# Diary of a Private Investor - structured product too good to be true



## Colm Fagan (11 Sep 2019)

*Too good to be true
Colm Fagan            Diary of a Private Investor          Update 17         10 September 2019*

A conversation with my friend Brian Woods almost four weeks ago started it all.

“Colm, I found an investment you might like.  It’s called Accelerator Bond 4.  Google it and see what you make of it.”

“OK, Brian, I’ll have a look.  While I’m looking, tell me more.”

“It’s a five-year lump sum investment.  There are two options; I’ll focus on the second.  The return after five years is linked to a stock market index.  If the index is at or above its starting level, the investment return is at least 40%.  If the index is below its starting level, you lose 15% at most, less if the index has fallen by less than 15%.”

“So, I’m guaranteed at least 85% of my initial investment after five years, come what may, and I’ll get at least 140% if the index is above its current level.  Is that what you’re saying?”

“Yes, assuming of course that the bank backing the product hasn’t gone bust.”

“And who are they?”

“BNP Paribas.  They’re one of the world’s top investment banks.”

“Sounds great, but why do I get the feeling that you’re not convinced?”

“The fact that it looks so good is precisely the problem, Colm.  It’s seems too good to be true, and you know what they say.”

“Indeed.  If there is a catch, it must be in the index.  The brochure says the bond is linked to an index called the Solactive European Deep Value Select 50 Index.   I never heard of it”.

“It’s exclusively for BNP Paribas.”

“Brian, reading the brochure, this Solactive index is very peculiar. The most peculiar aspect is that up to 25 of the 50 stocks selected for inclusion each month are chosen specially because they’re due to go ex-dividend within the month.  As you know, the price falls when a share goes ex-dividend, because the seller, not the buyer, is entitled to the dividend.”

“Colm, are you saying that stocks are chosen specially to depress the index?”

“Yes, that’s what I think.  I’ll have to do some homework to estimate the extent of the drag. Talk to you tomorrow.”

***********​
“Brian, I’ve done the sums.  I estimate that including in the index an above-average number of shares that are due to go ex-dividend cuts the return by around 2.3% a year.  On top of that, the dividend yield on the Solactive index is at least 1.2% more than on the EURO STOXX 50, the main benchmark index for Eurozone stocks.  So, if the shares in the two indices deliver identical total returns in future, the Solactive Index will lag the EURO STOXX (price only) index by at least 3.5% a year.”

“Are you sure, Colm?  That’s a drag of almost 20% over five years.  Putting it another way, are you saying that, if the EURO STOXX 50 Index increases by 20% over the next five years, the Solactive Index could still show a loss?”

“Yes, that’s what I’m saying.”

“Hold on now.  If you’re right, how do you explain the chart in the brochure showing the Solactive Index outperforming the EURO STOXX 50 over the last 14 years?”

“Brian, it’s apples and oranges.  The two indices are completely different, in terms of industry sectors, geographies, and even currencies.  There is no logical reason for comparing them.  The EURO STOXX 50 consists entirely of Eurozone stocks; the Solactive Index has a mishmash of currencies, including sterling, Swiss Franc and the three Scandinavian currencies.  The UK and Switzerland have the highest weightings in the Solactive index.  Neither is represented in the EURO STOXX.   A cynic might claim that they compared the two indices simply because the comparison gave the “right” result (from their perspective), but I’m not a cynic.”

“Colm, I still find what you’re saying hard to believe, but it ties in with work I’ve been doing, based on the costs and charges on pages 18/19 of the brochure.  The margins in the product indicate that there’s about a one in six chance of the investor getting a profit of 40% (or more) at the end of five years.  That’s about the same as the chance of landing a six with one throw of a die.  There’s a five in six chance that they’ll lose money.  Those odds are reasonably consistent with your conclusion that the probability of making a profit is equivalent to the probability of the EURO STOXX Index (price only, excluding dividends) increasing by around 20% in the period.”

“For a mathematician like yourself, Brian, it’s nice to see the two approaches coming to similar conclusions.  Not nice for investors, though.”

“Indeed.  Our conclusion that there’s a small chance of investors making money also disagrees with the back-testing results on page 11 of the brochure.  The Irish promoters (a company called MMPI Limited, trading as Broker Solutions) say that they back tested 1,304 5-year periods between 2 July 2009 and 1 July 2019 and that every single one of those 1,304 back-tests showed a profit.  The worst return was +40% while the best was +81.27%.”

“That sounds very impressive, Brian.  How did they get 1,304 simulated past returns?”

“Good question!  They assumed that someone could have invested in a five-year product each working day between 2 July 2009 and 1 July 2014 and seen it mature.  But there were only two independent five-year periods in that time – the first between July 2009 and July 2014 and the second between July 2014 to July 2019 - not 1,304.”

“Crazy.  I’m surprised they didn’t aim even higher.  They could have got more than 15,000 successful past simulations by assuming people invested every half-hour rather than just once a day.  They undersold themselves!”

“That’s funny, Colm, but it’s no joke for the people who bought the product.  We should do something”

“Like write about it in my investment diary and hope someone in authority will read it?”

www.colmfagan.ie


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## Boyd (12 Sep 2019)

Surprised but not surprised if you know what I mean! Any investment product sold by banks and life companies tend to be terrible value but that definitely take the biscuit. Great explanation on the nitty gritty details, which the Joe Soap would be very unlikely to understand.

I think KBC offered something like this before as well, really complex product based on index being above or below a value. Hmm, looked for this but can't find it now, perhaps it was another institution. However they have funds with 1 percent transaction fee plus 1.68 percent annual charge! Again if only it were not a tax nightmare to just buy the index yourself....

As I mentioned on other thread, whilst enjoyable and informative read, this merely reinforces the mistrust of people with financial institutions, and IMO investing is an area where people really feel they are exposed to this. I had began buying ETFs but stopped to overpay mortgage after reading on here. Easier, effectively risk free and a guaranteed return of about 2.6 percent tax free.

Would wonder what percentage of people invest outside of pension wrapper in Ireland. It must be miniscule?


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## WhiteCoat (12 Sep 2019)

Hi Colm,

I echo the comments of all those that welcome your continued posting!

But............................................................I don't know what a tracker (bond) is!

Well, what I mean is, I just have a very hazy understanding of the mechanics of how these products ought to work. In particular, if the chosen index was completely bona fide, what are the drivers of pricing? From what I've seen, these products typically tend to have a floor value (gtd % of original investment) coupled with some upside potential and what I'm trying to figure out is how does one establish which tracker bonds are reasonably priced and which ones are taking the biscuit! Can light be shed on the maths here?

Moving from the general to the specifics of your article, I had a quick look at the brochure. In it, it is claimed that various filters are used to determine the stocks that make up the index. From previous posts, you will know that ethical considerations are a primary "filter" of mine. And so to my observation/question. It seems that Friends First is happy to be associated with/distribute this product. Since, I have no reason to question your analysis and that you were able to rip this product apart in jig time, how can the deficits in this product not be as readily apparent to the actuaries/management in Friends First? Consequently, is it ethical for Friends First to be associated with such a product?

Note 1: I highlight Friends First because of its scale and because FF really should have proper governance in place.

Note 2: There is quite a bit of overlap between my "ethical questioning" above and what username123 is saying - real trust in financial institutions, etc.

Note 3: My circumspection regarding financial institutions is because I have been duped.....and more than once. Fool me once, shame on you and all that!


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## EmmDee (12 Sep 2019)

WhiteCoat said:


> ... what I'm trying to figure out is how does one establish which tracker bonds are reasonably priced and which ones are taking the biscuit! Can light be shed on the maths here?



A good starting point is... assume they are taking the biscuit. They almost all are


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## New2This (12 Sep 2019)

I think that this kind of analysis is critical, too often people conflate hearing that "the stock market has always gone up over the longterm" with any investment in the stock market will go up over the longterm.

