Every investor deserves a second opinion

ALMOST a year ago, I called for the formation of an independent, non-profit body to provide retail investors guidance for evaluating potential sophisticated investments.

Since then, the Monetary Authority of Singapore has removed the need for mandatory financial advice for certain investors and enhanced disclosure, all in order to widen the range of products available to retail investors.

These moves recognise that investors are becoming more sophisticated and want access to a broader range of investment opportunities.

This is the right direction. Capital markets should not protect investors by restricting choice; instead, they should ensure that investors can make informed decisions.

But if responsibility is increasingly being placed on individuals, one important question remains unanswered: Where can investors obtain an independent second opinion before committing their savings?

Consider that for major medical decisions, patients are often encouraged to seek a second opinion. Not because the first doctor is necessarily wrong, but because another assessment can provide greater clarity and confidence.

Retail investors deserve the same opportunity when faced with increasingly sophisticated investment products.

Prospectuses, product-highlight sheets and risk disclosures are essential, but they are often lengthy, technical and prepared by the institutions manufacturing or distributing the products.

These are commercial organisations that naturally emphasise the features that make their products attractive.

Risks are disclosed as required by regulations, but they are rarely explained from the perspective of an investor asking: “What could go wrong?”

Consider, for instance, equity-linked notes (ELNs). One bank’s website tells prospective investors: “Pay a discount to principal amount and get back 100 per cent of principal amount on maturity. The difference is your profit, and this will be reflected in the quoted annualised yield.

“Pick the stock you like at the price you don’t mind collecting (the strike price). Customise your own stock, tenor and strike price.”

Based on this, an ELN may appear to be an investment that offers an attractive yield that allows investors to purchase shares at a preferred lower price if markets decline. This description is correct.

But there is another equally accurate description.

From an economic standpoint, an ELN is equivalent to the investor writing a put option to the issuing bank. In exchange for the yield, the investor accepts potentially significant downside risk if the underlying share price plunges sharply over the tenor of the ELN.

Because the return is capped – preventing upside participation if the stock price surges – the risk-reward trade-off is, in reality, tilted against the investor and in favour of the bank.

One explanation highlights the opportunity; the other highlights the asymmetrical risk-return trade-off. An independent body would explain both perspectives, allowing investors to understand the complete picture before investing.

The UK offers a useful precedent. Independent organisations such as Which? have built public trust by evaluating products from the consumer’s perspective rather than the seller’s.

Singapore could adapt a similar model for investment products, publishing concise, jargon-free assessments that simply “tell it like it is”.

As Singapore embraces a disclosure-based regime, investor protection should evolve as well. Disclosure alone is insufficient. Every investor deserves access to an independent second opinion that explains both the upside and the downside with equal clarity.

Helping investors look before they leap would strengthen confidence in Singapore’s markets, and make better-informed investing the norm rather than the exception.