Cheongdam-dong investment genius Lee Hee-jin is a well-known self-made millionaire and quasi-investment advisor who occasionally appeared on television since 2011. On September 2016, he was taken into custody under charges of fraud and violation of financial acts. He assembled 24 billion by ensuring profits to clients, but did not return anything, and the number of victims is estimated to be at least 3,000. Accordingly, the police confiscated Lee’s property of 31.2 billion at the end of the September. Likewise, as more general investors are using quasi-investment advisory services, the cases of loss are increasing as well. The Sungkyun Times (SKT) introduces the concept of quasi-investment advisory companies, the specific incidents of adversity, problems, the dilemma that the government is facing, and what investors should do.
What is a quasi-investment advisory company?
• Investment Advisory Companies
Investment advisory companies offer customers one-on-one counseling and advices on the value of marketable securities. According to the Free Dictionary, marketable securities are “securities that are easily convertible to cash because there is high demand allowing them to be sold quickly.” To put it simply, investment advisory companies provide investment tips to clients. One of the biggest investment advisory companies in the world is Goldman Sachs Asset Management, which provides advisory services to 17,600 clients.
In order to become an investment advisory company in Korea, corporations should meet certain requirements for registration, such as possessing at least 100 million and one investment expert. After the authorization process, they are registered in the Financial Supervisory Service (FSS), a financial regulator that examines and supervises financial institutions in South Korea. In addition, they are constantly administered on a regular basis by the FSS.
• Quasi-investment Advisory Companies
Quasi-investment advisory companies provide investment advices to many and unspecified people via publications, TV appearances, and the Internet. There are two sales routes that customers use to sign up for membership and to purchase advisory services. The first is the online channel. Investors check Internet websites and fill the sign-up form, which is sent to the managers through e-mail. The next step is paying the membership fee and becoming clients. The second route is the offline channel, such as investment briefing sessions.
Unlike investment advisory companies, quasi-investment advisory companies can operate immediately after filing in relevant documents and reporting their establishment to the FSS. In addition, they are not subjected to the FSS’s supervision.
Quasi-investment advisory companies complement the market demand. They handle the demand of private investors that investment advisory companies do not adequately deal with. Although investment advisors can grant services to any kind of investors, they do not provide sufficient services to general investors who lack the ability to handle risks than professional investors. The reason investment advisors are indifferent to general investors and especially those who are interested in small investments is because individual consumers have been stingy with counseling services related to financial stock products. Therefore, profits are low when enterprises deal with general customers.
As a result of the economic recession, floating money could not find proper investment outlets. Ordinary investors began to show interest in risk assets such as stocks, which led to the increase in the usage of services offered by quasi-investment advisors. The number of quasi-investment advisory companies has increased from 422 in 2010, to 1,064 as of August this year.
Cases of Loss
According to the Korea Consumer Agency on September 25, the number of cases of loss that general investors faced because of quasi-investment advisory companies has escalated in the last three years. 140 cases were reported in 2014, 201 were notified in 2015, and 91 were disclosed in the first half of this year. There are several common types of loss that consumers encounter frequently.
• Loss Related to Withdrawal
Sometimes investors request for termination of the services before the expiration due to reasons such as constant loss. Some quasi-investment advisory companies, however, refuse to break the contract even when clients’ demands are justified under law. The law states that customers can legally execute the right of withdrawal, which is the right to cease contracts within seven days of signing. Many corporations do not give ample money back or even decline the offer by presenting self-defining terms that cover problems that have to do with refund. One example of a self-defining term is having a long mandatory subscription period like one month, or even three months. These regulations hinder small investors from exercising the right to put an end to arrangements.
For instance, a man named Kang received a short message inducing investment from an advisor named Lee. In March 2012, after having a phone call with Lee, Kang decided to arrange a 15-month contract. Kang, however, decided to cancel the arrangement in December 2012, because of continuous investment loss. He demanded a refund of the visa charge, but Lee rejected with a few regulations that he had created.
Another example is a case from an enterprise that gathered lifelong members through its online homepage. The corporation collected 30 million every month, reminding the clients that memberships originally cost 100 million, but the price was discounted since they purchased permanent memberships. When a customer tried to get a refund, however, they only received a few million won back. The enterprise claimed the start-up fee was 25 million and since it is not the dues, they refused to give a full refund. In a very small font, the contract stated that the company does not allow any rebate on the start-up fee.
