. It doesn't seem possible under current market conditions.

Money market funds which invest in short-term financial instruments like treasury bills currently yield about 3.5 p.a. and is considered to be quite safe. The return is stable, but also not guaranteed. It is the next safest thing to invest in after fixed deposits and Singapore government securities.

Always read all about a fund from the prospectus and not just from the marketing brochure. Marketing brochures tend to highlight all the attractive features but only the prospectus will outline the fine print like "return is not guaranteed" and "payout can be made out of your capital".

Ms Liu I-Chun