License article

Take steps to avoid bad moves

Big promises, poor returns? Annette Sampson looks for the telltale signs of a dubious investment.

We've all been tempted by them. Enticing investments that seem to make perfect sense at the time but end up leaving us disillusioned and out of pocket.

Australia has proved fertile hunting ground for conmen promoting investment scams. The Australian Competition and Consumer Commission's latest scam report found Australians reported losses of $85million to scamsters last year. This figure is likely to be on the low side because many scams go unreported.

But it's not just the scamsters you need to watch out for. Dud investments come in all forms, from the supposedly safe mortgage or fixed-interest funds that lend your money to high-risk property developers, to outright frauds and genuine investments that just don't live up to their promises.

So, how do you spot an investment lemon before you commit your hard-earned dollars? The adage that ''if it sounds too good to be true, it probably is,'' has been used so often it has become a motherhood statement. But, like many such statements, it holds more than a grain of truth.

Money went in search of the top 10 signals that should set off the warning bells.



OK, we're not suggesting you avoid the dogs by focusing on investments that provide the lowest returns. However, the senior executive for financial literacy for the Australian Securities and Investments Commission, Delia Rickard, says a hallmark of scams and dud investments is that they generally offer returns well above market rates and usually claim to be low-risk.

''People need to understand that higher returns in all probability come with higher risk,'' she says. ''You have to do your homework on the risks associated with the product and know what to look out for.

''We're seeing a whole range of products at the moment that promise high returns and are incredibly complex. Some are almost like gambling, such as CFDs [contracts for difference].''

The chief investment officer at Select Asset Management, Dominic McCormick, says the key is to look at returns from comparable investments. ''You need to develop a sense of what to expect from different strategies and asset classes,'' he says.

It's about comparing apples with apples. A blue-chip share might bring a higher return and higher risk than a bank deposit but that doesn't mean it's a dud investment. However, a ''safe'' debenture claiming a similar return to that of the blue-chip share probably should set the alarms ringing.

The managing director of van Eyk Research, Mark Thomas, says a mortgage fund that pays more than 2 percentage points above the big banks' lending rate has to be higher-risk because it is lending to people who can't borrow from standard lenders.

Don’t buy something until you can confidently explain to a friend what it is and how it works.

''They're marking the price of the loans up because they know they're higher-risk and putting all those loans together into one product doesn't mean they won't still be high-risk,'' he says. ''If, at some stage the system becomes stressed, they'll all go down together.''

Rickard says ASIC's Moneysmart website ( is a good place to start because it provides indicative returns and risks for different types of investments, so people can find out what to expect - and what sounds too good to be true.


If this is a ''once-in-a-lifetime'' offer and you need to get in before you miss out, you would probably be better off running for the nearest exit.

This is a true story. A property developer in the 1990s boasted of selling a truckload of apartments off the plan, all at a single ''seminar''. His trick? When told they could sign up for a deposit at the end of the presentation, most attendees went home to think about it. But when told there was a limit of two a person to give everyone a fair go before they were sold out, people rushed to join the queue.

The managing director of WLM Financial Services, Laura Menschik, recommends always seeking advice before investing, particularly if you have been approached, and trying to find out who you are dealing with and whether they are genuine. And if you're thinking of investing a large sum of money with someone you don't know or in something you don't understand, seek an independent expert opinion.

''People don't always want to pay for advice but it's like getting a pest inspection when buying a property. Not getting one is a risk most people wouldn't even consider,'' Menschik says.

If someone phones you out of the blue, Rickard says, hang up and check whether they have an Australian financial services licence and whether they're on ASIC's list of cold callers selling fake deals.

''[Fakes] these days are really glossy, really well organised and sophisticated,'' she says. ''But if they're not licensed you have no protection if something goes wrong.''

Publicity blitzes can also be a warning sign.

''[Failures] like Estate Mortgage, Pyramid Building Society, Centro and Austwide did a lot of advertising before they collapsed,'' Thomas says. ''They were trying to create a flow of money [to keep them afloat].''


If you don't understand it, don't invest in it. This is another rule of thumb that can help investors avoid the duds.

There are plenty of investments around that claim magic formulas but, like the debt products offered in the lead-up to the global financial crisis, they can hide all sorts of potential time bombs.

