Viewpoint / Don't Look, Just Bungee

The Israel Securities Authority zeroed in on the ads Ilanot Batucha were running, which purported to show that its mutual funds achieved the highest, or nearly the highest, yields. Not so, barked the watchdog, when mutuals managed by private brokerages are factored in, and it forced Ilanot to change its ads.

Ilanot's isn't the only campaign that begs a closer look. In the last few days Israel Discount Bank has been running ads calling on the public to buy structured deposits. Under the headline "Your money will grow fat from content," the bank writes: "A structured dollar deposit at Discount - 12 percent guaranteed interest on your money".

No mistake: the Discount deposit really does offer dollar interest of 12 percent. Of that, it offers guaranteed interest of 10 percent in the first year. But it doesn't guarantee to pay that same interest over the years. The ad does say the deposit is limited to 10 years. But potential customers are unlikely to grasp that the risk here is one of time, not of the fund itself or of prevailing interest rates. The accrued interest may not come to 12 percent except after 10 years. That is the risk.

Structured deposits have become a star product at the banks. They sold about NIS 30 billion worth of these instruments in the last year, according to estimates. Most were sold by Bank Hapoalim. Financial daily Globes reported on Tuesday that the instrument's success induced the Bank of Israel's Supervisor of Banks to audit the banks' actions with them. But the inspection focused on stability, meaning, the risks the banks undertake by offering these instruments.

But as structured deposits turn popular, consumer questions arise. Bank Hapoalim ran an ad featuring a bungee jump, in which it depicted the structured deposit as risk-free. No risk to the principal, that is.

Indeed, they do assure return of the principal, but that doesn't mean there's no risk of losing money. If your money is locked into a dollar deposit over 10 years, with 12 percent interest for the whole term - translating into 1.2 percent a year, on average - you have lost a great deal of money, because it could have been in alternative vehicles that yielded much more.

Structured deposits are highly complex, and incorporate a great deal of risk. Yet they are being marketed to the general public. In fact, Bank Hapoalim, which is spearheading the trend of Structured Deposits for the People, isn't even limiting their sale to investment advisers. The bank says these deposits are not covered by the Consulting Law; structured deposits are the same as any other bank deposits, it claims, so there is no legal requirement to provide advice on them before selling them.

Other banks, such as Discount, say in their ads that potential buyers should avail themselves of professional advice first.

The Bank of Israel has yet to speak on the issue, whether structured deposits are like any other (and not subject to the Consultancy Law) or whether they are a financial instrument (and are subject). Meanwhile, NIS 30 billion worth have already been sold to the general public, which most probably understands nothing of their real risk-reward ratio.