Thanks to this forum and the contributors here, I know that not all investments, and therefore investment products, are created equal. There are a lot of people out that don't get this and the stock market is this big nebulous concept.

I am still early on my journey to educate myself, but have already decided that my mortgage and pension come first and only when I get to the stage of having "fun" money that I can afford to completely lose will I start looking as the stock market outside of my pension.


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## Sunny (12 Sep 2019)

I would love to know much money has gone into this and which financial advisors showed it to clients.... There are so many alarm bells in that brochure...

I love this from BNP in the brochure...

Disclaimer: This document has not been reviewed, approved or otherwise endorsed by BNP Paribas or any of its
affiliates and BNP Paribas accepts no responsibility in relation to the accuracy, completeness or adequacy of the
information included herein. Nothing in this document should be considered to be a representation or warranty
by BNP Paribas to any person, including without limitation, any potential investor and any member of the public,
regarding whether investing in the Bond described herein is suitable or advisable for such person.


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## Duke of Marmalade (12 Sep 2019)

WhiteCoat said:


> Hi Colm,
> 
> I echo the comments of all those that welcome your continued posting!
> 
> ...


_Whitecoat_, good surgical questions.  Can you give me a link to the Friends First product?
They are all a bit different but the basic autopsy goes as follows using Option B of this particular beaut.
You are guaranteed 85% back in 5 years.  At today's interest rates that will use up at least 83% of your investment.  We are told that expenses will consume 7% of your investment.  That leaves 10% to play at the derivative tables.  The bet that has been chosen is that their own makie up index will be ahead of its opening level in 5 years time.  The casino is giving 55%+ for this 10% bet - as good as the odds on throwing a six with a die.  So far the autopsy has proceeded well but how can we tell if these are good odds? This was an index made up in July 2015 and started life with a silver spoon in its mouth.  A backtest at that point shows that it had beaten Eurostoxx 50 by 5.44% p.a. or 144% since February 2001.  As Colm has shown this poor index in the normal course is carrying a handicap which will burden it by 3.5% p.a. against its benchmark from its birth.  And indeed it has underperformed by something similar since that time.   If this was a human delivery the parents would be suing by now!
Anyway, having started life with such an enormous historic advantage it can withstand its inbuilt handicap for some time.  So much so that when the product was backtested in July this year simulating 1304 daily incarnations since mid 2009, this die came up a 6 on all 1304 occasions (for the nerds in this parish the odds of that are greater than the number of atoms in the universe).
The quants know that in future they would expect over 1,000 of such 1,304 incarnations to fail and lose the punter money.  There is no great surprise that it backtests so well. 2009 was the bottom of the crash and the  beginning of a prolonged bull run, and in any case when it entered this world the parents had already ensured it had a superb 5 years behind it.
Mind you if they had gone back to February 2001 in this backtest (they do elsewhere in the brochure) they would have found that it would have failed 480 times. Still not as bad as the throw of a die but nonetheless enough to put off most punters.


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## Duke of Marmalade (12 Sep 2019)

Sunny said:


> I would love to know much money has gone into this and which financial advisors showed it to clients.... There are so many alarm bells in that brochure...
> 
> I love this from BNP in the brochure...
> 
> ...


Really quite unbelievable!!


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## Colm Fagan (12 Sep 2019)

WhiteCoat said:


> Well, what I mean is, I just have a very hazy understanding of the mechanics of how these products ought to work. In particular, if the chosen index was completely bona fide, what are the drivers of pricing?


Hi @WhiteCoat   I hope that the Duke has answered your question on the mechanics of such products and the drivers of pricing.  I can't add anything.  By the way, these products are called Trackers in Ireland but in the UK they're called structured products, which is a better name. There, trackers are investment products that track an index, such as the FTSE 100 etc., without any guarantees. 
As to whether such products offer value, I wrote a short introduction when posting the diary update on www.colmfagan.ie and on LinkedIn.  The introduction didn't copy onto the AAM posting.  It will help answer your question:
*If something looks too good to be true, it usually is.  That’s the message from this month’s diary update.  It tells of a weird product, concocted to satisfy savers’ hunger for security and return.  That’s an impossible combination in today’s low-interest environment. *

I've been constantly trying to hammer home the impossibility of security *and *return in my diary entries.  It's necessary to take a risk to get a reward.  There are no short-cuts.  If you invest in good quality companies and have a sufficiently long time horizon, however, risk-taking pays off handsomely. 

At my age, I still think there's time for the risks to bring their reward.  Speaking of which, I was in Blackrock Clinic for some routine checks this morning when I read your post.  It made me wonder if I'll find myself close to death at some future date, for a kindly face to lean over my bed and whisper in my ear "I'm WhiteCoat"!  I'll immediately confess  my sins of having smoked almost non-stop for twenty-five years before finally giving them up!


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## DeeKie (13 Sep 2019)

Thanks so much. I feel saved somewhat by your posts. It seems extraordinary that it could be legal to use information that is irrelevant to the investment model in the brochures?


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## Colm Fagan (18 Sep 2019)

*"The world's best investor?"*_ is the title of my latest diary update (update 18).  It's the second part of a conversation with Brian Woods.  The first part of the conversation is at the start of this thread.  _

“Colm, I took a closer look at the ‘_Solactive European Deep Value Select 50 Index_’ we discussed last week.”

“I remember it, Brian.  That’s the one promoted by BNP Paribas.”

“Yes, that’s the one.”

“As I recall, BNP Paribas promised that, if the index (I’m calling it the Solactive Index, though they have other indices) is at or above its starting level at the end of five years, the bank will give punters at least 140% of their initial investment; otherwise they lose money, possibly up to 15%.”

“That’s it, Colm.  When I looked at it first, I thought it was a fantastic offer, but you took the wind out of my sails by pointing out that, if the underlying performance of the two indices is identical, the Solactive Index will lag the EURO STOXX 50 by around 3.5% a year.”

“Yes, but in the past performance stakes the Solactive Index beat the EURO STOXX 50 hands down over the last donkeys’ years, despite this enormous handicap.”

“That’s what’s puzzling me, Colm.  Its past performance against the EURO STOXX 50 was unbelievably good – and I mean that.   Looking at a BNP Paribas sales presentation from 2017, the Solactive Index produced an average return of 3.49% a year in the sixteen-and-a-bit years from February 2001 to July 2017; the EURO STOXX 50 (price only, excluding dividends) fell by an average 1.87% a year over the same period.   That’s an average outperformance of 5.36% a year for the Solactive Index.  Incredible!”

“I see what you’re getting at, Brian.  If they both started at 100 in February 2001, the Solactive Index would be worth 176 in July 2017 while the EURO STOXX 50 would have fallen to 73.  You’d be worth more than twice as much if you’d put your money in the Solactive Index rather than the EURO STOXX 50, and that’s before dividends.  The dividend yield on the Solactive Index would also have been much higher than on the EURO STOXX 50, making you richer again.”

“If our years of studying the actuarial exams when we were young did anything for us, Colm, it is that we’re able to do compound interest calculations!  Your arithmetic is right, but do you really think BNP Paribas has found a magic formula for identifying shares that can deliver outsized returns over so many years?”

“Brian, BNP Paribas is one of the biggest and most prestigious banks in Europe.  I’ve just read their 2018 Annual Report.  In it, they say that they want to be among the most trustworthy players in the industry.   You can’t be claiming that they’ve ..?“

“Stop!  Don’t say another word!”

“OK, Brian, but let me put it another way.  Suppose you discovered a winning formula for the stock market, what would you do?”

“I wouldn’t tell a soul.  I’d put everything I had, more if I could borrow it, on the shares that I’d identified as likely winners.  BNP Paribas is a bank, so it can borrow lots.”

“Exactly, but that’s not what happened, is it?  Instead, ordinary punters were encouraged to put their savings into a product linked to this wonderful index, with BNP Paribas promising to give them a 40% bonus, plus their money back, if the index is up after five years.”

“Strange, isn’t it?”

