A Filipino Lawyer’s Guide to Investment

Atty. Rami Hourani

In this difficult time brought about by the nCoV-19, of the many realizations we are coming to is that we must prepare for the future. These will often require you to pay sums of money up front for a benefit in the distant future. The nature of such endeavors makes them prone to fraud and abuse. How though do we separate out legitimate opportunities from attempts to separate us from our hard earned money? In the course of this short article I hope to impart a few rules of thumb for how to approach investment opportunities.

“Investment” is a word the piques interest in the Filipino. We are naturally a very conservative people that deeply discount the value of the present when weighed against the promise of the future. You can see this in the sincere glow in a mother’s eyes when she proudly proclaims today’s sacrifice will ensure her child be a doctor tomorrow. (Curiously, seldom does a parent dream of their child growing up to be a lawyer.) This is perhaps our most admirable trait as a people. It is also frequently taken advantage of by those who seek to take advantage of our unabashed optimism and incomparable trust in the kindness of strangers. It is these traits that are first excised from lawyers by their law professors. This is not intended of course, but occurs as a consequence of empathizing with the victims we encounter in case law.

Despite this, a lawyer’s role in the lives of people is a reactive one. We stand in the rubble of peoples lives after tragic events to occur, setting in motion the legal processes to get past them. We are your mediators when creditors come knocking. We end bad marriages through annulment. We defend you when the state accuses you of a crime. In each case, we can only intervene after something tragic has happened. The training of lawyers is not simply the requisition of remedies but the prudence of prevention. Every lawyer’s training grants him generations worth of human experience in the myriad of ways that people use to cheat and do harm to each other. It is a shame though that of a lawyer’s repertoire, this is often the least invoked over the course of a lawyer’s professional life.

I will refrain from invoking legal rules and instead supply you a few logical tests to apply when approached with a place to stash away your money.

First, do you understand how your money will be made? 

It seems basic but is often neglected in the pursuit of money. In the Philippines, we are very transactional in the way we do business with other people. I pay you this money, you render this service or deliver a good. The attitude that is often taken is, “I pay them so I don’t have to worry about it.” As a consequence, people often pay the most attention to the returns that are advertised and go with the investment that will return them the most per peso invested. 

However, our recent collective experiences with the “KAPA” and “Organico” leads us to the inevitable conclusion that perhaps a little more thought should go into it. In law school, our professors would command us to stand up and say out loud our understanding of case law. As was common, what left our mouths was a garbled mess which reflected the level of understanding we had obtained in our first frantic read throughs of the material. 

A similar level of understanding is often the result of that first exchange with the marketer of a purported “investment” product. We are left with a high level of enthusiasm but a modest level of understanding. Once the excitement has abated, sit down by yourself or with someone you trust and ask yourself what that person was really selling you. If you just sit and thinkabout it, you will be able to separate the falsehood from the facts.

Let us use the example of Organico. The refrain sales pitch went something like, your investment goes towards the purchase of piglets which will then be reared on your behalf slaughtered and sold for a 60% profit in 3 months. A complicated series of computations is used to justify the reliability of this figure. The computation will be done in front of you, as a kind of proof of its verifiability. Curiously, very few products are sold using this method of assault by mathematics.

 Let’s take a step back though, assuming that every pig is sold, in a year a person could make back five and a half times the money he puts in. That is a rate of return that should make every broker on the Philippine Stock Exchange hide his head in shame. If you invested 50 pesos, in 10 years, you’d have 6.7 Billion pesos. If you had really dug deep, and invested 2,500 pesos, in 10 years you’d be richer than Manny Villar is today. (Roughly 300,000,000,000 Pesos.) For the sake of this mental exercise though, lets assume that everything they are selling you is true. (Let us assume even that a Philippines covered in piglets from Batanes to Tawi-tawi is no obstacle.) Why do they need your money? If it was such a sure thing, wouldn’t the banks be begging them to loan money, which would allow them to keep the profit for themselves?

Second, what does the person selling you the product stand to gain?

Over the course of an investment’s lifetime, it is very common to hand over hundreds of thousands, if not millions, of pesos. This is money you will not see for decades because of the trust you have reposed in the seller of the investment. You have a right to know how the person who is selling you the product is going to be compensated. It is common practice for insurance companies that in the sale of Variable Universal Life Insurance (VULs) an agent is compensated an amount equivalent to between 40 and 90% of all the premiums paid in the first year. This will amount to between 8 and 18% percent of the total amount invested in a typical VUL whose premiums are paid out in 5 years. Aside from this, an amount will be taken as compensation for the insurance policy itself and an annual charge made on the remainder as a management fee typically around 2.5% per annum.

For context, there are brokerage firms that offer investment products which only charge 1% per annum as a management fee and lower. This means you could potentially be paying 30-50 times more over the life of the investment in the abovementioned case as opposed to possible alternatives. This is not an indictment of a particular financial product; people are permitted by law to earn money on the money they make for you. However, you should be aware how much of your money goes to them in exchange for the service they are providing you. I should add though that I do not see any situation where a VUL Insurance policy is the right choice, where investment is the primary aim.

The above example is to my mind is a relatively minor loss when confronted with the horror stories faced by others. The total loss of life savings, pension, and retirement plans are just some of the ruins that lawyers help sift through in an attempt to rebuild a shattered life. I think of the people that you should be most concerned of are those who seek to help you out of the goodness of their heart. Kindness is the artifice most commonly used by those who seek to separate you from your money. Often times, a man with the ear to ear smile is doing it to distract you from his hand reaching for your pocket. I cannot stress this enough, be wary of the kindness of strangers especially when money is involved.

Third, who has control over the investment?

The money you give to someone else will fall into one of two categories insofar as its control is concerned. First, they are taking your money as part of their own speculative/investment endeavor and will buy land, condominium units, bitcoin, stock, bonds, or whatever thing under the sun and remit to you a portion of their profits. Second, they are purchasing a thing on your behalf for you to hold until you decide to sell.

The ultimate goal of investment is to get more money in the future on money spent today. This ultimately entails a cashing out, whether in whole or in portion, of whatever thing was bought. It’s important to keep this in mind because whoever has control of the investment controls when the cashing out occurs. The kind of control you should consider granting to someone else depends largely on the kind of thing they are dealing in. Is this really investment? Or was it speculative?

Montreal, Canada – 28 February 2018: Stacked cryptocurrency coins (Bitcoin, Ethereum, Litecoins)

Speculating is purchasing a thing in the hope that someone else will pay you a higher price than what you paid for it at some future date. (A simple example is gold; a more novel example is bitcoin.) Investing is purchasing something for what it will produce. (A plot of land with mango trees, a share of stock that regularly pays dividends.) In the case of the speculation, if you yourself are not well versed in the peculiarities of the thing bought, you are entirely at the mercy of the person who purchased it for you. You will need his say so to know when and how much to sell for. So even if you ostensibly make the decision of how much or when to sell, you are completely reliant on someone else for knowing when to exercise that judgment. In short, you are not in control. This is a dangerous situation to be in and will require that you to have a very good reason to trust the person you are reliant on.

Investment, and soundly chosen investments, require very little in oversight. Your returns will be volatile in relation to your risk appetite, but respectable and consistent through the years. The date of cashing out will be determined without reference to the price that currently prevails but the needs of the investor. Are you 65 years old and retiring? Did someone in your immediate family get hospitalized? Is one of your children headed off to college and tuition was more than you expected? These, and these alone, will be your guide for when to cash out your investment. A good example of this is a diversified portfolio of stocks and bonds from a licensed broker. In this situation, you are truly in control of your investment and consequently your financial destiny.

I hope these rules of thumb have helped you come to a more workable understanding of how to approach investing for the future. If you are reading this and have recently been the victim of an investment scam, do not despair. You always still have time to rebuild. If there is anything that you would like to have discussed in a future article, please do not hesitate to comment below and let me know.

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