12/04/19Protecting your money from inappropriate investment products
It’s natural to want your hard-earned savings to grow as much as possible. However, as the saying goes ‘if something seems too good to be true, it probably is’. When we hear about people losing their life savings, it’s often related to scams and fraudsters. However, recent headlines show that getting sucked into inappropriate products can be just as dangerous.
The case of London Capital & Finance
Over the last few weeks, you may have heard of London Capital & Finance; the scandal has been covered in the media all over the country.
The firm was authorised by the Financial Conduct Authority (FCA) and HM Revenue and Customs (HMRC) had granted the bonds it was selling tax-free ISA (Individual Savings Account) status. For most investors looking for somewhere to put their money, this would have signalled that their cash was in safe hands. Yet, this wasn’t the case.
More than 11,000 investors put £239 million into the bonds. It’s easy to see why people were tempted; London Capital & Finance were offering advertising interest rates of up to 8%. With interest rates still low following the financial crisis, this far surpasses what you can find at banks and building societies. Even when investing in the stock market and being exposed to risk, 8% returns would be considered highly optimistic and unlikely.
So, what went wrong? While the company pulled customers in with talk of bonds, only a very small portion of the money actually went into these investments. A large portion of the remainder went into high-risk investments, such as property developments in the Dominican Republic and oil exploration off the Faroe Islands.
The company collapsed at the beginning of the year, sparking an investigation at the FCA, as well as arrests by the Serious Fraud Office.
What happens now is still to be decided; it’s thought that as little as 20% of the money placed with London Capital & Finance will ever be recovered. Investors that have been affected currently can’t place a claim with the Financial Services Compensation Scheme (FSCS), though the scheme is working with administrators to identify where claims for compensation may be made.
Some investors stand to lose their life savings after investing through London Capital & Finance in a product that wasn’t appropriate for them. It’s a costly mistake in terms of losing money, but also the stress it would have caused and the aspirations that now can’t be achieved.
Choosing the right investments for you
The case of London Capital & Finance highlights why it’s important to carefully check investment offerings before you proceed, even when they appear to be secure. If you’re tempted by a lucrative offer but aren’t sure it’s right for you, these tips can help:
- Ask ‘is it too good to be true?’: If you’re left wondering how a product can offer such high returns and why everybody else isn’t snapping it up, it’s a sign that you should delve a bit deeper. If it sounds too good to be true, there’s probably a catch somewhere. Go through the document and available resources to understand all the ins and outs before you even think about parting with your money.
- Take the time to understand the products: While diversifying is important in investments, so too is understanding where your money is. Financial products can be confusing and complex, however, if you’re having a difficult time getting your head around how you’ll make money, take a step back.
- Don’t rush into any decisions: No important financial decision should be rushed, particularly ones that could affect your future financial security. Take your time to weigh up the pros and cons of an investment before you go ahead. If you feel like you’re being pressured into making a decision or there are time-sensitive offers, this should be a red flag.
- Do your research: With so much information available online, there’s no excuse for not doing a bit of research before deciding whether to invest. It can help you identify the pros and cons, as well as those signs it’s an investment to stay well away from. Of course, one of the challenges with this step is verifying the information you can trust, so be careful here.
- Remember not all products are right for everyone: Whilst someone might be singing the praises of a particular investment, it doesn’t mean it’s right for you. Your investment decisions should reflect a whole range of factors, such as attitude to risk, capacity for loss, and goals.
- Speak to your financial adviser: Go to your financial adviser with any questions or concerns you may have. They’re in a position to offer you advice, based on your wider financial plan, and have the experience to understand when you should pass up an offer.
If you’re planning to invest your money, but aren’t sure which options are right for you, please contact us.
Please note: The value of investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.