Alarms should ring if offered high returns by unregulated schemes

New rules meant to protect consumers are due in 2014 but, until then, Emma Dunkley says we need to tread carefully

From timber to fine wines and classic cars, there are exciting funds on the market offering dazzling returns of 30 per cent a year and the chance to diversify your investments. But as the old adage goes, if it seems too good to be true, it probably is.

A lot of these investments have run into big trouble over the years, leaving you nursing major losses or unable to get what's left of your money out.

Only in the past couple of weeks, a firm called Brandeaux had to suspend its range of property funds as it could not meet investors' requests to withdraw their cash.

Many of these products are unregulated, meaning they have a lot of leeway to put your money into exotic areas or complicated instruments such as traded life policy settlements, which promise glittering returns but often work against you.

And although the Financial Conduct Authority moved to ban advisers from promoting such unregulated schemes from the start of next year, you could still easily fall prey to the many adverts littering internet sites.

But it is not just unregulated products that are high-risk. Having a stamp of regulatory approval might set an investment apart from these unregulated types, but it does not necessarily safeguard it from being potentially risky.

Looking at the myriad of products out there, we ask a range of experts to name some of the investments where you should dig a little deeper and unearth the risks.

Property

There are many robust property funds on the market, but there are times when it becomes tough to sell property quickly enough for investors asking to withdraw cash.

Last year Castle Trust, a company founded with the backing of private equity firm JC Flowers, launched two 'HouSA' products, allowing you to share in the returns of residential house prices, but for a minimum investment of only £1,000 and without the hassle of going down the buy-to-let route.

The Growth HouSA, for example, is a fixed-term investment and provides you with a return higher than any rise in the Halifax House Price Index (HPI), while allowing you to invest for three, five or 10 years. And if the index falls, you will lose less and be cushioned from the dropping prices.

But some advisers warn this works like a structured product, with a fixed term and high exit penalty if you want to access your money before the expiry.

"What we don't like about it is that it's very difficult to get your money out," says Darius McDermott, managing director of Chelsea Financial Services. "Over 10 years, your criteria can really change and you might need access to your money. They don't say they will give you your capital back before the term is over and they don't publish the rate at which they give it back – so you could get a lot less."

Wine and antiques

"I have had texts asking whether I want to invest in wine and antiques and that I'll get a guaranteed return of 25 per cent," says Philippa Gee, who runs her own wealth management firm. "If you're not astute, you might think you should do it.

"Too many people have become unstuck – these might be OK for very wealthy investors or for specialist people with an interest, but for someone trying to make their hard-earned cash work for them, they're not appropriate.

"And even if a company is regulated and authorised, that seemingly gives everything the seal of approval, but it's not necessarily the case. Getting a product authorised doesn't mean it's a great product."

Leveraged investments

There is a new type of exchange- traded fund (ETF) that offers three times the return of an index such as the FTSE 100. But just as you can see your returns soar, if the markets take a turn for the worse, you could see the value of your money plummet, by three times the amount.

"This makes them highly volatile instruments," says Ben Willis at Whitechurch Securities. "I would rank these at the very highest 10 out of 10 on the risk scale and not suitable for most clients, and only to be used by highly experienced, sophisticated investors."

The way these products work means you are unlikely to get exactly three times the amount the market rises, if you're holding it for a period longer than one day. As a result, you will be sorely disappointed if you think you've beaten the Footsie by three times to discover your investment has gone up far less than that.

"I would label these as short-term trading instruments, not investments," says Mr Willis. "I see investing as taking a long-term perspective. Trying to second-guess short-term market movements is merely speculation – so it is a dangerous game for private investors."

Structured products

These investments could play a role in your portfolio, but others are sceptical about their purpose.

"Structured products are sold based on fear," says Ms Gee. "If you're scared of market risk, don't go into the stock market. People are buying them for the wrong reason – because they are nervous of the stock market. Instead, go for a really well-diversified portfolio that suits your risk tolerance."

What to look out for

Aside from the usual due diligence you would do when buying an investment, there are a few points highlighted by the experts that you should also consider.

"Watch out for property, land or alternative investments in exotic parts of the world," says Peter Sleep, fund manager at Seven Investment Management. "This includes countries that may sound like great holiday destinations, but may be very poor investments locations.

"Never buy over the phone or respond to junk emails. Don't believe a rep who makes grand claims that this is a risk-free investment or the investment always goes up. And never give out credit card details."

Mr Sleep also highlights the importance of checking the fees attached, including upfront costs, annual charges and performance fees. "Even a proper, regulated scheme can become a very poor investment if all the returns are eaten up by high fees," he says.

So the next time you stumble across an advert that suggests money grows on trees, remember: it doesn't.

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