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

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.
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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.
 
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.
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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:eek: 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:cool:
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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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?
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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.
 
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.
 
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 LiamLawloresque 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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Elac, your withering sarcasm can lead to misunderstandings :rolleyes: Why don't you and Colm admit it was all a misunderstanding? After all Boris and Leo are all palsy walsy these days:)
 
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?
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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.
 
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.
 
Colm Fagan said:
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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Colm Fagan in 2019 said:
“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?”
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Well this is what actually happened.
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This product matures in September. Fagan & Woods complained to the Central Bank in August 2019 that this was grossly misrepresented in the brochure (a) by majoring on how the Index had beaten the pants off EuroStoxx over the previous 17 years despite its inbuilt negative drag and (b) by showing that in all 1,304 backtests the Index would have finished above its starting level after 5 years and therefore would have triggered a minimum return of +40%. Ok, over a month to go, might still happen ;)
 
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