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
Saturday 03 August 2013
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.
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."
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."
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.
- 1 Woman accidentally shoots herself in the head while posing for a selfie
- 2 Isis burns woman alive for refusing to engage in 'extreme' sex act, UN says
- 3 Puerto Rico, island of lost dreams: People are leaving the debt-hit territory in droves as near neighbour Cuba's star rises
- 4 Female Muay Thai champion hustles coaches to give them a beating
- 5 16-year-old girl beaten and burned alive by lynch mob in Rio Bravo, Guatemala
As a white man, I'm surprised more women aren't tweeting the hashtag #KillAllWhiteMen
Scotland may have to leave the EU even if it votes to stay in, David Cameron confirms
Report finds that Britain's wages are the most unequal in Europe
The day that Britain resigned as a global power
Almost a third of school pupils believe 'Muslims are taking over our country', study claims
SNP fury as HS2 finds 'no business case' for taking fast train service to Scotland
iJobs Money & Business
£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...
£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...
£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...
£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...
Day In a Page
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof