High note 5 - Know what you have invested

Recently, the hottest news in the press is about High Note 5 saga. As a result of bankruptcy of Lehman Brothers, the investors suddenly discover that the investment they thought was safe is actually not. Worse still, some lost their life long saving.

It is not exactly clear on the terms and condition of the product. But in a nut shell, these are the facts gathered on the web:
- The structured product is linked to a basket of banks and when the credit event trigger, investor is likely to lose money.
- If everything is fine, we get the 5% interest from this product.
- It is supposed to be a credit default swap(CDS) in disguise

A structured product is a combination of financial instrument to be sold as a package. They can package a lot of different instrument together and sell to investors. The key selling point is enhanced yield. This is the result of the income that some underlying instrument generates.

CDS is a form of insurance. The seller act as the insurance company, gives the buyer protection in return of a premium. If nothing happen on the protected asset, seller get to keep the premium.

The auntie uncle who bought the product was sold on the promise of 5% interest return. It is quite a high return consider the bank deposit interest rate in Singapore. Maybe the relationship manager did explain about the product features. However, how do you expect the man on street to understand CDS and credit event? Furthermore, the reference entities are all big names, which unlikely to fail.

The sales person often highlight more on upside rather than downside. Beside this, getting the customer to understand the product is also a tough job. More than often, if you cannot convice them, confuse them. Many investor claims that they are not aware that they could lose all the investment amount. It is either a form of ignorance or the risk is being down played. From another perspective, it is like putting all money into one basket. This basket was thought to be very safe, but is actually not.

Not an easy problem to solve.
- Bank has to refrain selling complicated product to people who cannot appreciate the product risk.
- There has to be constant education program for people to recognise that high risk high return.

When the sales person trying to sell you product, ask yourself, do you really understand the product. What I always believe is if it is too good to be truth, then it most probably is.