Gaining and holding on to the Trust of investors

For close to the past one year, I have been based out of Hong Kong and work on Structured Equity Derivatives for a leading investment bank. These products have exotic names like Accumulators, Decumulators, Equity Linked Notes, Variable Maturity Range Accrual Notes (VMRANs), etc. I wasn't surprised by the complexity of these products. However, what surprised me was that increasingly buyers of these products were not institutions, but High Networth Individuals. Over 50% of the orders to the investment bank are coming from the wealth management arm. These products are a major source of revenue and profit for the investment bank.

I am surprised by how investors are able to comprehend the structure of these complex products and the risks associated with investments in these products. Either investors are getting increasingly sophisticated or given the bullish markets assuming greater risks that they aren't cognisant of.

Would investors lose trust in these financial engineered products if they take huge losses? Would investment banks and distributors be able to keep finding investors to buy these products? I believe the underpinning tenet should be "Sell TRUST when selling products, by making investors aware of the risks".

I reflect back to the year 2002, where I was interviewed by Financial Engineering News:
www.fenews.com/fen29/special_feature/special_feature.html#Shriram_Subramian

I reproduce below my thoughts aired in that interview, that I believe, hold true even now.

Views on Critical Trends That Will Shape Financial Engineering : Financial engineering will emerge as a main source of revenue for financial institutions and be considered a key profit center. This is because plain vanilla products are passé and increasingly sophisticated customers demand simple, yet sophisticated products.

One Major Challenge You’d Like to Solve and How: The biggest challenge financial engineering faces today is to get clients to develop TRUST in financial “engineering”. The large losses and scandals in complex product structures have resulted in this perception. A concerted effort of all financial engineers and industry associations is required to develop trust with clients and convey the message that financial engineering is all about helping clients in finding solutions to their problems and manage their risks.