In­vest in un­reg­u­lated prod­ucts only if you can af­ford to lose the money

Weekend Argus (Saturday Edition) - - PERSONAL FINANCE -

Don’t, do not, and I re­peat, don’t, do not in­vest in or through un­der-reg­u­lated com­pa­nies that are not listed on a for mal stock ex­change or make in­vest­ments that re­quire you to give loans to an un­listed en­tity. The only ex­cep­tions are if:

You are in­vest­ing money that you can af­ford to lose; or

You have checked ev­ery as­pect of the “in­vest­ment” to en­sure that you un­der­stand all the risks. Do not take the word of the per­son who flogs you the prod­uct that it is safe. Such peo­ple are nor­mally paid an ex­traor­di­nary com­mis­sion and so are un­likely to point out the down­sides of the “in­vest­ment”.

To­day, Per­sonal Fi­nance re­ports on yet more un­listed, un­der­reg­u­lated “in­vest­ments” that have gone awry.

This week, it is the in­vest­ment ve­hi­cles of Dy­namic Wealth and the im­ploded Cor­po­rate Money Man­agers. Last week, it was Platinum In­vest­ments – a clear case of a scam – which sold shares in a non-ex­is­tent com­pany. Last month, it was three prop­erty syn­di­ca­tion com­pa­nies: City Cap­i­tal, Div­i­dend In­vest­ments and King Fi­nan­cial.

The three prop­erty syn­di­ca­tion com­pa­nies are only the most re­cent in a long list of prob­lem­atic prop­erty syn­di­ca­tions. The prob­a­bil­ity that prop­erty syn­di­ca­tions will fail in­creases when:

The prop­er­ties are given ex­ces­sively high val­u­a­tions; Ex­ces­sive costs are taken out; Ex­ces­sive com­mis­sions are paid; and

An eco­nomic down­turn sees de­faults on pur­chases and rentals.

WHY REG­U­LATED IS BET­TER

I am not say­ing that all un­listed en­ti­ties are scams or even that all of them have un­ac­cept­able lev­els of risk. There are many sto­ries of suc­cess­ful un­listed en­ti­ties. For ex­am­ple, many of South Africa’s blue-chip com­pa­nies – of which Rem­brandt is the prime ex­am­ple – started as un­listed com­pa­nies. But you must un­der­stand the risks you are tak­ing.

And I am not say­ing that reg­u­lated prod­ucts have no risk. Of course they do. We have only to look at the col­lapse of linked-in­vest­ment ser­vices provider Ova­tion, or at the im­plo­sion of Fed­sure, or at how nearly ev­ery unit trust fund has been af­fected by the in­vest­ment mar­ket melt­down. How­ever, the risks are lower when prod­ucts are reg­u­lated, be­cause it is less likely that things will turn sour. And if they do, you have a bet­ter chance of ob­tain­ing re­dress.

For ex­am­ple, there are plenty of al­ter­na­tives to prop­erty syn­di­ca­tions, with all their po­ten­tial pit­falls. The al­ter­na­tives in­clude:

Prop­erty com­pa­nies listed on the JSE;

Prop­erty unit trusts listed on the JSE;

Unit trust funds (col­lec­tive in­vest­ment schemes) that in­vest in prop­erty com­pa­nies listed on stock mar­kets here and abroad;

Par­tic­i­pa­tion mort­gage bonds, which are reg­u­lated in ter ms of the Col­lec­tive In­vest­ment Schemes Con­trol Act; and

Life as­sur­ance en­dow­ment poli­cies that have prop­erty in their un­der­ly­ing in­vest­ment port­fo­lios.

I find it amaz­ing that fi­nan­cial ad­vis­ers, of­ten driven by ex­traor­di­nary com­mis­sions, are still pre­pared to risk your sav­ings and their fi­nan­cial ser­vices provider (FSP) li­cences by plac­ing you in un­reg­u­lated prod­ucts at ad­di­tional risk. It is even worse when the vic­tims are pen­sion­ers.

