The Taiwan Banker

The persistent low-interest environment has made customers eager for financial products with returns exceeding deposit rates. Because these products are usually more complex than deposits, though, and are not guaranteed, risk events causing losses may result in disputes or even litigation, harming the image of the industry. In order to eliminate this problem, practitioners should not only improve their professional knowledge of the products they sell, but also proactively and objectively understand their clients’ ultimate investment objectives and risk tolerance. To reduce possible disputes, a financial product should only be sold when its risk/reward ratio matches the client’s investment objectives and risk tolerance. The relationship between a bank and its customers is one of trust and professionalism. Agency problems and information asymmetry require full disclosure ahead of time, as well as codes of conduct. Trust in the financial system can be regained by changing the improper sales behavior of not only institutions and their sales staff, but also customers. Wealth managers bear the pressure of return expectations Because of insufficient training, overbearing performance pressure, and insufficient understanding or interaction with clients, sales staff must grasp every sales opportunity when they find clients have idle funds, expired deposits, or underutilized investments. In the process, they force themselves to become experts in everything. As wealth management competition becomes increasingly fierce, managers bear increasing expectations from both clients and internal sales evaluations. Current performance management and incentive systems for financial product sales channels are usually based on performance or new sales. Besides short-term cash holdings and bills, however, most funds, bonds, and insurance policies are long-term products. The issuers encourage channel sales with large incentives, and then the financial institutions follow the same system to push sales to end clients. As a result of this food chain, clients are not only unable to obtain long-term returns due to constant churning, but may also make investment mistakes due to ignorance of risks. This phenomenon of short-term greed by wealth managers and financial institutions can lead to loss of clients’ trust, subsequent opportunities for long-term asset management income, and even trust in the entire financial system. Credibility first In a report on wealth management a few years ago, McKinsey & Company wrote that the five top indicators of a good wealth manager in a client’s eyes are low risk, outstanding customer service, convenient branch locations, branding, and professionalism. Wealth management isn’t just about clients’ dreams, but reputation. Credibility is the first step. To give appropriate and effective advice, wealth managers must truly understand trends and products from the client’s perspective. In practice, the main reason the clients go through a financial institution is to earn higher returns. Faced with all sorts of financial products they do not understand, they can only use financial experts in order to get fair returns. Clients generally hope for wealth management service to have three attributes: empathy, expertise, and responsibility. Empathy: Modern finance is like an information torrent. Any piece of news may influence investor sentiment, and any product may decide an investor’s wealth. Financial institutions and wealth managers should imagine how their family members would react to information to make decisions. We often hear clients asking wealth managers why they need to buy certain products. As an advisor, would you buy that same product? Indeed, just as in the manufacturing or food industries, customers also expect that representatives or their family members would consume the products they sell. Without such a guarantee, a lack of trust may influence growth. Professionalism: Finance is not the client’s area of expertise. Otherwise, they would not need a wealth manager. The client specializes in their own business. The objectives and time frames of different clients may vary. Besides just empathizing with the background of the client, the wealth manager should be able to professionally analyze the products they sell to meet the needs and portfolios of each client, rather than just selling blindly to every client they can reach during the promotion period for a certain product. Responsibility: After painful experiences, most clients understand that investment is inherently risky, and past performance doesn’t represent future results. They hope that in the case of systematic or idiosyncratic risk, their wealth manager can accompany them through the crisis and try to solve the problem or reduce losses, rather than just using financial laws as a defense or initial risk notifications to shirk responsibility. In some cases, they have even switched jobs to avoid the client. Most rational clients are worried more about deception or being cheated than investment losses. Investors must improve financial knowledge and risk awareness Disputes are not entirely the responsibility of financial institutions or wealth managers. The illegal or inappropriate activity would typically not occur without negligence from the client. Therefore, it’s important for clients to not only improve their financial literacy, but also risk awareness and avoidance ability. This isn’t limited to just common market and credit risks, but also operational risk from wealth managers or the bank itself. In particular, clients have been known to give their passbooks, seals, passwords, or signed blank transaction slips to wealth managers or tellers for the sake of convenience, creating opportunities for fraud. This behavior must be eliminated from the source. Otherwise, the investor may not be able to pursue responsibility in a dispute, having already left the door unlocked. The wealth manager is usually the person in the bank who knows the customer the best, including their deposit balance, account composition, and frequency of use. Those with closer connections may even understand their family status, lifestyle, and spending habits. With malicious intentions, they can cause great damage. Due to trust or convenience, bank supervisors tend not to interfere too much with wealth managers who have good client relationships. Those with strong performance may not be audited, greatly increasing the likelihood of fraud. Know your employee Therefore, banks must think about Know Your Employee (KYE). Just Knowing Your Customer (KYC) and Knowing Your Product (KYP) isn’t enough. Furthermore, clients must also be responsible for themselves and should avoid giving tellers or wealth managers the opportunity to commit crimes. The FSC’s “Ten Commandments of Wealth Management” are fairly complete, but market participants including financial institutions, wealth managers, and clients each have their own specialties, positions, objectives, and pressures, and legal regulations alone cannot completely prevent fraud. Recent severe penalties are not just a warning to the market, but also a good opportunity to inspire institutions to deepen their thinking and act to rebuild the foundations of trust. Multiple points of information asymmetry A very specific information advantage ecosystem exists in financial sales. Issuers have an incentive to increase the complexity of product pricing in order to increase their market power and profitability, so that fewer investors know the information, increasing their producer surplus; banks, aiming to maximize sales commissions, are incentivized to make use of retail investors’ difficulty in obtaining information to selectively disclose information that helps sales, and to design mechanisms to enable wealth managers to sell products most beneficial to themselves; and wealth managers similarly use their commission mechanism when recommending products to take advantage of their information asymmetry with clients and get them to buy the products they or their bank want them to buy, not necessarily the ones they need. Wealth managers should provide further expertise to protect investors, in addition to the information from the issuer and their employer. When recommending products, they should disclose full market information to the best of their abilities, and provide appropriate recommendations. After, loyal clients are the source of sustainable performance. When clients hand over their assets for outside management, it is not just a matter of performance, but also trust. Clients should improve their financial literacy, carefully read public disclosures when selecting investments, and absorb as much market information as they can for comparison. Do not put all your eggs in one basket, and compare several banks to prevent improper sales for the sole purpose of wealth managers' commissions. In addition, the contracts for financial products always have a review period, reminding customers to take their time and to carefully evaluate any potential investments. Improving clients’ financial literacy and risk awareness Professor Robin Chou, Vice Dean, College of Commerce of National Chengchi University, recommends approaching the problem of improper sales caused by information asymmetry from incentives. Banks can use assets under management (AUM) as a basis to calculate processing fees, encouraging long-term thinking, and preventing excessive churn or unsuitable recommendations for the sake of short-term commissions. In addition, the financial system should strengthen literacy on financial planning. Financial institutions or community colleges could hold seminars on the topic, promoted by CFPs or other financial license holders in addition to the government. Instructors could receive fees for a certain number of lecture hours, with the ultimate goal of comprehensively strengthening financial literacy and risk awareness, helping gradually eliminate information asymmetry. (Edward Hsieh is Deputy Director of the TABF Publications & Communications Center; I-Tsung Liao is Standing Supervisor and Chairman of the Disciplinary and Ethics Committee, Financial Planning Association of Taiwan.)