Which emotion drives us at times when we are vulnerable that often leads to financial disaster? If you said fear, you would be nearly right, that is secondary. The emotion that scammers and promoters of unsound products play on is greed.
The poor, that is most of us, often have fantasies of getting a windfall. And when that fantasy is presented in writing (by email), no matter how far-fetched it seems, we want to believe it. Someone in the world has written to us claiming that: a) we can help them transfer their millions to our bank account as they are receiving an inheritance, b) we have won a lottery and only need to pay some fees to receive it, or c) there are some small US company stocks to buy which will prove profitable.
As we have seen lately on Australia’s 60 Minutes and Current Affairs programs, these types of email traps are run by unsavoury types in Nigeria, Thailand, and other poor nations, sometimes with links in Australia.
A Trap for Fixed Interest Loving Retirees
Another type of trap is disguised as a good investment. I’m talking about promoters of unsecured notes and mortgage debentures offering high-yield fixed interest. You may have read about Westpoint, Fincorp and Australian Capital Reserve collapsing. There are still many other similar companies operating in Australia, all unrated by Morningstar.
The product looks like a term deposit and is promoted as investing in “brick and mortar”. But there are still retirees out there that know little about the product they are investing in. Nor do they realise that their investments barely keep a very poorly structured company alive, with advertising taking a quarter of all profits just to bring more money in to keep it afloat (as in the case of Fincorp before it sank). Fincorp’s unsecured noteholders are owed a total of about $23 million, which is gone, and secured noteholders are owed a total of $178 million, and they may see about 30c in the dollar.
While $1 billion dollars of investors money has gone down in the three companies’ collapse, what about the remaining $8 billion in high-risk debentures? If ASIC clamp down on the promotion that these other companies do, then they might fold like a house of cards too.
While ASIC’s FIDO website has warnings on all types of scammers, schemes and unsafe investments, sometimes these financially unrated companies (with their TV and newspaper advertising) and financial advisers with greedy pockets get naive investors’ attention first.
Don’t let it happen to you. Be sure of what you are investing in by doing your own research.