Monday, November 17, 2008

Crevaet Emperator and Emperator's Creveat and I'm not sure why I like to Blab so I'll just do it to P You Off

It's easy to hit out at big organisations like multinational corporations and governments. Organisations like these tend to be bureauractic, inhuman, dehumanising and seem to serve the sole purpose of hurting the individual and the small businesses. Governments seem to enjoy nothing better than creating means of taxing hard working citizens and multinationals like the tobacoo and alcohol companies actually make a profit by selling you things that kill you. In Singapore it's especially easy to vent your frustrations at such organisations because the system seems especially prone to supporting "Big" government and business against everyone else.

While there's allot of be said about the evils of big government and big business, I do think that this image can go a little too far. The "Little" guy, as Saddam Hussein often showed in his struggles against the USA can be pretty brutal too. OK, perhaps it's a stretch to call the guys protesting at Hong Lim Park, Saddam, but I think we've now reached a stage where government has become so much a part of our lives that we've lost the ability to take personal responsability for our own actions.

It's sad to see and read about old ladies who have lost their life savings when they've invested in financial products and it is certainly a clever PR move by the financial institutions to offer to refund "Vulnerable" investors who lost their shirts on certain financial products. No bank chief wants to be summoned by the financial regulators who got screwed because the politicians realised that stories of little old ladies being screwed of their life savings can cost them votes. Pay off the vulnerable and you appease allot of angry people. Then you can carry on as before.

However, is this good for the actual economy, the financial system and even the nation at large. I believe that clever crisis management on the part of the financial insitutions here has cost the nation dear and if we carry on like this, we're not going to learn anything. Sure, learning is going to be painful but then again, don't the best of life's lesson's involve a little bit of loss and sacrifice?

What allot of peolpe forget is there is a clear definition between a creditor and an investor. A creditor provides money with the expectation of getting back that money regardless of the situation of the company. An investor on the other hand expects a share of returns but also assumes a share of the risk. Creditors can only expect their principle (what they loaned out) with perhaps a bit of interest in return. An investor can expect to reap rewards of an investment but if that investment goes sour, then he or she has to expect a loss.

If you look at things in this light, you'll understand why creditors get paid off first during a bankruptcy and investors (shareholders) are usually the last to get their money back. However, a creditor does not expect to get rich while an investor does.

Banks and financial institutions are obliged to provide a leagl warning that investments can go down as well as up. True, this warning is usually in print so fine that you can go blind reading it, but surely common sense should prevail here and one should know that when buying into a financial product, one should be prepared to lose as well as gain.

So, when you look at it this way, what are the protestors talking about when they ask for a "refund" on their investments losing money? Did the bank promise them that they were 'guarenteed' to make money for an indefinate period? If this is what the bank promissed, the banks should be shot for lying and decieving their clients. But doesn't the client also have a responsability to ensure that he or she knows what he or she is getting into? If a client claims that everything was left to the bank, the client deserves to lose money.

But what if the client is a little old lady who does not know left from right? Well, it is sad when old ladies get burnt and I have to aknowledge that not every old lady was like my late grandmother who was exceedingly sharp when it came to counting her pennies. My grandmother was incidentally very sharp with money because she had next to no inheritance from my grandfather and her kids and grandkids didn't rush to keep her in style. But even then, do simple old ladies rush out to buy 'advanced' financial products on their own? Perhaps there are, but common sense tells me that many of these 'vulnerable' investors had relatives who helped pushed them into it. It's the relatives and friends who should be compensating the old ladies not the financial institutions.

Of course, the financial institutions and the government are not blameless either. The Financial Institutions thrive on sending out "high-pressure" sales people to "push-products." Sales people are paid on comission so it's in their interest to push the products which pay the best commision, regardless of whether the product is best for the customers needs. The financial regulator should be sued for allowing the financial institutions to name their sales peolpe as "Advisors" or "Planners." In true Singapore style, the government merely insisted that those selling financial products take exams but then left the financial institutions for allowing their 'advisors' and 'planners' to push products.

You might call this a matter of semantics. You could say it's just a name, so what? Well, there's allot of significance in a name. An 'advisor' provides you with 'advice' while a 'planner' actually get's involved with 'planning.' By these definitions the value comes from 'advice,' and in the 'planning,' and not in the product sale. However, most financial institutions bundle the planning and advice into the product sale. The "Financial Advisor" or the "Planner" gets rewarded only when you guy the product. I can't think of another industry that allows this to happen. Do you get "Auto-Advisors" working for Honda to advise you on which car to buy? I believe Honda is very clear that its staff are there to "Sell" you a car.

I'm sorry people have lost their life savings. I'm thankful that I've never had enough money to tempt me into playing with some of the financial world's more risky investments. But a situation where you have investors behaving like gamblers and being compensated when things go sour when they lose is unsustainable. And a system that only places a value on product sales rather than on knowledge is equally unsustainable.

Yes, it's nice to compensate the old lady who lost her savings but is it the right thing to do. I think in this case, we've only helped perpetuate the unsustainable and if the government and leaders of the financial system had a real intention of doing right, they'd look into how to fix the real issues rather than buying off a few angry voices.

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