Investors desperately looking for somewhere to put their funds to outstrip inflation, or looking to regain some lost ground following the turmoil in the markets in an effort to restore the prospect of a comfortable retirement, would bend over backwards to find a secure, high yielding investment. With bank accounts yielding less than inflation and with 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 scepticism and often, the phrase “Well, that is just too good to be true” is used and the investment would be dismissed as folly. Yet, the above investment returns are genuinely available from investment products that have a long track record of success and a mountain of due diligence material to support them.
So why are these type of investments dismissed without much more than a casual glance?
The main reason why such returns are dismissed as being “too good to be true” is because the comparisons are being made with traditional investment routes such as savings accounts or collective funds, gilts & corporate bonds, which in recent history have generally produced far lower returns. But this is an unfair and illogical comparison. The investments such as the one I mention 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 really is like comparing apples with pears.
But there is understandable concern and mistrust out there as we fairly regularly hear of alternative investments that have gone wrong.
Often the promised returns have been exaggerated and the fundamentals of the investment have just not been in place. One such “hot investment” has been the carbon credit investments where, in the final conclusion, the returns were based on the market price of a carbon credit, which was severely hit by the industrial slowdown.
There was a couple of recent examples of a forestry/agricultural products that had gone wrong. One, mainly due to the wrong choice of crop – it just did not grow well enough in the chosen location, and the other, because of disputes over land ownership.
Alternative investments are regularly discounted by advisers and institutions as they are not ‘Regulated Investments’.
But why? It does not make sense, and this is why.
Regulation will offer some protection in the case of miss-selling or fraud, or if a bank was to go bust, but it probably will not offer any protection in the case of poor performance. A ‘buy to let’ is an unregulated investment, 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 be offering the right fundamentals based on your own thoughts, research or (even) our personal hunches or preferences. We can accept that sometimes we just have to make our own decisions based on our values and our own understanding of risk. We would like control over our own destiny and will accept responsibility. I am asking you to consider using the same thought process when considering other unregulated investments.
One of the main reasons for an early dismissal, is the reluctance of financial advisers to grasp the concept of alternative investments. There is talk by the Financial Conduct Authority (FCA), that Independent Financial Advisers (IFA’s) will have to have a knowledge of alternative investments if they will be able to call themselves as true Independent Advisers. But I expect it will still remain very difficult for a potential investor to be able to find an IFA who could give a knowledgeable and objective view of a non regulated investment, particularly those investments that are “based” elsewhere in the EU or further afield. IFA’s will continue to be focussed on UK Regulated Investments in the advice they give.
As a former regulated adviser for 12 years, I understand how they feel when they come across and 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, and 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 in my view, somewhat nervous about sticking their head above the parapet or may be banned from actually doing so 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?
Well, the best way of assessing the viability of these returns is by looking at the individual investment circumstances and business plans of the investment product providers. Has the chosen crop 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 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?
Examination of these factors may reveal sound business plans with and a track record of success. Furthermore, they may also provide protection by means of ownership and/or 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.