The challenge: Darren Snyder
The regulator ASIC is warning retail (smaller) investors to be cautious when investing in fixed-term products that directly compare themselves to bank term deposits. It is seeing a surge in marketing and advertisements for fixed-term investment products that portray themselves as “alternatives” or “substitutes” for term deposits when this is hardly the case.
If these products really were like term deposits, they would be well capitalised, protected by the government guarantee (up to $250,000 per investor) and supervised by APRA. ASIC says investors should be cautious about products that are backed by concentrated portfolios of higher-risk unlisted and illiquid (can’t be sold quickly) assets.
The saying “if it seems too good to be true, it probably is” works as a rule when it comes to identifying risky investments. That’s why it’s always good to consult a financial adviser before you invest in a product that you might not totally understand.
“If an investment product offers higher returns than a term deposit, it is more likely than not to be higher risk,” says ASIC deputy chair Karen Chester. “In the current uncertain and volatile markets, higher-risk investment products are, more than ever, not for everyone. Especially for smaller investors … when they are not investing as part of a diversified portfolio.”
She says products spruiking even a 2% or 3% higher return than a term deposit represent significantly higher risk. ASIC is also seeing products offering only marginally higher returns with much higher risk profiles.
“Investment products marketed to consumers should be ‘true to label’. Products should not be marketed as having features like low risk of loss, regular returns or easy access to withdrawals unless the product issuer has reasonable grounds to believe they have and will continue to have such features through the economic cycles.
“When choosing an investment product, carefully assess if the product is appropriate for your circumstances.”
So how do you know what’s appropriate? Knowing your investment risk profile will go a long way to determining what, when, how and why you or your adviser choose certain investments.
Troy Theobald, financial adviser and director of financial services at Robina Financial Solutions, says a good adviser will ask the right questions and not just give you the “guided tour” of your risk profile.
This includes asking how you think you would react and feel if a major financial event such as Covid-19 happened, and what it would mean for you. Your risk profile should be reviewed at least every six to 12 months.
“A structured approach with adequate cash buffers that quarterly re-weights the client’s individual portfolio should allow them to hold their risk profile and actually benefit from market downturns,” says Theobald.