Attention over-50s: Investment scams – six dangers when getting financial advice

Note: This article reports that the most unlikely people can be victims of investment scams. SuperGuide suggests that it is not only the scams you have to watch out for – being mis-sold legitimate but high-risk investments can be just as probable, and a lot more costly as the failed investments in Westpoint and Trio Capital illustrate. In the second half of this article SuperGuide warns of six dangers when getting financial advice on investments.

Every few years, research is published that lists the typical investment scams and the unlucky targets of investment fraudsters. The most alarming trend is that investment fraud is becoming more serious and more organised, based on a report released during July 2012.

In Australia, the targets of this type of crime are predominantly men who are aged over 50, who are highly educated and with high levels of financial literacy. The victims of this type of crime are also likely to manage their own super, says Minister for Justice, Jason Clare.

During July and August 2012, the federal Government is mailing information to very Australian household warning them about this criminal activity and how to avoid becoming a victim. The scammers use telephone, email and often high-pressure tactics.

“These criminal syndicates usually operate from outside Australia. They use front companies and false names. Once they’ve stolen your money the website disappears and the trail goes dead,” says Minister Clare.

The report, jointly produced by the Australian Crime Commission (ACC) and the Australian Institute of Criminology (AIC), is titled ‘Serious and Organised Investment Fraud in Australia’ (you can find a link for the full report at the end of the article).

Disturbingly, ACC chief executive officer John Lawler, has said the level of superannuation savings in Australia make it an attractive target for organised crime groups.

“These scams are typically unsolicited ‘cold calls’ used alongside sophisticated hoax websites to try and legitimise the fraud,” says Lawler.

Who is the typical victim of investment fraud in Australia?

According to the ACC report, the most likely individuals to be victims are:

• Middle-aged to older persons (usually over 50 years old)
• Male
• Small business owners
• Self-funded retirees
• Individuals who have previously made investments in other companies and were considered ‘financially literate’
• Victims who are on shareholder registers
• Socially isolated individuals (can be geographically or otherwise)
• Educated, computer literate and have undertaken preventative research “that provides them with a sense of assurance”

What are the risk factors for becoming a victim of fraud?

According to the report, the fraudsters convince financially literate Australians to invest because they “technologically groom” the victim (potential investor), and engage in personal contact with the victim over weeks and sometimes months. The table below sets out some of the identified risk factors for fraud

Identified risk factors of fraud victims
Previous victimisation	Belonging to organisations	Retiring, or turning 65
Signing up for “free offers” and “prizes”	Buying things over the phone	An engagement, marriage, birth, graduation or death in the family
Entering contests or sweepstakes	Making purchases on the Internet	Moving
Being on catalogue mailing lists or “junk mail” lists	Registering with any sites or groups on the Internet	Purchasing a house, car or major appliance
Having a major medical treatment or operation	Buying stocks or bonds, or making some other investment	Requesting information about an advertisement
Giving to a charity	Buying insurance

Table source: Serious and Organised Investment Fraud in Australia report (for report link see end of article)

Crime prevention: Steps to fight the scammers

The federal government offers you the following advice to prevent being ripped off by scammers:

• Visit moneysmart website or call 1300 300 630 for further information or advice
• Alert your family and friends to the fraud (even if embarrassing), and to anyone who may have savings to invest
• Report suspected fraud to ASIC, on moneysmart.gov.au or 1300 300 630, or your local police.
• Hang up on unsolicited phone calls offering overseas investments.
• Check any company you are discussing investments with has a valid Australia financial Services Licence (AFSL) – you can check at moneysmart.gov.au
• Always see independent advice before making an investment.

Watch out for legitimate investments: Wolves dressed in sheep’s clothing

I congratulate the federal government on highlighting this serious and growing trend but I do take exception to some of the superannuation industry quoting the Trio capital fraud in the same breath as the investment scammers. Trio Capital (see article Super fund fraud victims to be compensated for background information  ) was a so-called legitimate investment sold by financial advisers, and regulators APRA and ASIC took a long time to discover that the money was disappearing through fraudulent means.  As a consumer, there was nothing you could have done to spot the fraud since the company had all of the required licences and the financial advisers involved had all of the required licences.

