[Issue Interview] "Hong Kong ELS, If Pushed, It's Not 'Investment'... Don't Put Your Money In If You Don't Understand"

Interview with Kim Jin-ung, Director of the 100-Year Life Research Institute
"If the interest rate is high, you should start with 'rational suspicion'"

[Image source=Yonhap News]

"Compensate the full principal." This was the slogan shouted by investors in Hong Kong H Index equity-linked securities (ELS) at their first rally in front of the Financial Supervisory Service on the 15th. Elderly people with white hair were noticeable throughout the rally venue. On that day, the H Index closed at 5700.39. The H Index peaked at 12,228.63 in February 2021 and has been falling for three years straight. It has now plummeted to 46% of its peak.

If the H Index fails to rebound sharply, investors will face principal losses starting January next year. The loss corresponds to the percentage drop in the H Index compared to three years ago when the product was first subscribed to. The maturity amount in the first half of next year (January to June) is 9.2 trillion won. Even if only half of this is recorded as a loss, 4 trillion won will be lost.

"I didn't know." This is the core claim of the investors. They say they subscribed without knowing what it was because a bank branch employee they often visited recommended it. Financial Supervisory Service Chairman Lee Bok-hyun cited "investors in their 70s," putting the elderly under scrutiny. Nearly half of the total sales of H Index ELS by major banks were to those aged 60 and above.

This raises the question: Should the banks that sold ELS to the elderly bear full responsibility for the losses? Can the elderly be seen as completely innocent victims?

We asked Kim Jin-ung, director of the 100-Year Life Research Institute, who has analyzed and educated retirees' financial lives for 12 years. The institute is affiliated with NH Investment & Securities.

Jinwoong Kim, Head of the 100-Year Life Research Institute at NH Investment & Securities. Photo by Huh Younghan

- Why did such a large-scale loss situation occur?

▲People who go to securities firms and those who go to banks are different. Securities firms are originally frequented by people who take risks. Those who dislike risk tend to do more banking transactions. Bank customers outnumber securities customers by more than tenfold. Since banks got involved, sales were actively conducted. Because banks sold ELS, many people started to take interest. There are likely quite a few customers who subscribed without knowing what the product was.

Customers who have dealt with securities firms might have thought, "Oh, banks also sell ELS." On the other hand, customers without investment experience might have understood it as a special promotional product sold by banks. Then, the condition "if the H Index falls by 50% within 3 years," which is probabilistically very low, became a reality. This situation arose due to a contradiction between the financial institution handling the product (banks) and the product itself (ELS).

- Why is the elderly group highlighted?

▲Young people have no spare money because they are buying houses and raising children. According to the Household Financial Welfare Survey, the average age of the top 1% in net asset size in Korea is 63. These people invest in derivatives. Structured products like ELS, which have points where principal loss can occur and come with conditions, are indeed difficult. However, people in their 60s do not have cognitive abilities inferior to younger people. Many elderly investors have diverse investment experience and understand the nature of ELS better than anyone. It doesn't make sense for people with that level of capital to say "I didn't know." Of course, there are elderly investors with asset constraints and no investment experience. Each case is different, so is it fair to say that banks recommending ELS to the elderly are always at fault? This needs to be viewed objectively.

- What do you think about the frame of 'elderly = victims'?

▲Most investors would say, "It's all because of the bank employees." That's avoiding their own responsibility. Of course, this doesn't mean banks have no responsibility. They probably sold aggressively to boost performance and for personnel evaluations. Still, the starting point of investment should be my own decision. When putting money into financial products, you must approach it with the mindset that "no one will take responsibility for me." Otherwise, the chance of failure is high. Right now, investors are saying things like, "I trusted this because someone told me to do it, and it failed." That is not investing. Starting from a decision made by someone else is far from proper asset management.

The most important thing when investing is 'rational suspicion.' For example, if the ELS interest rate is 3 percentage points higher than the regular deposit rate, you should be suspicious. They pay more interest because there is some risk. But investors ignore such risks and focus only on the interest rate. They say they want to manage money safely at the bank but judge based on profitability. This behavior is another cause of the current situation.

- Then how should the elderly manage their assets?

▲After retirement, cash flow stops. From then on, they live on the National Pension, retirement pension, and personal pension accumulated over decades. This is one pillar. The other pillar is money related to desires. Moving to a better house, buying a better car, going on overseas trips. Money for fulfilling these desires should be set aside and invested. You can do what you want whenever you make a profit. The investment amount should be limited to a level that does not burden daily life even if you fail. Warren Buffett also experiences trial and error. You learn by gaining experience.

But you should not invest "money pressed by time." "If this money is gone, retirement life is impossible." Putting such money into ELS is a big mistake. No matter how much a bank employee says you can get early redemption, there is no such thing as 100% in this world.

Cross-checking is also a method. When getting implants, you are told to visit three dental clinics. If a bank recommends a complicated financial product, ask a securities firm as well. Nowadays, access to securities firms has improved. Many transactions are made with small amounts. If there is no securities branch nearby, at least call and ask for advice.

- There are even opinions to ban banks from selling ELS altogether.

▲You should invest where you know well. That reduces the chance of failure. If you don't know well, put in only a minimum amount first. Think of it as studying. Banks sold ELS even more than a decade ago. Now that losses are expected, people say don't sell, but many have profited so far. Using investment products yields higher returns than just regular deposits. However, you must understand and use them properly.

Korean elderly have built assets mainly through real estate. They relatively lack knowledge in finance. Even though their own money is at stake, they do not put much interest or effort into it. When someone says "this is good," the market starts to heat up. When it peaks, they rush in en masse. Leaving decisions involving your money to others makes it hard to make money through investing. We are collectively learning this fact now, but the cost of learning is very high.

This content was produced with the assistance of AI translation services.