Meanwhile, the majority of self-defining terms are likely to be classified as illegal in accordance with the provision of Article 9 of the Act on the Regulation of Terms and Conditions. One clause of the article covers the consumers’ right to undo the contract.
• Loss from Nonfulfillment of Contract
Some companies do not provide services that were supposed to be offered. For instance, broadcasting channels are not open or the short message service (SMS) is closed. Other companies offer very poor services. Unfortunately, multiple individual investors are subject to these amoral and helpless situations.
• Loss Related to Deceptive Advertising
Several quasi-investment advisory companies advertise their advisory services via Internet banner advertisements and lure people with an excessive rate of return. In fact, Lee Hee-Jin used to draw people’s attention by saying the following: “This stock price will definitely go up to 500 thousand in the near future. The share is currently traded at the price of 250 thousand. You should purchase it in advance to earn a huge profit.” It was later found that Lee had obtained the stock at an extremely low cost, but sold it to individual investors at a much higher price, about 20 to 30 times higher.
According to the FSS, it is illegal to gather members through deceptive and exaggerated advertising in any circumstances. The other two types of loss, however, depend on the particular circumstances. Therefore, some could be illegal, while others are not.
Problems and Solutions
• Problems
There are several problems in the law, media, and online postings relevant to quasi-advisory companies. First, there is a blind spot in the Financial Investment Services and Capital Markets Act. Quasiadvisory companies are not subject to the FSS’s administration, and as such, even though they are categorized as financial markets firms, they are not regulated under the Financial Investment Services and Capital Markets Act. The FSS can request for information from quasi-advisory corporations, but there is no actual enforcement on submitting the data. Consequently, victims must personally request for police investigation. Second, the media is irresponsible. Mass media relies mostly on popularity. The broadcast presented unqualified people like Lee Hee-jin as investment geniuses and allowed them to appear on TV. There is no proper verification system that filters unqualified people. As a result, individual investors are easily deceived and become victims of fraud. Third, it is difficult for the victims to share their cases of loss with each other. It is possible to erase postings that have been charged with libel on portal sites. Quasi-investment advisory companies abuse this system and delete postings that raise sensitive issues, such as the amount of total loss. Thus, the online world is aberrantly overflowing with positive comments and posts, which are distorting the reality.
• Dilemma the Government is Facing
In 2012, the FSS announced the abolition of the quasiinvestment advisory service system because unfair trades by the advisors occurred frequently. Nonetheless, the revision of the Financial Investment Services and Capital Markets Act still remains unclear because the government faces a dilemma. Despite various problems from quasi-investment advisory companies, the system plays a positive role of preventing small private investment advisory corporations from trading under the table. The government is able to grasp at least the current state and the number of the enterprises through legalization and reporting system.
According to Yeongnam Ilbo, investment experts say that “more and more people, especially politicians, are claiming that the system be improved immediately. Improvement, however, cannot be a practical solution and no one knows how long it would take. Therefore, in order to prevent losses, investors should make decisions prudently. They should look for crucial information such as the work experiences of the quasiinvestment advisors, and consider the amount of profits they might obtain.”
• What should investors do?
Because of the dilemma the government is currently facing, the role of individual investors is becoming more significant. Consumers should examine the terms and conditions of the business before arranging a contract. Moreover, before signing a contract, it is crucial to check the cost that clients must bear when terminating the arrangement before expiration. The contract period must be as short as possible in order to prepare for defaults like suspension of services. In addition, it is necessary to use credit cards for payment records.
Moreover, people can seek help from the FSS by using the reporting center that deals exclusively with losses related to quasi-advisory services. In fact, the FSS established the center on its homepage on September 26, in order to prevent cases like Lee’s in the future. The government endorsed investors’ direct claims of cases of loss by utilizing the report center. When irregular acts are suspected, it would be prudent for the clients to contact the FSS through the homepage or phone calls. Submitting evidence like voice or video recordings when charging companies helps the FSS inspect specific corporations efficiently. In addition, the FSS is planning to open a counseling center that handles quasi-investment advisory services soon. It is desirable for the victims to actively seek for assistance from the government.
It may seem cliche to say that general investors should be shrewd and cautious in order to lessen the loss caused by quasi-investment advisory companies. It is, however, extremely difficult for the government to simply abolish the system because of the critical role it is taking in our society. Considering this reality, the avoidance of negative situations highly depends on consumers. We should be wiser and brighter when arranging contracts.