Financial Toxic: Structured Products

I am starting a series in financial toxic. In this article, I shall focus on the analysis of structured products sold by financial institutions. Before I move on, I would like to state my disclaimer. The entire article is written based on my personal opinion. I am not a licensed financial adviser nor am I a financial expert. I am only an engineer. Financial advisers and experts are trained to obey everything written in the financial textbooks while engineers are trained to think and analyze logically. This explains why engineers have different views from financial advisers and experts.

Let us begin by some basic introduction on the subject under discussion. What are structured products? To put it simply, they are things that you pay a certain amount of money for. When certain conditions in the contract happens you will receive a certain amount of profits but when another set of conditions happen, you will suffer loss. This is supposed to be an “investment”. How do they work? I don’t think any one other than their creators know. This means not even the sales people (also known as relationship managers) know anything about them other than their commission and sales quota. They are extremely complex.

This is another proof on how bad it is when non-engineers are in charge of the financial sector. Why do you think they create such complicated products? Are complications necessary for our investment needs? I don’t think so. It is clear that such complications are only meant to mislead and deceive.

Engineers do encounter complex problems in our work. However, our role is to simply them. Let me share some of my experience in this regard. Once I was working in the construction of a recreation club at a hill slope. The whole plan is very complex. Due to many changes in the design, the drawings do not match anymore. The architectural and structural drawings were no longer showing the same thing. Nobody knew what to do.

When I first got in, my role was to set things in order. I knew that there was no use writing to the consultants to ask them what to do. I will only get some general answers, which will require me to ask even more questions. The only solution I could see was for me to take out the relevant drawings, take out my stationary and draw out the details that matches the engineer’s and architect’s requirements. Then I faxed my drawings to the consultants to ask for approval. They only have to answer “yes” or “no” and I always get “yes” to all my drawings. After I got the approval, I made photocopies of my drawings and pass them to the foremen to built accordingly. Most of the development was built based on the diagrams I drew. Basically, I had simplified a complex development into simple diagrams that individual workers can build.

This is what engineering is all about. The existence of the structured products shows us that their producers are doing the opposite from the principle of engineering. While we simplify complex stuff, they complicate simple stuff. The question here is why do they do that?

All products are supposed to meet the demand for specific needs. For example, our need to protect our feet creates the demand for shoes. Our need to protect our heads creates the demand for hats and helmets. So, what needs do the structured products fill? The answer is none. The structured products do not fill any need and there is absolutely no demand for them. However, they still got sold.

How did they do it? The answer is in the generous commissions and high pressure selling in a morally challenged environment. Let me explain in the Singapore context. In Singapore, we have a lot of senior citizens who have accumulated a lot of savings in the bank due to their thrifty lifestyles. They do not have much education and do not know much English. So, the only investment they know is fixed deposits.

When these people go to the banks to renew their deposits, the banks’ tellers referred them to the relationship managers who then introduced them to invest in the structured products sold by the banks. These relationship managers managed to convince their prospective clients (or victims) that the investment is as safe as bank deposits but produce a much higher interest. They made a lot of sales. When Lehman Brothers collapsed, the rest is history. Many senior citizens found themselves losing their life savings in their “safe” investments.

Even professionals who can read in English bought those products. Obviously they trusted those relationship managers more than they trusted in their ability to read in English. Somehow, these professionals must have thought that the title “manager” makes a person honest. Now they had to pay for their mistakes with their life savings.

This may be an isolated event but it tells us very clearly that the structural products are designed to make us part with our money. This is their only purpose. Their complexity is meant as a cover. Therefore the only conclusion here is never buy any of them. Shun them like toxic waste.

Of course, I will not be surprise if there are investment experts like financial advisers and relationship managers who disagree with me. After all, who am I to prevent them from earning their commissions?


2 Responses to “Financial Toxic: Structured Products”

  1. John Says:

    Yeap, I agree with your views on whole life policy, expensive loaded bond funds, and structured products. It seems you have a positive view on 500 index funds. What is your opinion of Corporate bond index funds?

  2. Yeap Chee Seng Says:

    Index funds are foolproof as long as the underlying are equities, not bonds. All bonds are toxic, when governments start to print money.

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