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