Sunday, April 26, 2009
Creating or destroying value?
Business should create products that give value to customers. If the cost is $X and the value to the customer is $Y, then the business is entitled to keep the difference to cover its marketing cost, expenses and profit.
For tangible products, the customer can assess the value of $Y by looking at the price of similar products.
For financial products where the future value is uncertain, such as shares, structured products, life insurance and land banking products, it is difficult for the customer to know the real value. This allows the experts (i.e. financial advisers or businesses) to exploit the ignorance of the consumer by giving misleading advice.
The technique is to give the promise of a future value that is not likely to arise. For example, that the asset will appreciate in value. Usually, this is based on looking at the price movement in the past and selecting a period that shows the most favourable results. This is misleading.
All businesses, if it is runned well, will give a modest rate of return. If inflation is 2% per year, a return of 5% is reasonable. If the business projects a return of 15%, it is not reasonable. The business is taking excessive risk, e.g. through leveraging, or playing a speculative bubble, such as the US housing market (funded by subprime mortgages).
The promoters of these financial products take in a lot of money from investors by making unachieveable promises. They take away a large portion of their money in marketing expenses and profit. The leave the investors with assets that have depleted in value. Eventually, the investors have to realise their investments at a big loss.
Look at the history of many time share, land banking, structured products and life insurance products. While some of these products, give good value, the majority of these products destroy value for the investors.
Be careful about these types of financial products. Do not believe that the assets will appreciate in value. Often, there is someone behind that will cream off your gains and leave you with a poor yield.
Tan Kin Lian
UK: Banks face fine for poor service
I hope that MAS will implement similar measures in Singapore. Read this.
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