“Strange indeed.  Here’s a thought, Brian.  Most of this fantastic past performance is theoretical.  BNP Paribas quote figures going back to 2001, but the index only came into existence in 2015.  It’s all theoretical before then.  The proof of the pudding is in the eating.  It would be interesting to know how the index has actually performed since its launch.”

“I’m ahead of you on that, Colm!  I’ve already done the sums, some of them anyway.   The figures I quoted earlier, which showed the Solactive Index beating the pants off the EURO STOXX between 2001 and 2017, were taken from a BNP sales presentation of July 2017.  BNP Paribas have updated the presentation to include figures for both indices to June 2019.”

“And …?”

“The new presentation included figures for the eighteen years from 2001 to 2019.  Once again, BNP Paribas showed the Solactive Index beating the pants off the EURO STOXX 50, but not by as much as in the 2017 presentation.  By comparing the two presentations, I was able to deduce the performance of the two indices between 2017 and 2019.  Guess what?”

“From the way you’re leading me on, Brian, I guess that the outperformance relative to the EURO STOXX 50 was less than in the previous sixteen years?”

“It’s worse than that, Colm, much worse.  In the two years (actually, one year, eleven months) between July 2017 and June 2019, the average return on the EURO STOXX 50 was a positive 0.36% a year while the average for the Solactive Index was a negative 2.74% a year.  The Solactive Index underperformed the EURO STOXX 50 by 3.1% a year.  You estimated that it would underperform by around 3.5% a year, so you were almost spot on.  I salute your powers of deduction, Holmes.”

“Elementary, my dear Watson, elementary.  But one thing I still can’t get my head around is that BNP Paribas, a bank that wants to be among the most trustworthy players in its industry, which surely knows more than we do about the expected underperformance of the Solactive Index –“

“ and which must also know of its actual underperformance over the last two years.”

“ - still advertises its supposed long-term outperformance in its sales literature.  In the circumstances, I’ve decided there’s only one thing for it, Watson.  Get your hat; we’re going to have a word with Inspector Lestrade of the Yard.”

******​
Other diary entries can be found at http://www.colmfagan.ie/investments.php


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## joe sod (18 Sep 2019)

Colm Fagan said:


> “I see what you’re getting at, Brian. If they both started at 100 in February 2001, the Solactive Index would be worth 176 in July 2017 while the EURO STOXX 50 would have fallen to 73.



So a 100 euros invested in the euro stoxx 50 in 2001 (excluding dividends I know) would only have been worth 73 euros in 2017. You would think that investing in the 50 biggest companies in europe would have been a fairly safe bet, yet the performance has been dismal. Im surprised better minds than mine have not focussed in on this issue, the dismal performance of the european stock markets over the last 2 decades. Even the german economy exporting all those cars and equipment was not reflected in the european stock market.


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## WhiteCoat (19 Sep 2019)

In relation to internet forums, I suspect that there must be some etiquette protocol in terms of timescales for acknowledging responses to questions posed which I have breached badly......sorry Duke and Colm and thanks for your responses.

Attached is the brochure that I found in relation to the product in question. It feels like the same product but the page numbers don't match with the initial post.

In any event,

1. In the attached brochure, under section 8, Friends First and Cantor Fitzgerald are expressly listed as distribution partners. Hence, my original question about the ethics of their effective endorsement of the product.

2. Regarding the maths element in all of this, I appreciate very much the Duke's explanations but would like to understand a little more please:

(i) How can such a product be back-tested when choices are made continuously regarding which stocks to include as described in the filtering process?

(ii) Is there an available derivative to cover the "bet" element here and how can the derivative provider ensure that it is not exposed? (I'm taking the follow the money approach here.) I'm at a loss to understand how such a derivative could be created given the discretionary nature of this so-called index.

(iii) Can you explain why the drag on performance is estimated at 3.5% please? [I would have thought that if dividends were paid twice yearly and the stocks in the index had a dividend yield of 3.5% and that in any given month, half the stocks were ex-dividend, one would end up with a crude monthly drag of 3.5%/2/2, i.e. just shy of 0.9% and that this drag would broadly apply for each of the 12 months. Just like to understand where my thinking is flawed!]


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## Steven Barrett (19 Sep 2019)

Have you not read Colm's latest installment? I read it on LinkedIn this morning 

Article here

Can't wait for the next installment next week


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## Duke of Marmalade (19 Sep 2019)

WhiteCoat said:


> In relation to internet forums, I suspect that there must be some etiquette protocol in terms of timescales for acknowledging responses to questions posed which I have breached badly......sorry Duke and Colm and thanks for your responses.
> 
> Attached is the brochure that I found in relation to the product in question. It feels like the same product but the page numbers don't match with the initial post.
> 
> ...


Thanks _Whitecoat_.  Ok, so the Friends First reference is in their role as pension providers.  I was hoping that they had designed a life product around it as these tend to be more regulated.
Your questions are spot on.
(i)  When launched in 2015 it was known to backtest with an +5.4% p.a. against its benchmark since 2001 and that is despite the c. 3.5% dividend handicap i.e. an overall staggering outperformance of c. +9% p.a. if we were to include dividends.  It is difficult to tell whether the strategy/algorithm which is expressed as the use of filters is 100% objective or whether it contains an element subjectivity.  If there is an element of subjectivity then I agree, how could such judgement be backfitted?  But the backtesting is said to have been performed by Bloomberg so I take it that the algorithm is entirely formulaic.
(ii)  Your second question shows a surgical understanding of the anatomy of these products.  On Page 28 of  the attached presentation you will see a dissertation on option prices.  And yet given the proprietary and very idiosyncratic nature of the index there is very unlikely to be an active market in options on it.  Rather, Paribas themselves are underwriting the option.  It is unlikely that they are taking a "naked" position on it but instead will be using hedging techniques to secure their profit.
(iii) I'll leave Colm to address this one.


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## Sunny (19 Sep 2019)

Would love to say this is a one off but check out the Kick Out Memory Bond...…

[broken link removed]


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## Colm Fagan (20 Sep 2019)

WhiteCoat said:


> (iii) Can you explain why the drag on performance is estimated at 3.5% please? [I would have thought that if dividends were paid twice yearly and the stocks in the index had a dividend yield of 3.5% and that in any given month, half the stocks were ex-dividend, one would end up with a crude monthly drag of 3.5%/2/2, i.e. just shy of 0.9% and that this drag would broadly apply for each of the 12 months. Just like to understand where my thinking is flawed!]


Brian and I went through a similar discussion.  I didn't document how we (sorry - I!) finally arrived at 3.5%, but I think the logic was as follows:
BNP state in one of their sales presentations that, even though up to half the stocks in the selection can be within a month of going ex-dividend, only a quarter (on average) fall into that category.  This compares with one-sixth on average for a "normal" index (assuming dividends twice a year).  Thus, 50% more stocks are in this category in the Solactive Index.  The drag on the index is thus 50% of the dividend yield.  I estimated a dividend yield of 4.7% for the Solactive Index (from calculating the yields for a random sample of stocks in the index), so the drag under this heading is 2.35%.  In addition, the dividend yield on the Solactive Index is at least 1.2% higher than on the EURO STOXX 50.  That adds to 3.55% in total, rounded down to 3.5%.  As I write this, though, I think we could have done better.  Companies don't declare dividends randomly during the year.  They're strongly bunched into March/April and September/October.  I haven't worked out how that affects the calculation.
Going back to how you derived your estimate, I think you assumed (as I did initially) that 50% of the stocks in the selection (i.e. the max allowable) are within a month of going xd, not 25%.  Also, don't you have to multiply by 6, since it's a monthly drag for the six months?


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## Duke of Marmalade (20 Sep 2019)

WhiteCoat said:


> (iii) Can you explain why the drag on performance is estimated at 3.5% please? [I would have thought that if dividends were paid twice yearly and the stocks in the index had a dividend yield of 3.5% and that in any given month, half the stocks were ex-dividend, one would end up with a crude monthly drag of 3.5%/2/2, i.e. just shy of 0.9% and that this drag would broadly apply for each of the 12 months. Just like to understand where my thinking is flawed!]


