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Tuesday, 21 October 2008

Confession of a ex-bank relationship manager

POST-MINIBOND LOSSES: What makes good relationship manager



I REFER to last Thursday's article, 'Retirees recount their big losses'.

My heart went out to the elderly woman whose face was was shown on the cover. On reading her account, I could comprehend her predicament and anticipate the tremendous duress and social repercussions that could lie ahead for those folk who have invested their life savings in the Minibonds that result in their financial bondage.

While the witch-hunting process has begun, I don't see the issue of whether the bank has mandated that retirees should be targeted for this product. If the product is genuinely suited for risk-averse investors , I don't see any reason to target them.

The point of contention is whether the risk-reward ratio has been properly articulated and communicated to investors. My take is, many zealous relationship managers are trained to convey potential returns of the myriad investment products offered by banks, but not to fully disclose the other side of the coin.

A former relationship manager myself, I was often told to go to regular product launch training during my banking career. The modus operandi was, the product manager briefed us on the key features of the product and then gave us the sales pitch, emphasising the unique selling proposition (or USP) of the investment. The downside risk of the product did not seem inherent and it was taboo to talk about it.

The financial turmoil is undeniably caused by mispricing of assets. This Minibond crisis is, arguably, caused by mispricing and miscommunication of the risk-reward of the product.

Quite often during the sales process, reward of the products was highlighted, emphasised and repeated, but the risk factor was never clarified or verified, not to mention certified. The best thing the relationship manager could advise about risk was the line often highlighted in brochures, 'past records are not indicative of future performance'. Derivatives and structured products are complex investment vehicles that went through a rigorous financial engineering process and carry an element of risk. The risk of the principal defaulting is coloured with terms like 'principal protected' and 'capital guaranteed'. How can a layman understand these sophisticated terms? But he would look rather foolish if he asked, so such terms are not explained or discussed.

Second, the competence of relationship managers currently in the market is debatable. Many are fresh from university and, though armed with degrees in finance, business administration or accountancy, have not experienced, not to mention understood, the dynamics of the market. Many are given onerous weekly, monthly and yearly sales targets. These relationship managers, who are the profit centre, are pushed to bring in lucrative creme-de-la-creme fee-based income, as opposed to traditional interest income, by virtue that fee-based income has zero downside risk of loan default.

Having said that, it seems the so-called downside risk has been transferred to investors in the Minibonds case. The current infrastructure uses incentives to reward star relationship managers but humiliates non-performers. In the world of survival of the fittest, many relationship managers are under pressure to deliver the magic sales numbers. Perhaps subconsciously, I surmise, they downplay the risk of investment products while delivering their impeccably honed sales pitch.

Yes, for Singapore to move up as an international financial hub, 'caveat emptor' should be the principle mooted. However, while this remains as a guiding principle, it should not be the cardinal rule that overrides the spirit of transparency and governance, and the sanctity of the trust of people in banking institutions. For years, banks have been upheld as the epitome of integrity , underscored by the highest form of governance to allocate credit to the bloodline of the economy. The word credit has a Latin root meaning 'to believe'.

In short, integrity and competence have to be intertwined to lend credibility to a bank, that is, the relationship manager. These are two quintessential traits of a credible relationship manager. To have one without the other is a fiasco.

Given the current financial turmoil, with an urgent need to review the financial infrastructure of the international banking system, local banks should take time to soul-search whether they deliver value in the goods they bring to customers. Second, it is time for them to mull over their top-down approach in their strategy of increasing fee-based income, and whether this has shortchanged internal processes in order to fast-track profit.

The process of delivering the trade-off between risk and return with clarity should be in place. In this way, the consumer can then assess the ratio and make his own judgement and so take ownership of the outcome.

The explicit guarantee by the Government on all deposits will last until 2010, and banks should take this time to restore confidence or else the role reversal will continue. Banks which conduct KYC, Know Your Customers, will see themselves scrutinised, as customers are now conducting KYB, Know Your Bank.

Angela Hoe (Ms)

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