Full scheme ahead

Published in the Herald Sun, June 2015 by Karina Barrymore

If it sounds too good to be true, then the chances are it probably is.

A surge of risky investments, not seen since the global financial crisis, is again flooding the market, with finance and investment experts warning against the renewed threat.

“A wave of low quality investments, including hedge funds, retail property syndicates and initial public offers — trying to raise money on the ‘promise’ to invest — have started to reappear on the market,’’ wealth company William Buck director Adrian Frinsdorf says.

“It’s a bit frightening. “Many of these type of investments were frozen during the GFC and I thought that was the death of them.”

The surge is being driven by financial product manufacturers trying to get a slice of more than $900 billion stashed away in cash and personal bank accounts by Australians.

However, these savers and investors, too, are also chasing higher returns as falling interest rates have cut their income from term deposits and other cash investments, Mr Frinsdorf says.

“There’s so much cash out there. “Investors are comparing everything to term deposits — they get 3 per cent for a term deposit but the promise of 8 or 10 per cent with propertyrelated investments.

“They’re chasing yield by putting money in to illiquid investments through a range of second-tier products,” he says.

Property investments, in particular, are where some of the riskiest products are showing up.

“The way they are packaged, they look very attractive and Australia has always had a love affair with property.

“But investors shouldn’t forget that these products caused a lot of financial stress during the GFC.”

However, the swarm of new investment offerings is not limited to property, with most investment sectors experiencing a rise in secondtier or higher risk products.

Morgans Financial senior analyst Ivor Ries says there has been a noticeable increase in high risk financial products.

“Record low interest rates have created an opportunity for all the worst kind of investment spruikers,” Mr Ries says.

“We are now seeing a flood of investment ‘opportunities’ that offer high rates of return but are very risky and should be avoided by all investors.

“Unfortunately, unscrupulous promoters, of generally unlisted investment schemes and products, target the least sophisticated and small investors who cannot afford to lose any part of their capital.”

Fund manager Wealth Within also says the honey pot of cash in Australia is attracting significant attention from overseas schemes.

“We are hearing now from a lot of retail investors that they are being bombarded with offers for things such as foreign exchange and binary options — both extremely high risk,’’ Wealth Within founder Dale Gillham says.

“And some appear to be tempted by these exotic products because of our low interest rates and their search for better returns.

“Non-Australian companies are also heavily promoting investments to Australians and this is adding additional risk.

“If a company is based offshore there is very limited recourse, if any, from Australian regulators and laws.’’

One of the most important things to consider when assessing an investment is how quickly it can be sold, the experts say.

“How freely are you able to sell when you want to get out?

In some investments the liquidity can be very restricted, requiring you to only sell to the people you purchased from or to others in the same scheme,” Mr Gillham says.

“The fine print of the offer documents will detail this information, how to invest such as buying units and how and when you can redeem those units.

“For example some of the investments before the GFC locked investors in for five years and they could only sell to another investor in the scheme.”

According to William Buck’s Mr Frinsdorf, even a small investment in one of these risky products can have a big impact.

“The problem with chasing yield only is that the level of quality in your portfolio will go lower and lower. It also opens you up to the risk that if there is another GFC-type event, your money will be locked up or at worst, lost.

“While blue chip investments are getting more expensive, there’s a reason for that. They offer quality along with solid returns,” Mr Frinsdorf says.

Lonsec Stockbroking chief executive John Murray also warns investors not to take unnecessary risks.

“In low interest rate environments, investors can be tempted to compromise quality in the pursuit of yield.

In the end, however, a quality portfolio of great stocks, invested — not traded — is the tried and tested path,” Mr Murray says.