Just checking this and Colm's response.  You calculate a drag of 7.2% p.a. but the Eurostoxx itself would have a dividend drag of 3.5% so you are calculating a drag against the benchmark of 3.7% which isn't a million miles away from Colm.  Though there are two compensating inconsistencies as Colm has explained.  First of all we are told that they do not take up their full allocation of 50% but on average it is 25%.  On the other hand the process appears to filter out high dividend yield stocks.  It is not clear why that should be the case as the filters themselves do not seem to directly target high yield stocks.


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## Steven Barrett (20 Sep 2019)

Sunny said:


> Would love to say this is a one off but check out the Kick Out Memory Bond...…
> 
> [broken link removed]




Once off? There are companies out there that do nothing but construct these products. There's loads of them out there. Problem now is with interest rates so low, they have become a lot more complex, making them impossible to understand. Given their target market are people who usually leave their money on deposit, most of the people who take them out won't have the actuarial qualifications of Colm and Duke that is required to know what is actually going on. All they know is they want something better than 0.1% they are getting on deposit, they don't want too much risk and they are sold something that promises the returns of equities with the securities of deposits. 5 years later, they get 85% of their money back!!


Steven
www.bluewaterfp.ie


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## cremeegg (20 Sep 2019)

And who sells these products to the public Steven ?

I am sure you don't, but many financial advisors do. And it is difficult for members of the public to know what type of FA they are dealing with. One that sells perfectly legal products which are designed to profit their promoters, or one who would not do such a thing.


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## jpd (20 Sep 2019)

Surely all financial products are designed to produce a profit for the producers - otherwise, why would they bother?

The problem is making them understandable to the potential purchaser. If they are so complicated that the purchaser has no chance of understanding what is being sold, then they should walk away.


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## Duke of Marmalade (20 Sep 2019)

cremeegg said:


> And who sells these products to the public Steven ?
> 
> I am sure you don't, but many financial advisors do. And it is difficult for members of the public to know what type of FA they are dealing with. One that sells perfectly legal products which are designed to profit their promoters, or one who would not do such a thing.


Maybe even the FAs are being duped or at worst engaging in wishful thinking.  Certainly some of the backtesting illustrations are very seductive.  A product that is shown to backtest successfully, providing 40%+, in 1,304 times out of 1,304, must be a winner even if that is a very flattering backtest.  Even I, when I first saw this one knew to dismiss the backtesting results but I argued with myself that surely any self respecting index would have at least a 50% chance of being above its initial level in 5 years.  But the reality is that this weirdly contrived index would appear to have a less than 20% chance of achieving that humble goal of being above water in 5 years.


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## WhiteCoat (20 Sep 2019)

Colm/Duke,

Sorry if I'm being a bit slow on the draw here. I haven't looked that closely at the minutiae or perhaps picked up the detail in your posts correctly and wasn't aware of the average XD stocks being 25% rather than 50%, etc., etc.

Before I get into it - Duke, is 7.2% a typo?

Anyway let me try again please! I accept that I might be wrong - I'm just trying to figure out where (think dog with a bone). Thanks for your continued forbearance.

1. This silly index (SI) is made of stocks that have DYield of X% (Please tell me what X is)

2. Let's take it that dividends are paid twice yearly

3. On average, in each month, 25% of the stocks will be XD. (Could this be due to the clustering of dividends that Colm spoke about, i.e. close to 50% some months and close to 0% other months?)

4. On average and very crudely, etc. does it not follow that:
(a) The total monthly dividend would be X%, divided by 2 (because dividends are paid half-yearly) and then divided by 4 (because of the 25%). In simple terms, X%/8

(b) Wouldn't this X%/8 need to be multiplied by 12 to arrive at the annual impact? So, for example, if the DY of the stocks within SI is 4%, the annual impact would be c. 6%?


----------



## Duke of Marmalade (20 Sep 2019)

WhiteCoat said:


> Colm/Duke,
> 
> Sorry if I'm being a bit slow on the draw here. I haven't looked that closely at the minutiae or perhaps picked up the detail in your posts correctly and wasn't aware of the average XD stocks being 25% rather than 50%, etc., etc.
> 
> Before I get into it - Duke, is 7.2% a typo?


12 x 0.9 = 10.8.  I think my calculator was running low in battery



> Anyway let me try again please! I accept that I might be wrong - I'm just trying to figure out where (think dog with a bone). Thanks for your continued forbearance.
> 
> 1. This silly index (SI) is made of stocks that have DYield of X% (Please tell me what X is)


Colm estimates 4.7%.



> 2. Let's take it that dividends are paid twice yearly
> 
> 3. On average, in each month, 25% of the stocks will be XD. (Could this be due to the clustering of dividends that Colm spoke about, i.e. close to 50% some months and close to 0% other months?)


  Yes, they allow themselves up to 50% but there are months when there simply aren't that many available.



> 4. On average and very crudely, etc. does it not follow that:
> (a) The total monthly dividend would be X%, divided by 2 (because dividends are paid half-yearly) and then divided by 4 (because of the 25%). In simple terms, X%/8
> 
> (b) Wouldn't this X%/8 need to be multiplied by 12 to arrive at the annual impact? So, for example, if the DY of the stocks within SI is 4%, the annual impact would be c. 6%?


That is all correct.  And with Colm's 4.7% estimate that would give 7.1%.  But the benchmark is itself a price only index and so suffers a drag versus a total return index of its dividend yield, which Colm reckons is 3.5% hence the relative drag versus its benchmark is 3.6%.


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## WhiteCoat (20 Sep 2019)

Penny has dropped - thanks Duke


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## WhiteCoat (20 Sep 2019)

Duke - I need to spend another penny (I'm of that age, alas - hopefully nothing sinister.....). [My wife just asked me what I was doing "It's Friday night, dear" - "Oh just some lab reports, pet"...….if she knew the time I was spending on this and other similar stuff, she'd have been sectioned or worse! Men are truly from Mars.]

*********

I understand, I think, BNP's bet from the perspective you so ably set out in post #7 of his thread.

When you get the chance, I'd like to understand the mathematical merits of this bet PLEASE! (i.e. I don't, for a second, wish to take your time for granted.)

This is what I understand so far. If the total return, including dividends, of the stocks that are included in the Silly Index, is greater than c. 7.1% p.a. (on average) over the next 5 years, then the bet pays out.

So the question is - is this a 1 in 5 to 1 in 6 chance as described previously or is it better or worse than that? (I guess we are getting into expected returns, SDs and all that good stuff - but I'll happily be guided by you!). In this way, we'll be able to establish better the merits of this bet from the _p_unter's perspective?!


----------



## Duke of Marmalade (20 Sep 2019)

WhiteCoat said:


> This is what I understand so far. If the total return, including dividends, of the stocks that are included in the Silly Index, is greater than c. 7.1% p.a. (on average) over the next 5 years, then the bet pays out.
> 
> So the question is - is this a 1 in 5 to 1 in 6 chance as described previously or is it better or worse than that? (I guess we are getting into expected returns, SDs and all that good stuff - but I'll happily be guided by you!). In this way, we'll be able to establish better the merits of this bet from the _p_unter's perspective?!


Yes that is the deal.  You and I have no way of knowing the odds but if Paribas are pricing rationally their quants must reckon the chances of this are of the order of the throw of a 6 with a dice.  Certainly not 1304 chances out of 1304!


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## WhiteCoat (21 Sep 2019)

Duke,

The essence of this thread is that the SI structured fund represents really terrible value - to the extent that it's reportable, etc. (as in how could BNP seek to be reputable whilst peddling such merde, etc.). The product may, indeed, be merde……..but only if the odds are poor! If the odds are better than 1 in 5ish, then the odds may not be / are not, poor - especially so given the risk free (or least risk, if you will) alternative. By extension, certainly not reportable?