''Too much structuring is where people came a cropper in the GFC,'' Thomas says. ''People were being too bloody clever.''

Rickard says investors all too often think the shortcoming is with themselves if they don't understand an investment. ''But even here at ASIC, we keep seeing things that make us all scratch our heads. You shouldn't be embarrassed.

''Don't buy something until you can confidently explain to a friend what it is and how it works.''

McCormick says while there are complex products that are not duds, you need to find someone with the expertise to understand the role they can play in a portfolio and whether the complexity works or is merely hiding something.

Thomas says his warning bells start ringing when products have a high leverage and/or a very narrow focus.

''If someone is putting out a product with a very narrow focus and it's geared three times with a capital guarantee, it just sounds awkward,'' he says. ''The cost of the guarantee must be enormous. I'd be very wary of exotic structures.''


There's an old joke that investors should avoid any investment with a former political leader or prominent sportsperson chairing its board or pushing it as an investment. Like most jokes, this one is based on truth.

''These people are put in to appeal to investors,'' McCormick says. ''Often they're as conned as the investors.''

He says it is the people running the investment who are crucial. They should be proven investors or managers, not just marketers.

McCormick says one of the warning bells that should have gone off with Astarra and Trio was that those running those funds arrived in Australia and immediately started offering products.

''You need to have a sense that the people involved are experienced and have a reputation for ethical conduct and integrity,'' he says.


Thomas says the alarm bells should also start ringing when people throw out the old investment rules and try to tell you the world has changed. The classic example of this was the dotcom bubble, when people threw out the old valuation matrix for companies and tried to pretend earnings didn't matter.

''Guess what?'' he says. ''They did. Earnings are what allow companies to pay dividends and if you're not receiving dividends, you're not getting anything back from the company. We look for companies with free cash flow and attractive real assets. If you do that, you will avoid the rubbish.''


As boring as it sounds, you need to do your homework to avoid the lemons. Get hold of a copy of the prospectus or offer document and read it.

''You need something tangible,'' Menschik says. ''Look for real documentation, not just a promotional piece of paper and make sure you understand it. If there's an asset such as property involved, does it really exist?''

Menschik says extra care should be taken with private schemes about which information is not widely disclosed. Even outright scams can seem impressive at first glance.

Menschik says it is easy to be hoodwinked by slick promotional material, so do your own research. ''Just because someone has a glossy website and says they have 30 years' experience doesn't make it true.''

Thomas says there is also such a thing as too much information. ''In the case of Estate Mortgage, [the manager] provided heaps of stuff but it was all lies,'' he says.

Rickard says Moneysmart has a good video on what to look for in a prospectus and has issued disclosure guidelines and guides for several types of investments to help would-be investors assess the risks.


They say past performance is no guide to future returns but Thomas says there are still plenty of investments are still sold off a recent trend or performance that may well reverse.

The managed investments industry is as susceptible to fads as the fashion industry and history is littered with investments launched at the top of the market to take advantage of past returns. Just consider the proliferation of technology funds at the top of the dotcom bubble, property funds in the property boom and emerging market funds when Asian markets were all the rage.

''It's often safer to look at what has been doing poorly and to ask whether it's a cyclical thing that's likely to turn around,'' Thomas says.

Menschik says it is critical to beware of fads. ''I've seen people who have gone into the next big thing to try to recoup the losses they made from the last next big thing,'' she says. ''There will always be some new beaut fad on the horizon.''


Then there are the investments that simply can't deliver what they promise. Thomas says claims of diversification often fall into this category.

''Often, when there is a slowdown, all things go down together,'' he says. ''And that's the sort of market we're in.

''The investments that genuinely provide diversification are pretty limited. All shares will fall if there is a shock, and any diversification benefits you get by buying small companies or emerging markets are not there if there is market weakness.''

The message? Look for investments grounded in reality rather than making big promises.


Where people have really been hurt, Menschik says, is when they have been convinced something is so good they've put most or all their savings into it. ''People are told they can't lose so they cash up everything to get in,'' she says.

But if something goes wrong, you won't just lose a portion of your savings. You'll lose the lot.

Sure things don't exist.