Investments you can trust part 4
Tip no 1 – don’t invest in anything too good to be true
Tip no 2 – don’t invest in anything exclusive
Tip no 3 - don’t invest in anything that is not widely known or well established
Tip no 4 – you can’t entirely rely on the FMA or the government to protect you
Tip no 5 - just because an investment institution is big and glossy does not mean they automatically have your best interests at heart, or that you can trust them
Tip no 6 - there are thousands and thousands of RFAs in NZ, but less than 2,000 AFAs
Tip no 7 – if it is serious money you are investing, and you are using an adviser, deal with an AFA
Tip no 8 - only AFA’s are required to put their client’s interest first and act with integrity, and they are very much in the minority
When it comes to your investments, you want them to be as solid as a rock. So you have to look at the “rock”, around the rock, and under the rock, and maybe even chip at the rock with a big hammer and chisel, to see what it is really made of.
There is never any hurry, so make haste slowly and examine the “rock” through and through.
Oh no! They are back again in England
Interest rates are every low and likely to go lower, or stay low, all around the western world, so anything with 8% pa on it will attract investors who need income from their investments.
Hence a new “structured” fund in the UK offering 8% from 5 years. It is invested in a high yield ETF share (passive low cost) fund.
Let’s assume you invest $100,000.
The ETF is expected to pay about 5% pa in dividends so the fund constructor puts aside the other 3% x 5 years ($15,000) and sets it up to pay you 8% pa.
The constructor / promoter takes $2,000, pays an administrator $1,000 to manage the fund, and $2,000 for a futures contract (see below) , and invests your remaining $80,000 in the ETF.
Since a share fund is expected to grow at about 5% to 6 % pa (excluding dividends) the $80,000 will probably become about $105,000 in 5 years’ time.
Just to make sure they snare your money, the promoter buys a futures contract ($2,000 as above) to “guarantee” you will get back $100,000 in 5 years’ time.
If the promoter gets in $50 million, he will gross $1 million for himself, for only 6 months work.
So 8% and your money back in 5 years’ time
Sounds good, but do you understand it? I have seen these structured funds in NZ in the past and observed:
· Once the fund was set up, and the promoter had made his money, he moved on
· Investors could not always get an annual report or performance figures
· If you pull out before 5 years, the guarantees don’t apply
· If it grows to say $110,000 after 5 years, you only get $100,000
· The futures dealer takes the rest
· In 2009 some futures dealers went broke and could not honour their contracts
Invest in the high yield share ETF yourself and avoid all the costs. You can take the 5% yield as it comes in and if you need more, you can use some cash you have (should have) put into bonds or the bank, or sell some of the fund.
Sure you don’t have the guarantee but you have no withdrawal restrictions and can withdraw anytime. You may well end up with more than $100,000 at the end of 5 years too.
Better still, invest in a properly diversified portfolio, and avoid these “gimmicky” structured funds.
Tip No 9 - Use the Fiduciary Test
Don’t invest in a fund unless:
· It has been in business for at least 3 years
· It has an established track record, and plenty of data available on it
· It is fully invested – not consistently holding lots of cash
· It is of reasonable size and is fully liquid - traded daily
· It has no withdrawal restrictions or long waiting periods
· It is not overly complicated
· You know how many people are “clipping the ticket”
· You understand it
Next week fees – nothing any good is free but what are you paying for >
Supplied by Alan Clarke, financial & retirement adviser, & author.
His 2nd book “The Great NZ Work, Money & Retirement Puzzle” is now available.
Alan is an independent authorised financial adviser (AFA) FSP26532.
His disclosure statement is available on request and free of charge.