Ad­vis­ers should not think that their ques­tion­able ac­tiv­i­ties will con­tinue to go un­no­ticed in the light of what seems to have been a lack of vigour on the part of the Fi­nan­cial Ser­vices Board (FSB) in ap­ply­ing the full force of the Fi­nan­cial Ad­vi­sory and In­ter­me­di­ary Ser­vices (FAIS) Act.

The Act, which was fully im­ple­mented from Oc­to­ber 2004, is still com­par­a­tively new.

BAD AD­VICE UN­DER THREAT

But things are chang­ing:

The FSB, which is re­spon­si­ble for is­su­ing FSP li­cences (and, more im­por­tantly, for with­draw­ing FSP li­cences), is get­ting tougher; and

An in­creas­ing num­ber of com­plaints are be­ing scru­ti­nised by the fine le­gal mind of Charles Pil­lai, the Om­bud for Fi­nan­cial Ser­vices Providers (the FAIS om­bud). But Pil­lai is only per­mit­ted to deal with com­plaints where the bad ad­vice was given af­ter Oc­to­ber 2004.

The best thing about the FAIS om­bud is that once he has de­cided that you have been ad­vised in­ap­pro­pri­ately, he can rule that you be com­pen­sated. His rul­ings are equiv­a­lent to an or­der of the High Court.

If you are a vic­tim of one of the in­vest­ments that has col­lapsed re­cently, I would sug­gest that you take your com­plaint to the om­bud, par­tic­u­larly if:

The risks of the in­vest­ment were not fully dis­closed to you;

You were not told that your money was be­ing placed in an un­reg­u­lated prod­uct;

All the al­ter na­tives to the un­reg­u­lated prod­uct, such as those to prop­erty syn­di­ca­tions, were not fully ex­plained to you; and

The com­mis­sion paid to the in­ter­me­di­ary was not fully dis­closed to you and you did not agree to it.

The prin­ci­ple that in­ter me­di­aries can be pun­ished for dis­pens­ing bad ad­vice and bad prod­ucts was es­tab­lished long be­fore the cre­ation of the of­fice of the FAIS om­bud.

It was firmly es­tab­lished in the 1997 court case Durr ver­sus Absa that an ad­viser has a duty to con­duct a proper due dili­gence. The case con­cerned an Absa bro­ker who ad­vised a client, Va­lerie Durr, to in­vest in the Master­bond scheme.

Most peo­ple can­not af­ford to go to court to seek re­dress in the event of bad ad­vice, par­tic­u­larly if they have been fleeced as a re­sult. This is the rea­son the FAIS om­bud ex­ists: it costs you noth­ing to com­plain.

Hope­fully, as Pil­lai makes more and more rul­ings, it will fo­cus the minds of care­less, greedy and/or un­scrupu­lous in­ter­me­di­aries. While on the sub­ject of reg­u­la­tion, in terms of the FAIS Act, fi­nan­cial ad­vis­ers are obliged to tell you whether they are reg­is­tered FSPs or rep­re­sen­ta­tives of an FSP.

They must also tell you what cat­e­gory of prod­uct/s they are li­censed to give ad­vice on and sell. This does not mean, how­ever, that regis­tra­tion is a stamp of ap­proval for any prod­uct or any prod­uct provider. It is not.

Do not take com­fort from the fact that most prod­uct providers high­light on their mar­ket­ing ma­te­rial that they are li­censed FSPs.

Dy­namic Wealth not only trum­pets the fact that it is a li­censed FSP but also that it is a mem­ber of the As­so­ci­a­tion for Sav­ings & In­vest­ment South Africa.

Most prop­erty syn­di­ca­tion com­pa­nies also trum­pet the fact that they have FSP regis­tra­tion.

The prob­lem is that the li­cence may have lit­tle to do with the main prod­uct be­ing sold.

For ex­am­ple, the li­cence may be re­stricted to risk life as­sur­ance, which has noth­ing to do with prop­erty syn­di­ca­tions.

The reg­u­la­tion of prop­erty syn­di­ca­tions does not fall un­der the FSB but (vaguely) un­der the Depart­ment of Trade and In­dus­try.

The sooner the prac­tice of mis­lead­ing in­vestors into a false sense of se­cu­rity is banned, the bet­ter.

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