Bank of East Asia

How banks fare on investment advice

Recommendations given to our 'mystery shopper' are assessed by an expert, as revealed in the first of a series

PUBLISHED : Monday, 17 June, 2013, 12:00am
UPDATED : Monday, 17 June, 2013, 5:17am

Hongkongers buy most of their investments through banks. They count on bank staff to recommend good instruments that suit their investment needs, income and risk appetite - rather than products that just help the adviser hit his sales quota.

To get a sense of the quality of financial advice offered at banks, the South China Morning Post sent a correspondent to visit eight banks. We look at the amount of time bank staff spent getting to know the customer's needs, the quality of investments suggested, how transparent they were about fees, and whether they propose investments that fit a client's budget.

The survey is done in the spirit of the Hong Kong Monetary Authority's "mystery shopping" exercises, where HKMA staff pose as investors, and ask banks to offer investment advice. They then assess the banks' compliance to the authority's rules on the sale of investment products. The HKMA publishes occasional reports on these exercises discussing banks' levels of compliance, including their lapses, without indentifying the banks.

This exercise takes things a step further in that we actually name the bank under review.

Our correspondent posed as a 37-year-old expat mother of two, looking to invest money for a pension. She told bank staff she has HK$10,000 a month to invest, and a medium attitude to risk. She was not sure if she would retire in Hong Kong or abroad, so requested flexibility.

We asked Glenn Turner, who recently stepped down as chairman of the Independent Financial Advisers Association, to give his assessment of how the bank staff conducted themselves, based on our notes.

Finally, we asked the bank to give their own response, and to address any perceived lapses.

The first bank visited was Bank of East Asia (BEA).

Risk assessment: Banks have to follow strict rules in their investment sales. If a customer walks into a bank, they are first directed towards a "green zone", where no sales can be done.

Bank staff first have to assess a client's risk appetite and experience with investing, which is assessed through a short questionnaire.

And so it was with BEA. Bank staff asked our mystery shopper to fill in a questionnaire, to get a sense of her appetite for risk. The questionnaire contained eight questions, three of which related to investing, with the others covering factual information, such as her name and age.

Two questions probed the client's attitude to risk: one was a multiple choice question asking how she would describe herself as an investor, the other asked her to select what level of loss she was prepared to sustain to make a gain on an investment.

The third question looked at previous investments she had held.

The mystery shopper's attitude to risk was rated as aggressive. The shopper disagreed, saying she viewed her risk appetite as moderate. The adviser suggested changing one of the answers, to adjust the rating, which the shopper did. This suggests that the questionnaire process is open to a degree of coaching.

The discussion took just under two minutes.

Banks are required to administer this risk appetite questionnaire before recommending an investment. They need to get a sense of the client's experience with investing and ability to take losses. Only those deemed to have a high risk appetite can be sold high-risk instruments, such as accumulators. Those registering a low to moderate risk appetite should only be recommended conservative instruments, such as funds holding investment grade bonds.

The BEA adviser did not ask the mystery shopper whether she had already set aside money for retirement, at what age she wanted to retire or where she wanted to retire, perhaps because the shopper had already said she was taking a flexible approach in her planning. The adviser did not ask whether the mystery shopper had any other savings or investments.

Investments offered: With green zone formalities out of the way, our correspondent was then ushered into the "red zone", where bank staff can start selling investments.

The first instrument BEA offered the mystery shopper was a two-year bond from an emerging-markets issuer.

The mystery shopper said this was not really what she was after, as she wanted to be saving every month for the next 30 years.

Next, the adviser suggested an insurance-linked savings plan that matures in five years, with an option to continue.

Finally, the adviser suggested a five-year yuan instrument that had a guaranteed return of 1.18 per cent.

The mystery shopper said that a return of 1.18 per cent was low considering the plan involved foreign currency risk.

The adviser sensed her client's reticence, saying: "I think bank products may not be suitable for your situation."

She then recommended an investment-linked assurance scheme, or an investment plan sold by an insurance firm. These instruments are rather controversial, as they can involve high fees and investors often find the plans hard to understand. They are now undergoing new regulation. (See Money lead article.)

The adviser would not name a specific plan. She said she would email this information later, but did not send anything. This is likely because the bank at this point had not done an assessment of the mystery shopper's financial needs - BEA says it would have needed to have done this before pitching a specific insurance plan.

Otherwise, the disclosure on the charges of the hypothetical insurance plan was good. The adviser said fees would be around 5 per cent a year of the total value of the investment, and she showed the mystery shopper that by year five an investor would be paying HK$30,000 a year or more in charges based on a HK$10,000-a-month contribution.

The adviser said the client would not be charged anything if she wanted to switch funds. However, many of these plans involve high bid-offer spreads when buying and selling funds (in other words, switching) which lower investor returns. The adviser did not flag the possibility of bid-offer spreads on the underlying funds. The entire interview took just 30 minutes.

Verdict of mystery shopper: Our correspondent would have liked more suggestions for long-term investments suitable for pension planning - for example, a low-fee exchange-traded fund or a suggestion of a portfolio of stocks and bonds. The bank instead offered shorter-dated (three to five-year) instruments, and an insurance plan, for which no specifics were given.

Independent adviser's assessment: Glenn Turner also asks why the bank recommended shorter-dated instruments, when the client was looking for a retirement plan.

"This is a mismatch and investing short term means the investment rate of return will be less than the investment rate of return that would be obtainable inside a longer-term investment," says Turner. "You have, say, 23 years of investment period left to age 60. If we follow BEA logic you will have a repetition of rolled over short-term investments."

BEA response: The bank notes that it needed to comply with HKMA rules on investment sales. For example, had the mystery shopper shown more interest in insurance, the bank would then have had to do an assessment of the client's financial needs, involving another questionnaire. Because the mystery shopper did not show interest in this instrument, those steps did not happen, preventing a discussion on those longer-term plans.

The bank also says staff were unable to find an investment plan that suited the client. "Normally, in such cases, the bank would need time to review the case and identify a suitable solution. "Regrettably, a representative [did not] respond to the customer in a timely manner, which the bank will strive to ensure in the future," a BEA spokesperson says.