Investors desperately looking for somewhere to put their funds to outstrip inflation or regain some lost ground following the turmoil in the markets to restore the prospect of a comfortable retirement would bend backward to find a secure, high-yielding investment. With bank accounts paying less than inflation and traditional stocks and share Funds and Bonds providing a fairly erratic recovery after many years of poor performance, it is not proving easy.
Yet, if potential investors saw a product that pays a fixed rate of interest of between 12% & 15% pa, they would treat it with skepticism, and often, the phrase “Well, that is just too good to be true” is used, and the investment would be dismissed as folly. The above investment returns are available from investment products with a long track record of success and a mountain of due diligence material to support them.
So why are these types of investments dismissed without much more than a casual glance?
The main reason such returns are dismissed as being “too good to be true” is that comparisons are being made with traditional investment routes such as savings accounts or collective funds, gilts & corporate bonds, which have generally produced far lower returns in recent history. But this is an unfair and illogical comparison. The investments, such as the one I mentioned above, have little or no link or relation to the markets that drive normal investments and savings, so why are they used as comparisons? It is like comparing apples with pears.
But there is understandable concern and mistrust out there as we regularly hear of alternative investments that have gone wrong.
The promised returns have often been exaggerated, and the investment fundamentals have not been in place. One such “hot investment” has been the carbon credit investments where, in conclusion, the returns were based on the market price of a carbon credit, which was severely hit by the industrial slowdown.
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A couple of recent examples of forestry/agricultural products have gone wrong. One, mainly due to the crop’s wrong choice – it did not grow well enough in the chosen location, and the other, because of disputes over land ownership.
Advisers and institutions regularly discount alternative investments as they are not ‘Regulated Investments.’
But why? It does not make sense, and this is why.
The regulation will offer some protection in the case of miss-selling or fraud, or if a bank were to go bust, but it probably will not offer any protection in poor performance. A ‘buy to let’ is an unregulated investment, and so is art, antiques, or wine investments. In these cases, we would not dismiss them because they are not Regulated, only because they would not offer the right fundamentals based on your thoughts, research, or (even) our hunches or preferences. We can accept that sometimes we must make our own decisions based on our values and understanding of risk. We want control over our destiny and will take responsibility. I ask you to consider using the same thought process when considering other unregulated investments.
One of the main reasons for early dismissal is the reluctance of financial advisers to grasp the concept of alternative investments. There is a talk by the Financial Conduct Authority (FCA) that Independent Financial Advisers (IFAs) will have to know about alternative investments if they can call themselves true Independent Advisers. However, I expect it will remain tough for a potential investor to find an IFA who could give a knowledgeable and objective view of a nonregulated investment, particularly those “based” elsewhere in the EU or further afield. IFA’s will continue to focus on Regulated Investments in their advice.
As a former regulated adviser for 12 years, I understand how they feel when they come across an alternative to what they normally deal with and advise on. Mistrust and poor performance within the financial world over the past few years have made them even more nervous about exploring new opportunities. With possible sanctions hanging over them for giving bad advice, it is understandable that they stick with the known, tried, and trusted, even where it may not be the best on offer. They are well-meaning, but I believe they are somewhat nervous about sticking their head above the parapet or may be banned by their employer. The result is that they may end up not giving the best (fully informed) advice.
So, faced with these concerns, how would an individual potential investor decide whether the published returns are balanced by acceptable risk?
The best way to assess these returns’ viability is by looking at the investment product providers’ individual investment circumstances and business plans. Has the chosen crop had a successful history in the area? Have steps been taken to counter disease, flood, drought, etc.? Are the land assets used already owned and unencumbered by debt? How is demand likely to be affected by the world and local events? Is the local government behind or opposed to foreign investment? How are the local rules and laws catered for in the business plan?
Examining these factors may reveal sound business plans with a track record of success. Furthermore, they may also protect using ownership and the first charge over a solid property asset. Any well-run alternative investment product will have a plethora of due diligence material to back it up, and this should be a good starting point for your research.