Avoid what's too good to be true
Everyone has heard horror stories about people who’ve lost their life savings after falling for the advice of some investment 'expert’ promising fantastic returns.
These are not urban myths, but real life stories which appear in the news on a weekly basis. At Reeves, we’ve a number of clients who, before they came to us, had fallen victim to scams or to plain old-fashioned bad advice.
There’s one golden rule which applies in all cases and that’s to ensure that your adviser is reputable, qualified and properly authorised. There’s nothing wrong with an adviser contacting you offering their services – we do that – but make sure that before you engage with them, you check them out thoroughly.
At Reeves, for example, we’re authorised and regulated by the FCA (Financial Conduct Authority) and that can be confirmed by looking at the FCA register, available online. We’ve been established for over 20 years and have numerous third-party references which can be viewed on Linked In. We only invest in regulated products, which are thoroughly researched by our team of research assistants, all of whom are graduates, and we never put all your money into one investment but always into a diversified portfolio.
The costs of not using a reputable and accredited adviser can be severe.
Bernard had some money in a pension scheme until he was approached by an adviser who persuaded him to invest £20,000 of it in a new over seas farm land. He was also advised that his investment should be administered through a SIPP (Self Invested Personal Pension), which is a vehicle really designed for the sophisticated investor, which Bernard isn’t. Years later, when Bernard came to review his pension arrangements, it was found that this investment had no value.
Another victim was Sheryl , who, although she was a solicitor, had no interest in investments. Over the years, she had put money into buy-to-let properties and had worked with a mortgage adviser, whom she had come to regard as a trusted friend. So, when he approached her and advised her to invest in a proposition, she agreed. This was in four separate investments, but they were all in the same company. She was also advised to put the investments in a SIPP.
Her adviser wasn’t authorised or regulated to advise on pensions and he received a large commission for signing Sheryl up to this scheme.
The company she invested in was legitimate, but the investment has not performed. Now, Sheryl can leave her money in it, in the hope that it does make a return, which is unlikely, or she can transfer out and lose £100,000.
As a result of this ill-advised investment in a single company, Sheryl has lost money, her early retirement plans have been knocked off course, and she’s distrustful of advice, which could handicap her in making a new retirement plan.
These are not isolated cases. In fact, our third example, Christophe, was one of 20,000 investors who got caught up in an established investment firm scandal in 2009.
Christophe was financially prudent, he knew and trusted his financial adviser and made the investment through the regulated Transact platform in an investment firm, a supposedly secure investment returning a supposedly guaranteed 10% a year. The investment firm was a regulated but complicated product, invested in a mixture of hedge funds, private equity, forestry, wine and Greek shipping. When it was suspended in March 2009, over concerns about its liquidity, it had £360m invested in it. At least, because it was regulated, investors received compensation, but they’ve had to wait years for payment.
There are a number of lessons to be learned from these experiences. We’ve emphasised the importance of checking out the credentials of your financial adviser but you should also take a long hard look at the investments they’re recommending. The old rule always applies: if it looks too good to be true – it probably is. Be highly suspicious of complex products: if you don’t understand them, you don’t understand where they can go wrong.
A common element in the above examples is that people invested ultimately in just one product or company. Never do that. You must aim for diversification in your investments, spreading your risk, so that losses in one sector can be balanced by holdings in another.
Also, ensure not only that your adviser is regulated but also that investments they recommend are regulated and authorised.
Finally, don’t be greedy. Greed leads to wishful thinking and gullibility.
It is important that no actions should be taken without first taking advice. Personal circumstances and an individual's appetite for risk means that the advice for one person may not be the same for everyone. The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up, and may be worth less than you paid in. Please note: This article has been published with the use of a fictional character to outline a case study.