Don’t be fooled by wealth-management promises, or dreams of getting rich quick
Print Edition
If you walk around the streets of Shanghai these days, you are sure to see plenty of piles of construction debris piled outside of gutted shops and darkened storefronts.
In many cases, such heaps indicate that some small business owner has decided to close their shop for good. In time though, the vacant space will be rented by another entrepreneur with their own plans to make money.
The only businesses that seem to have any longevity in Shanghai are its ubiquitous beauty and massage parlors, cigarette shops and real estate brokerages. But recently I noticed a new type of business is starting to pop up.
Over the weekend in my neighborhood I found rising from the ashes two new financial institutions, located within 500 meters of each other. Both specialize in licai, or wealth management.
In the past, the wealth manage products (WMPs) these businesses peddle were mostly provided through banks. In many cases, investors who “purchase” these products are pooling their money, which will then be lent to high-risk borrowers who can’t obtain financing elsewhere — like coal miners or manufacturers of low-value added goods. One of the new shops advertised an 8 to 12 percent annual returns for investors and another 13-16 percent, so one can imagine the rates these borrowers are being charged.
These well-appointed, spacious establishments certainly appear more trustworthy than those thrusting advertisement bills at passersby in the streets. They are also particularly attractive now that putting money into a deposit account, stocks, or even property no longer seems to make financial sense.
Real risks
But the products sold by wealth-management companies carry real risks. These risks are often glossed over by unscrupulous salespeople — or ignored by inexperienced small-time investors who believe they’ve stumbled across some get-rich-quick secret.
On December 12, Song Hongbing, a young economist, while giving a lecture in Taiyuan, Shanxi Province, was attacked by angry investors who saw their wealth wiped away after putting their money into an online financing company commended by Song.
Another victim (unconnected with Song) was Li, a septuagenarian from Inner Mongolia who had reportedly spent a sizable portion of his savings on a WMP sold by Ezubao, an online peer-to-peer lending platform (“What seems too good to be true usually is,” December 16, Shanghai Daily), which promised an annual return of over 10 percent.
The company is now being investigated by police. When the company went under, it allegedly took with it investments of 72 billion yuan (US$11 billion).
It is often moralized that people like Li are particularly vulnerable for their lack of sophistication to perceive the risks inherent in these financial products.
According to a recent media report, a former wealth manager in a bank in Huangpu District, Shanghai, revealed that of his 400 clients, more than half were elderly “aunties” who spent, on average, half-a-million yuan on WMPs.
Over the years these aunties have put aside quite some money, and seem more interested in investing than many of today’s young workers.
It’s all about salesmanship
In targeting these clients, salesmanship, patience, and good manners matter more than expertise. Beijing Evening News has reported that to woo these aunties, some young wealth managers from Ping’an Bank would join the aunties in their square dancing each evening.
A veteran accountant I knew wonders which industry today can hope for such high returns promised by WMP salesmen. It’s been reported that average profit margin across all industries this year stands at less than 6 percent.
Even real estate, an industry known for creating vast amounts of personal wealth, is looking increasingly normal with a return of less than 10 percent.
Online lending, generally perceived as an immensely profitable industry, saw average operating-profit of 8.5 percent from January to September this year, according to a Jiefang Daily report on December 5. How dare these wealth managers promise so high to their clients? One explanation is that technology has so “sexed up” these fancy products that clients can no longer exercise rational judgment.
In a recent article on this page, economist Robert J. Shiller wrote about the lack of effective regulation for the booming crowdfunding industry in the US (“Stop crowfunding from turning into fraud,” December 17).
According to Shiller, “crowdfunding is supposed to raise money fast, from those in the know, for businesses that bankers might not understand.” That sounds very exciting. But how many of us are so advantageously informed?
Obviously the government has an unshirkable duty in regulating the murky waters of wealth management.
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