Consumers urged to be aware of bogus investment opportunities

08 December 2011 Gavin Came, Chairman of the Financial Planning Committee at the Financial Intermediaries Association of Southern Africa (FIA)
Gavin Came

Gavin Came

With tough economic times facing most South Africans, many are trying to find an affordable investment product that will guarantee them a high return, but if they haven’t done their homework they could be heading for financial ruin by falling prey to a bogus investment opportunity.

According to Gavin Came, Chairman of the Financial Planning Committee at the Financial Intermediaries Association of Southern Africa (FIA), there are so many bogus investment schemes being advertised that new cases emerge each week. “It’s vital to conduct thorough background checks before considering investing any amount of money. The best route to finding a sound investment product is to speak to an accredited financial advisor, who is qualified to advise on authorised investment products that are best suited to each individual’s budget, investment needs and financial lifestyle.”

“Remember too that institutional risk (the risk that the business you are investing in will fail) is somewhat limited if you stick to businesses that are authorised by the Financial Services Board (FSB) or the Reserve Bank.”

“Some consumers have fallen victim to investment scams advertised in newspapers thinking the opportunity must be real since it has appeared in a respectable newspaper. Consumers must realise that anyone can place an advertisement in a newspaper or magazine, it is not the responsibility of the newspaper to verify the validity of the product advertised, the onus is upon the potential investor to do their research.”

Came says there are a number of ways to spot a bogus investment opportunity. “Usually any product offering an out of the ordinary return should be looked at carefully. For example, any product offering a guaranteed return, especially if it is above about 6%, should trigger an alarm bell as a yield higher than this normally requires some risk or some form of lock in of your funds.”

“An unplanned or unexpectedly volatile investment can have similarly disastrous impact on one’s finances if one doesn’t know what they are doing. That is not to say that all volatility is to be avoided, one has to take on volatility or risk in order to beat inflation, but it is critical that one understands the risk of the product to ensure it is appropriate to their needs.”

“A good way to find out more information about an investment product is to research the company and product on the Internet, such as: the ownership structure; whether it is listed on the JSE; the length of time in business; track history and size of portfolio(s); people in management, etc. Next, look for valid contact details and see if you can setup a meeting to discuss the product and company history,” says Came.

He says that when deciding whether an investment opportunity is appropriate, it is important to measure the proposed product against your financial plan. “Ask yourself: where and how does this proposed investment fit into the strategy my planner and I have agreed? Is it a shorter term product or a product for my old age? Is it a policy of insurance? Does it have liquidity i.e. can I get my money back on notice? If there is no or limited liquidity, you should seek advice.”

“A final important factor to remember is that you must determine how your funds will be held and invested by the institution you are considering. Find out whether the funds are in a legally protected vehicle like a trust or retirement fund or are they held directly by the institution. The question to ask is: if that institution fails will you lose your funds? Or will you wait many years to recover your money? Corporate failure in the financial services industry always leaves very unhappy people in its wake; while it is not always possible to predict failure with certainty it helps to ensure that you get the best possible advice to avoid this occurring,” concludes Came.

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