That was the driver of my question, respectfully posed.

Thinking about this again, are we sure that the drag from total returns of stocks that make up the SI is not c. 11.8% (7.1% + 4.7%)?


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## Duke of Marmalade (21 Sep 2019)

WhiteCoat said:


> Duke,
> 
> The essence of this thread is that the SI structured fund represents really terrible value - to the extent that it's reportable, etc. (as in how could BNP seek to be reputable whilst peddling such merde, etc.). The product may, indeed, be merde……..but only if the odds are poor! If the odds are better than 1 in 5ish, then the odds may not be / are not, poor - especially so given the risk free (or least risk, if you will) alternative. By extension, certainly not reportable?
> 
> ...


The original version of this post was the weirdest put down I have ever received after nearly two and a half thousand posts on this blog.  I thought we were having a constructive engagement until then.  Completely out of left field.  I can only assume that you were tired and emotional in the wee hours of a Saturday morning.


----------



## WhiteCoat (21 Sep 2019)

You're right, Duke - I should not have written what I did. I just was frustrated with what I perceived was a response which did not address the question.


----------



## Duke of Marmalade (21 Sep 2019)

WhiteCoat said:


> You're right, Duke - I should not have written what I did. I just was frustrated with what I perceived was a response which did not address the question.


Ok forgiven.
I had arrived at the place you had arrived.  I asked myself "what are the actual odds?"  As I said I am not nearly close enough to the market to assess those odds independently.  But I presume that Paribas are pricing rationally.  They would not run a naked position on the option.  They would dynamically hedge it and thus crystallize the market's assessment of the odds.  For example, say the odds are in fact even money so that the option is worth 30%.  By hedging the option, 30% would in fact turn out to be the cost to Paribas and since they got at most 10% from the punter they would ensure a certain loss of 20%.  I hope you are not making the rather metaphysical point that even the market might have these odds hopelessly wrong.
People have likely invested millions in this product, having been led to believe that the chances that they will not get 40% or more are less that 1 in 1,304.  That is not a trivial matter.


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## cremeegg (21 Sep 2019)

Duke of Marmalade said:


> I asked myself "what are the actual odds?"



Would a financial advisor selling this product not have the answer at his/her fingertips. And more pertinently, if not why not.

BNP must calculate the odds.

Anyone retailing a product could be expected to ask the manufacturer what the contents are, and share that with the public.

The take away for me from this thread is not; "structured products are bad value", I mean so what, lots of things from  BMWs to Jam Doughnuts are bad value; No the lesson for me is that the lack of transparency in the financial services industry is such that the whole thing is unethical.

The general public of pool of potential buyers does not understand these products. For a small group of well educated people with the time and the interest to unravel one product is great in that it may alert some others to the issue, but perhaps it distracts from the problem.


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## Duke of Marmalade (21 Sep 2019)

Exactly _cremeegg _it is the total knowledge asymmetry between customer and provider that is at issue here.  If the product under discussion was fairly presented in marketing material (maybe with an acceptable level of hyperbole) I wouldn't bother talking about it.  It would have no takers.


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## Colm Fagan (21 Sep 2019)

WhiteCoat said:


> The product may, indeed, be merde……..but only if the odds are poor! If the odds are better than 1 in 5ish, then the odds may not be / are not, poor - especially so given the risk free (or least risk, if you will) alternative. By extension, certainly not reportable?



I do not enjoy the cover of anonymity, so I must be very careful what I say or write, but it’s important to document what we do know about this product and why we believed that we had to take action in the public interest.

Brian Woods came to me after a broker had shown him the product, saying that he was thinking of offering it to his clients.  Brian thought it looked good, if the Index was kosher, and even suggested that I might like a piece of the action for my own pension fund.  He asked me to have a look at the index.

At that point, Brian’s main beef was with the 1,304/1,304 “successful” back-tests, derived from experience between July 2009 and July 2019.  As I joked, they could have shown a success rate of more than 15,000/15,000 by assuming bonds were issued every half-hour rather than every day, which is how the 1,304/1,304 was derived.  There were only two independent five-year periods in that time - July 09 to July 14 and July 14 to July 19 - not 1,304, so the past success rate was 2/2.    Even a 2/2 success rate is misleading: the last ten years have been good for shares (as commentators on my investment performance keep reminding me – quite rightly).

Neither Brian nor I had ever come across the index against which returns on the product would be determined, but we were impressed by the apparently superior stock-picking expertise of BNP Paribas and the invocation of gurus like Benjamin Graham and Warren Buffett.

We were particularly impressed by simulated past performance since 2001.  Over the 18 years 2001 to 2019, the Solactive Index showed an average return of +2.82% pa while the well-recognised EURO STOXX 50 showed an average decline of -1.64% pa over the same period.   Who could argue with that?

Warning bells rang when I read the bit in the brochure about selecting stocks that were due to go ex-dividend within the next month.  Most ordinary investors – and probably most financial advisers – would not have realised the significance of this statement.  I estimated that this, plus the higher dividend yield, meant that the expected return on the Solactive Index would lag the EURO STOXX by around 3.5% a year - a far cry from the rosy picture in the MMPI brochure and in BNP’s sales literature for the Solactive Index.

My conclusion on expected underperformance of the Solactive Index was supported by analysis of actual returns between 2017 and 2019.  Based on figures supplied by BNP Paribas, the Solactive Index underperformed the EURO STOXX 50 by 3.1% a year in the 23 months between July 2017 and June 2019, close to my expected 3.5% annual underperformance. 

I realise that I’m putting something in the public domain for the world to read and draw inferences from, but I cannot understand how a prestigious bank like BNP Paribas could have decided to produce a brochure in 2019 extolling the long-term outperformance of the Solactive Index, even though they must have known of its expected future underperformance and of its actual underperformance in the previous two years, both completely contrary to the message implicit in the brochure.  I’m not an expert on the legalities of what you can and can’t say legally, but it’s very clear to me what that is.  I believe it must be stopped.


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## Duke of Marmalade (14 Oct 2019)

Well, well, well!  From the folk who brought you Accelerator Bond 4 we have Accelerator Bond (you guessed it) 5 
Same deal, if index is in any way above its initial level in 5 years you get 40% or more.  Except the downside which was capped at 15% is now capped at 16%. But who cares!  Didn't they backtest Acc 4 1,304 times, and every one produced a 40%+ gain (see page 11 of attachment).  Not very surprising though when you think that the backtesting started in 2009 when the market was on its knees - hey anything would backtest well over that period!
But what's this?  Have they been reading Colm's diary?  They have backtested Acc 5 2,609 times, going back 15 years to 2004.  And lo and behold, the punters would have suffered a loss on 830 occasions (see photo of page 11 as attachment)
Okay, better late than never but what about the poor suckers who bought Acc 4 (1,2,3???) thinking the chances of losing money were less than 1 in 1,304?


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## Colm Fagan (14 Oct 2019)

Will the back-tests eventually get to a 1 in 6 success rate, which Brian Woods and I reckon is the real chance of this product yielding a profit?

Obviously brokers like it, if we're seeing another encore, after 1, 2 and 3.  By the way, I would love to see brochures for 1, 2 or 3.  Let me know if anyone out there has one they can share.


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## MugsGame (14 Oct 2019)

Hours of fun:

[broken link removed]
[broken link removed]
[broken link removed]
[broken link removed]
[broken link removed]
I'm chuckling at this statement in some of the brochures and guides:
_In order to achieve a good price efficiency, the Index selects stocks with a low volatility and that are expected to pay a dividend in the coming month. _

Is this really a Solactive product marketed and resold by BNP? It appears that Solactive conceived and operate the index, and possibly also the options supporting the bond pricing.


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## Colm Fagan (14 Oct 2019)

Thanks!  They really are bringing them out thick and fast.  Number 2 was only in February of this year.  I was hoping it might be further back so that we could compare and contrast. 

