Identifying financial flimflam
Risk comes in many forms. Investing offers the potential for growth, but it’s fraught with financial risks that can undermine even the most well-considered strategies. Among the most prominent, and immediately obvious, is market risk – every day the market value of assets, and investors’ portfolios, fluctuate off the back of economic or political events. Less obvious, but no less impactful, is inflation risk, which quietly erodes purchasing power over time. And, if you want to get out of an asset that is not performing, liquidity risk can trap you in assets that are hard to sell. Then there are two to be mindful of that are different but related: credit risk and counterparty risk. The former reflects the possibility that a borrower may default on its debt, while the latter occurs when one side of a transaction fails to fulfil their obligations. The financial crisis of 2008 provided one of the most famous examples of both, when Lehman Brothers collapsed. Not only could it no longer honour its obligations to bondholders, but those who relied on the bank to act as a counterparty to trades saw billions frozen in bankruptcy proceedings. Together, these key risks (and a handful of others) form a complex landscape where vigilance and informed decision-making are essential to avoid bad investments.
There are also non-financial risks, such as falling victim to an investment scam. In these cases, there was never an investment opportunity, only a ruse to dupe you into parting ways with your cash. Wealth managers are good at filtering out these scams through regular training and years of knowledge and expertise, but we find that even informed private investors can still be susceptible to questionable schemes. Only this week, BBC Sport revealed the millions lost by Premier League footballers who had fallen foul of fraudulent advisers and dodgy investments. This article aims to help you ask better questions and keep you away from the questionable investment schemes you may come across.
As a starting point, the UK’s Financial Conduct Authority (FCA) has a website (https://www.fca.org.uk/scamsmart) to help you spot scams. We also have the Financial Services Compensation Scheme (FSCS), which will give you compensation up to £85,000 if you are sold an inappropriate investment by a firm regulated in the UK by the FCA. The scheme will not compensate you for losses from market movements, nor if you buy an investment from an unregulated firm, but it can give you some reassurance that your investment is a legitimate one if it is recommended by a regulated firm. You should therefore check that the company backing your investment is registered with the FCA on (https://www.fca.org.uk/firms/financial-services-register). If the firm is not registered with the FCA there is a good chance it is a scam, and you will not be able to claim under the FSCS.
Even if you find a legitimate-looking investment, it could still be a scam. Do not give in to pressure from a salesperson to make a quick decision, whether it’s online, on the phone, or in person. Be sure that you fully understand the investment and that the information is clear and relevant. Crucially, don’t be afraid to seek clarification as often as is necessary if you do not understand your investment. A feature of an investment scam is that they are easy to buy, but getting your money back is difficult. Check that you can sell easily and that there are no penalties for an early sale.
Sometimes a salesperson will ask you to certify yourself as a “sophisticated” or a “high-net-worth” investor. There can be legitimate reasons for this, but you should be aware that you are signing away many of your regulatory rights and protections, including the right to go to the Ombudsman and the right to claim compensation under the FSCS.
There are a lot of financial influencers and celebrity endorsements online, and they carry significant weight with investors. There are some very good “finfluencers” but check the FCA Register as nearly all are unregulated, and as such you cannot claim compensation under the FSCS if you are misled. In the worst cases, there have been instances where celebrities – whether they knew it or not – were used to front outright scams, and the FCA announced a crackdown last year.
Similarly, regulators and governments do not recommend investments, so avoid schemes where the marketing materials state or allude to some sort of official endorsement. There are government schemes that subsidise some projects, typically green projects, but bear in mind that the subsidies are there because the investments are otherwise unprofitable, and if the subsidy changes you could be left in a loss-making investment that is hard to sell at any price.
High projected returns can coax many of us into an investment, but it is difficult to judge what is a reasonable level of return, and what is high. Over time, the best-returning investments have been equities, which have returned, on average, 9.7% a year since 1900 before fees and costs. A 10% return may strike you as reasonable, but it is high, particularly if it is after fees. Ask yourself: what is the catch? Salespeople will typically show historical returns, but they are probably showing you the returns in the most favourable light, possibly excluding investment management fees, local taxes, and any up-front costs of associated with the investment.
You may encounter some unregulated investment schemes that claim to be investing in property overseas, likely in a region that is very lightly regulated. This not only takes you outside the protection of the FCA and the FSCS, but introduces liquidity risk, exposure to foreign taxes, very high charging structures, substantial local legal bills, local planning restrictions, and foreign exchange risk.
There are questionable investment schemes, and there is just outright fraud. You may well encounter bad actors looking to steal your money or, worse, your identity. These non-financial risks are arguably more serious, as a criminal who has stolen your identity may be able to masquerade as you, opening bank accounts, making payments and running up credit. Always be on your guard, and be careful giving away your personal details, especially your bank details.
You would not buy a new home without seeking professional advice and help, and the same is true for your investment portfolio. If you come across an investment proposition that interests you, feel free to pick up the phone and run it by us first – before you part ways with your hard-earned cash.
Please be aware that the value of investments may go up or down and you may receive back less than you invested originally. Past performance is not a guide to the future.
This document contains general information only and does not provide any advice or guidance specific to your personal circumstances.
Callanish Capital is authorised and regulated by the Financial Conduct Authority to manage investments but does not provide Financial Planning or Investment Advice. Please refer any such queries to your Financial Advisor.
This email and any accompanying attachment are issued by Callanish Capital Ltd, a company registered in England and Wales under company number 13182424. Registered Office: 45 Pont Street, London, SW1X 0BD.
Callanish Capital Ltd is a Discretionary Fund Manager, directly authorised and regulated by the Financial Conduct Authority (“FCA”) under registration number 955992.