Now, whether the investment product offered by Trio was appropriate for an individual is something an individual can control. Identifying scammers is important, but grappling with the merits of dodgy or high-risk (but legal) investments is really the bigger issue for independently-minded investors. The discussion that follows on the dangers of getting financial advice is an updated version of an article that appeared on the SuperGuide website.

Six dangers when getting financial advice

I have been writing about, or working in or on the sidelines of the financial services industry for just under 25 years and the regulator and the advising industry are only now, in 2012, really grappling with how consumers make investment decisions and the influential role that advisers and financial organisations hold in distributing investment products.

We have reams of paper disclosing risk, conflicts of interest, fees and investment performance, as if all this paper matters. And these documents do matter, but the best disclosure in the world won’t save investors from financial loss when certain circumstances are in place.

Over the past two decades I have spoken with hundreds of advisers and thousands of investors in my various technical roles, and as a journalist and presenter, and I believe there are six main factors that determine whether a consumer/client receives quality information or advice. More importantly, one or more of these six factors also determine whether a consumer successfully protects themselves from unwise investment decisions.

Besides the dangers of greed, fear and overconfidence, the six factors are:

1. Investor ignorance

We don’t recognise financial literacy as a skill. Whether you were taught financial skills as a child can be a matter of luck. If you were unlucky enough not to be taught such skills, then you have to make a concerted effort to embrace financial knowledge as an adult.

What’s more, an investor cannot blame a financial organisation or a product adviser if the investor doesn’t do their homework. For example, if an investor places their money in a financial product without reading the disclosure material, even when they have an adviser, then it is hard to convincingly argue that they should be compensated for such an investment based on ignorance of the risks involved.

Retail investors are now offered sophisticated financial instruments dressed up as retail investments which are generally well beyond the financial knowledge of most individuals investing in such products. For example I am not a big fan of CFDs (contracts for difference) for the vast majority of Australian investors.

2. Blind faith

Some investors use financial advisers unquestioningly and fail to take the time to understand where their money is invested. Clearly, an investor can’t be responsible for an incompetent or fraudulent adviser but washing your hands of the financial decision-making is generally the first step down the slippery slope of financial loss. My experience with service providers is that a client generally receives a better service from the service provider when the client takes an active interest in proceedings.

Another common situation is where an investor relies on the advice of friends, and considers such advice as “expert”. I have seen friends and experts get carried away by an investment and who then feel compelled to encourage everyone they know into putting money into the investment as well.

In my experience, older women are particularly at risk of blindly relying on a financial adviser or a male friend for investment decisions. Of course, I don’t believe that all older female investors are likely to be in this category, and the research outlined earlier in the article indicates older males may also fall into this category.

3. Commission-based advice

Although commissions on new financial products will be banned from 1 July 2013, advisers can still receive commissions indefinitely on products sold before that date.  Advisers who receive commissions can be some of the nicest individuals that you may meet, but commission-based advice is not independent advice. The simple fact is that such advisers have to recommend products that pay commissions to make a living. If you want tax advice or superannuation strategy advice, then a commission-based adviser will only get paid for that advice if they also recommend some managed funds.

Commission-based advice means that you generally won’t be advised to invest in industry funds or direct property, and you probably won’t be advised that it is not a good time to invest at the moment, as may or may not be the case. In the worst-case scenario, advice remunerated by commissions can cause financially catastrophic consequences. For example, the widespread recommendation of Westpoint products was driven by commissions of 10–12%, even though the product was highly risky and unsuitable for most investors.

Many of the tax minimisation schemes, for example, forestry schemes, were so common (until relatively recently) because they were recommended by advisers who received at least 10% commissions on money invested.