BNP are very careful to keep their noses as clean as possible as far as the product is concerned.   See page 4, where it says that BNP Paribas accept no responsibility for the content of the brochure, etc.     As far as I can see, though, they're the geniuses behind the magical Solactive Index.  Solactive are simply number-crunchers, doing whatever BNP Paribas ask them to do.


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## Steven Barrett (14 Oct 2019)

Colm Fagan said:


> Thanks!  They really are bringing them out thick and fast.  Number 2 was only in February of this year.



Of course they are. Deposit rates are on the floor and there's all that cash on deposit that they can target from unassuming victims...ahem, investors


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## Duke of Marmalade (14 Oct 2019)

MugsGame said:


> Hours of fun:
> 
> [broken link removed]
> [broken link removed]
> ...


OMG so they all touted that 0 out of 1,304 lost money and now thanks to Colm, they tell us 830 out of 2,609 would have lost money and even that is a misrepresentation as the pricing indicates over 80% would show a loss.


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## MugsGame (14 Oct 2019)

Colm Fagan said:


> I was hoping it might be further back so that we could compare and contrast.



It looks like they had a previous "Secure Bond" series on the same index, e.g.

[broken link removed]
[broken link removed]
[broken link removed]
[broken link removed]
If you do a google search on keywords and then add " site:brokersolutions.ie" there are a few more interesting documents.


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## Mel Shanley (15 Oct 2019)

Can anyone confirm if they have asked the product producers to answer questions related to everyone's concerns here. I have been advising for over 27 years and have learnt very often that I don't know it all, so I ask for explanations. Nobody seems to have asked the product producers to answer your concerns. A lot of what I am reading are fund related comparisons and contrasts. This is not a fund, it is a structured financial instrument. One final comment from experience,  it is a regulatory obligation to back test a product on a daily template, yes daily. Please ask for clarification on a product from its producers before you jump to inaccurate conclusions.


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## Mel Shanley (15 Oct 2019)

Can anyone confirm if they have asked the product producers to answer questions related to everyone's concerns here. I have been advising for over 27 years and have learnt very often that I don't know it all, so I ask for explanations. Nobody seems to have asked the product producers to answer your concerns. A lot of what I am reading are fund related comparisons and contrasts. This is not a fund, it is a structured financial instrument. One final comment from experience,  it is a regulatory obligation to back test a product on a daily template, yes daily. Please ask for clarification on a product from its producers before you jump to inaccurate conclusions.


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## Colm Fagan (15 Oct 2019)

I agree.  It would be great if the product producers could address the various questions and concerns.  The ultimate product producer is BNP Paribas.  They have insisted on a blood-curdling disclaimer on page 4 of the brochure:  *"This document has not been reviewed, approved or otherwise endorsed by BNP Paribas or any of its affiliates and BNP Paribas accepts no responsibility in relation to the accuracy, completeness or adequacy of the information included herein."* There's more of the same.  If that's not enough to frighten you off, I don't know what is.   Why don't BNP Paribas and/or MMPI come onto this forum, or any of the other fora in which I've raised these questions, to allay any concerns actual or potential investors may have?  I know they've read the articles, but they've made no attempt to contact me.


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## elacsaplau (15 Oct 2019)

Colm,

You have very serious concerns regarding a product being marketed and distributed by a company being regulated by the Central Bank of Ireland.

In my opinion, it's very simple. I believe that you should share those concerns with the Regulator.

This matter requires a formal investigation, as follows:

1. Is what you are saying correct?

2. If yes, how did such a product become approved and what needs to happen to ensure that other similar products are not being marketed now and that other similar products do not become available in the future?

3. Who sold this products on behalf of Broker Solutions - including what checks did these intermediaries complete in order to satisfy themselves of the merits of this product?

4. How are impacted customers to be compensated for all this breakdown in consumer protection?


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## noproblem (15 Oct 2019)

As one of the ordinary Joe Soap's out there in this financial no no land I would like to thank, Colm, White Coat and the Duke for some very insightful and eye opening information on the dangers that await the uninformed, or the lightly informed. I can only imagine the quantities of hard earned money that's taken away from people in all of this, with most investors probably innocent victims of these immoral tactics. Many thanks.


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## Colm Fagan (15 Oct 2019)

@elacsaplau   Brian and I shared our concerns with the regulators.  It's up to them to decide what to do.  Obviously, it's not the job of the regulator to prevent poor value products from being sold.  Financial advisers have a vitally important role to play, analysing products to see if they offer good value for their clients.  If they can't do that analysis, are they in the right business?


----------



## elacsaplau (15 Oct 2019)

Colm,

Good that you reported it. That was the right thing to do.

The gist of this thread is that terrible financial chicanery is happening. What has been presented here (taking the thread at face value) is tantamount to fraud or at least highly deceptive, clearly inappropriate and wrongful practices.

The Regulator has a definite consumer protection responsibility so this, very much, is the job of the Regulator to sort out, as described.


----------



## Duke of Marmalade (15 Oct 2019)

Colm Fagan said:


> @elacsaplau   Brian and I shared our concerns with the regulators.  It's up to them to decide what to do.  Obviously, it's not the job of the regulator to prevent poor value products from being sold.  Financial advisers have a vitally important role to play, analysing products to see if they offer good value for their clients.  If they can't do that analysis, are they in the right business?


Colm,  the first 4 helpings of this product stated that they backtested the Solactive European Deep Value Select 50 Index over 1,304 times starting in 2009 and found that on all 1,304 occasions it finished above its initial level after 5 years and so 40% was the minimum return on 100% of backtests.
Now (in a fit of conscience?!) on the 5th incarnation they decide to double the number of backtests going back to 2004 and now we see that there were 830 occasions on which it would have finished below its initial level after 5 years.
Can this Damascene conversion be a mere coincidence?  Or has the Regulator taken up your cause?


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## Colm Fagan (15 Oct 2019)

Duke
I suspect that the visit Brian Woods and I paid to the CBI may have influenced Broker Solutions' decision to change the back-tests to the slightly less favourable ones shown in the latest version of the product.  We'll never know.  I'm not sure it will do much good though.  The back-test results are still a long way from what we believe is the real probability of the product delivering a positive return to investors.


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## Colm Fagan (15 Oct 2019)

elacsaplau said:


> The Regulator has a definite consumer protection responsibility so this, very much, is the job of the Regulator to sort out, as described.


I'm not the greatest fan of the regulator, but it's not their responsibility to do the job of the financial adviser.  The adviser gets paid for researching the market, checking the claims of the various providers and deciding whether a product is suitable for clients.  The back-test results for this product are presumably correct in so far as they go, and the brochure states that the past is not a reliable guide to the future.  Nothing wrong in all of this.  The index is one of the weirdest creations I've ever seen and caused alarm bells to ring immediately I saw it.  Should an adviser be able to pick this up?  You tell me.


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## RedOnion (15 Oct 2019)

Mel Shanley said:


> Please ask for clarification on a product from its producers before you jump to inaccurate conclusions.


Mel, in the interest of disclosure of any conflicts, is this a product you've been selling to clients?


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## elacsaplau (15 Oct 2019)

Colm Fagan said:


> I'm not the greatest fan of the regulator



Well, we agree on the above anyway! I don't like the rest of your post much, however - it's far too narrow in its reach! 

From the CB website....

"The Consumer Protection Directorate (of the Central Bank) aims to deliver on its consumer protection mandate in the context of three important desired consumer protection outcomes:

a positive consumer-focused culture that is embedded and demonstrated within all firms;
a consumer protection framework that is fit for purpose and ensures that consumers’ best interests are protected; and
regulated firms that are fully compliant with their obligations and are treating their customers, existing and new, in a fair and transparent way"

If you think the CB has achieved its own objectives in relation to the creation and distribution of this product, well...……..you are entitled to your opinion!


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## Mel Shanley (15 Oct 2019)

RedOnion said:


> Mel, in the interest of disclosure of any conflicts, is this a product you've been selling to clients?


