My work scope is, and has been, very international. I regularly deal, and have dealt with, clients and assets across many different countries. These include London, New York, Hong Kong, Singapore, Dubai, Seoul, Bangkok, Manila and Taipei.
Thus I think it is fair to say that I know structured products much, much better than the average layman.
Now, let me tell you something else. Personally, I have never invested in any structured product. Not even once.
Don't get the wrong impression. Structured products are not all bad. In fact, structured products can be very useful. They are specially tailored and designed to meet the needs of powerful, complex, sophisticated clients. Such clients could be hedge funds, other banks or even sovereign wealth funds such as GIC or Dubai World.
Now, why have I personally never invested in any structured product?
Because I am not a hedge fund. I am not a bank. I am not a sovereign wealth fund. I am not even an MNC. My needs are much, much simpler. I am merely an ordinary citizen, living in a HDB flat, married with two kids. In other words, I am very much like most of you.
Of course I do need a good personal financial plan (and so do you). I need a strategy to ensure that I can meet my daily expenses; to protect my family against any possible misfortunes such as illness; and to achieve long-term goals like sending my children to university and saving enough for my retirement.
However, that plan does not require any fancy structured products. Instead a sound combination of traditional, much simpler products will do fine. For example, I have a savings account; some fixed deposits; medical and life insurance; a CPF and SRS account; and some unit trusts.
And that's pretty much about it.
I do not need an illiquid rated first-to-default credit-linked note issued by a bankruptcy-remote Cayman Islands special purpose vehicle; linked to a basket of reference entities and their reference obligations; and secured by a portfolio of underlying assets whose cash flows have been modified by cross-currency and interest rate swaps with a swap counterparty called Lehman Brothers.
Mind you, I know exactly what the above means. I know exactly how it works. I could easily give a talk or presentation to explain such structures. (And actually, I have).
However, I personally do not need such an instrument. I simply have no need for it. For the purposes of my personal financial plan, it is completely unnecessary to own a Lehman Minibond, or anything like it.
And frankly, I cannot imagine why such a complicated thing would be appropriate, suitable or advisable for retail investors.
This is not merely my own opinion. Simply go to any bookstore, and look at books on personal financial planning for the individual. You will find that the books discuss cash, bonds, equities, insurance, funds, REITS. But you will find that the books do not discuss structured products at all. Certainly not credit-linked notes. Why? Because, as I said, such products are completely unnecessary for the man in the street.
In Part 4, I will discuss legal issues relating to the sale of unsuitable financial products to the unsuspecting general public.