A 2006 survey conducted by the Australian Securities and Investments Commission (ASIC) found that nearly half of all advisers in Australia received commissions or salary bonuses for making super fund switching recommendations. The ASIC report also found that advisers receiving such remuneration were six times more likely to provide unreasonable advice compared to those who are paid the same fee (rather than commission), regardless of the recommendation they provided to clients.

4. Trust/Transparency

Trust is a double-edged sword. A client/adviser relationship built on trust means that you are never afraid to ask questions and your adviser treats every question with respect. There are no secrets and your adviser is willing to deliver you both the good and the bad news.

One adviser I know describes the process of building trust between adviser and client as “when trust passes”. What he means is that the client lets go of some financial decision-making and delegates the transactional matters to the adviser. In some cases, particularly over a long period of time, such a trust relationship can drift towards blind faith (see also danger, ‘Investor Ignorance’).

Proper disclosure of conflicts of interest, fees, risk and tax implications also fall into this category. In an “open trust” relationship with an adviser who communicates effectively, disclosure generally includes verbal disclosure of investment and advice fees rather than hiding it in written form in a pile of client advice papers.

An adviser who communicates well doesn’t necessarily mean slick or polished, or the ability to deliver amazing presentations. In many cases, being too slick is a warning sign and strong selling skills are not the same concept as strong communication skills.

Note: A frank, open exchange is essential in any financial transaction regardless of whether a financial adviser is involved. It’s your money and clear communication should be expected when opening a bank account, investing in managed funds directly rather than via an adviser, purchasing a property, and even when nominating beneficiaries for your superannuation benefits for when you die.

5. Understanding risk

Prevention is better than cure when it comes to making unwise investment decisions, but talk to anyone who is a long-time investor and you are likely to hear tales of early investment mistakes, bad luck and, in some cases, times when they have trusted the wrong people.

Learning from investment mistakes is the surest way to avoid future investment losses, although investors also have to accept that when choosing risky investments that there is a higher risk of loss. If you’re a “no guts, no glory” style of investor then you’ve obviously prepared yourself for a rollercoaster investment experience.

If you don’t yet have investment experience, then talk to investors who do have experience, or read commentary from experts who have been in the market for a long time. For example, the spreading of risk through diversification always seems such a boring topic to write about but if one of your investments happens to collapse, then having a diversified portfolio can be a great feeling because you can take comfort in the fact that the single loss will not have a devastating impact on your overall portfolio.

6. Fraud/incompetence

Fraud is one factor that is nearly impossible to plan against, although in most cases when fraud occurs, there have usually been some early warning signs. Hindsight is an amazing thing.

Generally speaking, when fraud occurs in a company, or in a financial advising firm or a workplace, one individual often has had total control over a function, such as processing invoices and payment of invoices, or receiving of investment money and subsequent investment of that money. In internal audit language, there is a lack of internal controls. Alternatively, the culture is corrupt that creates an environment for fraudulent practices and/or there is collusion between two or more individuals who control the money flow, the information flow or key decision-making.

When fraud is committed by financial organisations or advisers, any recourse is normally through industry compensation schemes or through the courts.

You can visit the ASIC website to help you learn how to avoid dodgy investments or advisers. ASIC also has databases that contain banned advisers and illegal investment schemes, and a list of licensed advisory business. You can check out the database on ASIC’s website (www.asic.gov.au).

In relation to incompetence within a company in which you invest, you hope that your preliminary research before investing would have brought any deficiencies to your attention. If not, the market usually factors incompetence into the share price. If you have invested in an unlisted vehicle and you’re concerned about the competence of the operators, then vigilance, seeking information and monitoring ongoing performance are essential. And you can generally sell the investment, in most cases.

In relation to incompetent financial advisers, the only real checks are choosing wisely or learning from bitter experience. ASIC has produced a checklist that you can use when selecting a financial adviser. You can find the checklist on the ASIC website.

ACC report on investment fraud

If you are interested in checking out the full report from the Australian Crime Commission on Serious and Organised Investment Fraud in Australia then click here.