Hello Red Onion, in the interest of disclosure and transparency, I don't divulge my firms' business dealings and practices with people who are not disclosed and transparent but I will say this, since the last financial crisis, I would give any financial instrument serious consideration which had an 85% level of capital protection from a financial institution with the balance sheet of BNP Paribas.


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## Colm Fagan (15 Oct 2019)

elacsaplau said:


> I don't like the rest of your post much, however


So you don't like me saying that the adviser should research the market, check the claims of the various providers and decide whether a product is suitable for clients.   Interesting. 


Mel Shanley said:


> I would give any financial instrument serious consideration which had an 85% level of capital protection from a financial institution with the balance sheet of BNP Paribas.


..  even if independent experts have assessed the chances of making money from the product at about 1 in 6?  Interesting too. 

Are you both financial advisers?


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## RedOnion (15 Oct 2019)

The regulator did a themed inspection of structured retail products back in 2016. They focused more on the complexity of products that didn't have a guaranteed deposit element.






						Inspection finds firms offering more complex and risky Structured Retail Products to consumers
					

Press releases published by the Central Bank of Ireland.




					www.centralbank.ie
				






			https://www.centralbank.ie/docs/default-source/regulation/consumer-protection/compliance-monitoring/themed-inspections/stockbroking-investment-firms/gns4-2-1-2-ind-ltr-srprods-themed-insp.pdf
		


There are a lot of mandated disclosures on these products (tracker bonds in CPC). It looks like all the boxes have been ticked in this one.

But the fact remains, these products are all 'smoke & mirrors', and there's a lot of commission made on them.

For 100k invested, 85k is put on a zero rate deposit with a bank. 4.5k is commission, split between broker and product producer (now we know why brokers love them!).
There's a bit for fees, admin and regulatory compliance - let's call it 500. Then an unknown amount is invested in an option based on a stacked index. Let's give everyone the benefit of the doubt and say it's the full 10k remaining. So, there's a 9 to 2 bet on the index having a higher value in 5 years.

Sounds fantastic, right?

But, someone is happy to take the other side of that bet; a European bank that's better equipped to assess risk than Joe Soap talking to his broker who read a brochure produced by a vested interest.
If this was a one way bet, it wouldn't be available. It's priced to reflect a 4 in 5 chance of not getting your full money back!
Edit: should read 5 in 6 chance of not getting your full money back.


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## Colm Fagan (15 Oct 2019)

Thanks @RedOnion.   Your assessment that there's a 4 in 5 chance of not getting your full money back is close to my estimate (more correctly, Brian's) of it being a 5 in 6 chance.


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## RedOnion (15 Oct 2019)

@Colm Fagan 
I was just basing it on the guarantee amount rather than any scientific probability, so interesting to see similar numbers coming out!


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## elacsaplau (15 Oct 2019)

Colm,

Ok, it's half-time and I welcome this diversion! I already explained why your post was disappointing.

In relation to your incorrect comment about my desire to not hold financial advisers to account, please refer to post #45 where I specifically highlighted the need to investigate the checks and role performed by financial advisers in all of this. You should read other people's post before commenting - even if they are not using their real names! On a serious note, it's a little irritating that you completely misrepresent what I said.
.
Anyway, do you understand the CBI's mandate? If so, can you explain how each of its three key consumer protection goals, as quoted (please refer to post #53), were addressed in relation to this product and as set out in post #45 (please read it), what changes need to be made to properly protect consumers? I take it that you understand that all firms means, well, all firms! I take it also that you understand that consumers were not well protected here.

It would also be helpful if you explain the purpose of your visit to the Central Bank. The way you are portraying it now is like this crowd developed a really terrible product and that your main concern is that financial advisers are selling it!

I remain convinced that the much broader approach suggested by me (including, as you have missed it previously, the role of financial advisers) is better.

I admit it was probably a mistake on my part engaging with you earlier (past performance is not necessarily a guide to the future but it is informative). My main purpose in commenting (please read post #45) is that I believe that consumers were not adequately protected, as previously stated, in...…..


elacsaplau said:


> ….relation to the creation and distribution of this product



Finally, please note that I have adequately answered your questions. It will be interesting to see if you will do likewise......I won't be holding my _souffle - _past performance and all that!


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## Colm Fagan (15 Oct 2019)

Wow!  There's someone who's upset.  We spoke to the CBI about a number of aspects, one of the key ones being the back-testing which showed a 1,304/1,304 success rate and a worst back-testing result of +40%.  That was Series 4 (and all other series, I think). Series 5, which is essentially the same product, shows a 1779/2609 success rate and a worst result of -16%.  I hope that our intervention contributed to the change in presentation of back-testing results.  A change in the right direction.


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## elacsaplau (15 Oct 2019)

Colm Fagan said:


> Wow!  There's someone who's upset.  We spoke to the CBI about a number of aspects, one of the key ones being the back-testing which showed a 1,304/1,304 success rate and a worst back-testing result of +40%.  That was Series 4 (and all other series, I think). Series 5, which is essentially the same product, shows a 1779/2609 success rate and a worst result of -16%.  I hope that our intervention contributed to the change in presentation of back-testing results.  A change in the right direction.



Colm,

If you took the time to consider properly what I wrote, you would realise that I was addressing the specific and systemic issues involved in all of this. Otherwise, the issue that you are supposedly so exercised about will continue to recur.

I was disappointed that, not for the first time, you misrepresented what I said - so I was obliged to go to the trouble to explain my viewpoint. Admittedly, the very definition of futility! Anyway, as I said, it was my mistake for engaging with you. Fool me once, past performance, etc., etc....
So this will be my last post on this thread - life really is too short.

Your latest reply is characteristic in two respects of my sense of your typical responses to me:

1. There is no denial that you misrepresented me. Instead, we get a silly "Wow! There's someone who's upset." Crucially, no apology; and

2. The non-addressing, as predicted, of specific questions - I told you I wouldn't be holding my _souffle_.


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## Steven Barrett (16 Oct 2019)

Colm Fagan said:


> @elacsaplau   Brian and I shared our concerns with the regulators.  It's up to them to decide what to do.  Obviously, it's not the job of the regulator to prevent poor value products from being sold.  Financial advisers have a vitally important role to play, analysing products to see if they offer good value for their clients.  If they can't do that analysis, are they in the right business?



I can't do the analysis to the level that you do. But then, I take the approach that these are extremely complex products that most people don't understand. And if you don't understand it fully, you shouldn't be advising people to invest in it. And if an investor doesn't understand it fully, they shouldn't put their money in it. 

For full disclosure, in 2009, I advised my dad and my uncle to invest some of their ARF's into the New Ireland Secure Advantage fund, which is a structured product (it was an available fund, not a stand alone product and no commission for placing their money in it). They both did very well out of the fund but that was it for me. 


Steven
www.bluewaterfp.ie


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## Duke of Marmalade (16 Oct 2019)

Mel Shanley said:


> One final comment from experience,  it is a regulatory obligation to back test a product on a daily template, yes daily.


_Mel_, you're new in these parts, welcome to the bear pit  
The PRIIPS regs require the first four statistical moments of the fund performance to be assessed from daily observations of price movements over the previous 5 years.  In that context there are genuinely 1,304 independent daily observations.  The backtests in the Secure Accumulator brochure are completely different.  These suggest that 1,304 five year periods have been backtested.  That would require observing more than six and a half thousand years of current market dynamics.  
Your website says that you are a Financial Trainer of 10 years' standing, I trust that you appreciate the difference between the two situations.


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## Sunny (16 Oct 2019)

Mel Shanley said:


> Hello Red Onion, in the interest of disclosure and transparency, I don't divulge my firms' business dealings and practices with people who are not disclosed and transparent but I will say this, since the last financial crisis, I would give any financial instrument serious consideration which had an 85% level of capital protection from a financial institution with the balance sheet of BNP Paribas.



That is a frightening thing to hear from a financial advisor. You make it sound like 85% capital protection is the most important thing with no mention of what can be lost on the other 15% through fees, 'investment' etc etc. There are plenty of ways to get 100% capital protection with banks with strong balance sheets or saving certs etc if that is your concern. 85% capital protection is how they capture people's interest in these products. I would assume every Financial Advisor can look past that.


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## Duke of Marmalade (16 Oct 2019)

RedOnion said:


> For 100k invested, 85k is put on a zero rate deposit with a bank. 4.5k is commission, split between broker and product producer (now we know why brokers love them!).
> There's a bit for fees, admin and regulatory compliance - let's call it 500. Then an unknown amount is invested in an option based on a stacked index. Let's give everyone the benefit of the doubt and say it's the full 10k remaining. So, there's a 9 to 2 bet on the index having a higher value in 5 years.


Absolutely!! And I presume that this is exactly how Colm got his number.  If you allow for the possibility of the index being up more than 40% and that 10k is a generous evaluation of the bet, we can surely round 9/2 up to 5/1 i.e. the odds against rolling a six on a fair dice.
Paribas in a presentation to professional clients claim that they discovered an arbitrage or a mispricing or in the current metaphor a biased dice.  Just how biased a dice, Broker Solutions* gave an indication in earlier brochures.  They claimed to have thrown  the dice 1,304 times and it came up six every time Possibly the title of this thread made them throw the dice another 1,305 times for brochure 5. The results now indicate that our dice has 4 sixes. Still a very biased dice and surely you should bite their hands off at those odds of 5/1
But something niggles at me in this narrative.  My textbooks claimed that when the professionals spotted an arbitrage they filled their boots with it until it quickly closed.  Not so these folks.  They decided to let the great unwashed feed at this trough, and to forego the chances to make easy money on their own account.  That was certainly a noble gesture but the niggle remains.  They announced their discovery in 2015 and the brochures make it very clear how the arbitrage worked.  To suggest that 4 years later the arbitrage is still alive and well would mean that all the other professsionals have taken a similar altruistic approach.
* _Disclaimer:  Other than the reference to the arbitrage all of the points in this post derive from the brochures produced by Broker Solutions and are absolutely in no way the responsibility of Paribas at all at all._


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## Duke of Marmalade (16 Oct 2019)

elacsaplau said:


> 2. If yes, how did such a product become approved and what needs to happen to ensure that other similar products are not being marketed now and that other similar products do not become available in the future?


Some valid questions there _elac_, but my understanding is that products are not approved* by the Regulator.  I think the term used to be "freedom with disclosure", which seems to me to mean that you can produce anything you like even Bags of Hot Air as long as you present your product fairly and completely.  The Regulator then takes on the role of policing how the products are presented and sold. Let's hope Colm's endeavours produce results along those lines in this situation.  The revised backtest in brochure 5 is a small step in the right direction.
_* An exception is where products had tax breaks such as pensions, where the Regulator/Revenue felt they could set some rules.  Though these days the rules are more around the pension wrapper and it is free to invest in almost any product of its choice.  I don't think in my day pension plans would be allowed to invest in the sort of product under discussion in this thread._


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## Colm Fagan (16 Oct 2019)

Duke of Marmalade said:


> And I presume that this is exactly how Colm got his number.


Thank you Duke for the kind comment, but I have to give the credit to Brian Woods (aka Watson) for that piece of deduction.


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## noproblem (16 Oct 2019)

Just as a matter of interest can any of you whiz kids in the financial world inform us of funds that are easily available, doing well, have good exposure in the short term (5 year), don't cost a lot to invest in, to the ordinary Irish person with a few hundred grand to invest. There's bound to be a substantial no of that line of individual out there nowadays what with retirement pay offs, savings, inheritance, lump sums, etc. Most will say it has to be invested for long term but lots of the people with this type of money are getting old and investing long term is not attractive for obvious reasons. Then again the regime in this country makes people think of getting rid of their assets/cash, to sons, daughters, etc, etc, so they qualify for fair deal later on, for free this that and the other too. Surely this industry needs a thorough cleaning up and made more simple to understand for the ordinary individual.


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## elacsaplau (16 Oct 2019)

Ah Duke,

That's really spectacularly unfair!

Elacsaplau has thrown his toys out of the pram and Elacsaplau is not the type of individual who will collect them and go back on his promise to desist from further contributions to this thread. This plan was all going well until your measured and reasonable post leaves many crumbs for Elacsaplau to feast on but Elacsaplau has his principles.

If Elacsaplau is a slave to such principles, one coud reasonably ask how come this post appears at all? Has, for example, Elacsaplau's life expectancy been magically extended since last night? Such questions, admittedly, do pose a real challenge. All Elacsaplau can offer is that this post should be seen as some form of an aberrant apparition, a one-for-the-road, the AAM equivalent of a Mulligan.

Why, also, is Elacsaplau using the third person singular when referring about himself? Fortunately, Elacsaplau has a more robust rationale here as Elacsaplau has decided to become LiamLawlor_esque _in his language, as this seems to be somehow an appropriate form in this thread (see in particular post #50).

Anyway, Elacsaplau shall, accordingly, leave Sherlock (or should the er be replaced by a y?) and yourself at it!


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## Duke of Marmalade (16 Oct 2019)

_Elac_, your withering sarcasm can lead to misunderstandings  Why don't you and Colm admit it was all a misunderstanding? After all Boris and Leo are all palsy walsy these days


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## Bronte (16 Oct 2019)

I suppose some of you have been watching the Neil Woodford collapse.









						Neil Woodford closes crisis-hit investment empire
					

The UK's best-known stockpicker shuts his firm after a crash in the value of his multi-billion-pound funds.



					www.bbc.com


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## Colm Fagan (16 Oct 2019)

Hi Duke.  You should change your name to George Mitchell!   I'm happy to go along with that.


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## RedOnion (16 Oct 2019)

RedOnion said:


> It's priced to reflect a 4 in 5 chance of not getting your full money back





Duke of Marmalade said:


> we can surely round 9/2 up to 5/1 i.e. the odds against rolling a six on a fair dice.


I'm slightly embarrassed with my poor maths. Indeed 5/1 odds are a 1 in 6 chance, not a 1 in 5. I forgot to pay back the original stake.


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## Colm Fagan (17 Oct 2019)

RedOnion said:


> I'm slightly embarrassed with my poor maths.


We all do it!  I was watching "Who wants to be a millionaire" with my wife the other evening, and claimed that the sum of 1 to 9 was 55!!!


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## Colm Fagan (19 Oct 2019)

Zebedee said:


> Just one question from me. Under the priips rules the regulator has the power to ban products (eg binary options last year). Did this come up in your discussions with the CBI?


Sorry for the delay in getting back to you.  I don't claim any expertise on consumer protection rules (the last 25 years of my career was spent more at the "wholesale" rather than the "retail" end of life assurance).  I wasn't aware the regulator had that power.  In any event, the regulator was very much in listening mode with us.  They never told us (nor did we expect them to tell us) what action they would be taking on foot of what we told them.


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## elacsaplau (20 Oct 2019)

I have it on very good authority that both the design and distribution of insurance/investment products were often not transparent 25 years ago - resulting in poor outcomes for consumers. Poor consumer protection then.

This thread is principally about the non-transparency of a current product - likely to lead to poor outcomes for consumers. Poor consumer protection now.

Personally, I would not be deferential to those responsible for consumer protection in Ireland who have presided over a ineffective system for far too long. So who watches the watchman? 

Well, it may not be perfect but the Finance Committee has done a good job at upping the performance of the Central Bank in terms of protecting banking customers. I would suggest that in relation to this case a referral to the Finance Committee is warranted. It offers the prospect of genuine progress in this matter.


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## Bronte (21 Oct 2019)

Another fund manager to watch









						Top fund manager forced to resign after BBC investigation
					

Mark Denning, who managed billions of dollars of investors' money, broke investment rules, the BBC finds.



					www.bbc.com
				



_
One of the world's leading fund managers has been forced to resign after the BBC discovered he had broken investment rules._


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