Is something advertised in the money section of a respectable mainstream daily newspaper necessarily a reputable investment?
Very probably the answer is yes. Publishers don't want to sully their pages with rubbish, let alone publicity for scam products.
Once discovered, it can give them a bad reputation. And that could be off-putting for future advertisers.
But that is no guarantee – as I discovered when I found an advert for a “low risk investment” promising a distinctly high risk 18% plus returns a year in a leading UK newspaper.
First, I'll let you into an industry secret or three. Ad-sellers are not regulators. They cannot be relied on the scrutinise all the adverts they carry, especially the smaller ones. They are only human. They have commission targets to meet. So rejecting an ad could be personally costly. An ad that looks fine and is paid for in advance is rarely refused, especially if, as is often the case, it arrives just before the deadline.
I regularly scrutinise these small investment ads. The vast majority are fine – currency trading schemes, franchises or businesses for sale. But every so often a so-called "investment opportunity" catches my eye.
There is a payoff between risk and reward. If you go for a risk free option such as a building society savings account, you earn very little reward. But if you opt for a high risk strategy such as currency trading or bust country debt, you could make a fortune or lose the lot. And when something looks too good to be true, then it is almost certainly a scam.
The advert
So what does my advert offer? It promises “expected returns of 15 to 18% annually”. Now that is really high. The 15 to 18% return is difficult enough to achieve in any one year. Year after year – the “annually” is virtually impossible. And if any reader can find me an investment with that characteristic, please share it with me.
Now back to the balance between risk and reward. Besides offering that mouth- watering return, the advert also says the investment has a “conservative investment strategy” while featuring “low risk” and “low volatility”. It also states your cash will be invested in “AA (or better) rated insurance companies.”
Can this be the legendary philosopher's stone which turns base metal into gold? No. Instead, it's a “portfolio composed of a diversified pool of life insurance policies of seniors aged 70+.”
Here's the deal. In North America, policies that pay out on death at whatever age (known in the UK as whole of life) are popular. A 72 year old, who might have been paying into the policy for 40 or more years, knows that the estate will collect $100,000 on death. But this person needs money now.
So she or he offers it to a “life settlement” firm which buys it for, perhaps, $30,000. The settlement firm then continues to pay the premium, say $2,000 a year, hoping the original owner will die as quickly as possible so it can collect the $100,000 and not have to pay the annual amount too often. If this policyholder dies the next day, the settlement company makes a $70,000 profit.
That sounds good. Now change the figures. Perhaps the “senior” is not stupid and demands $80,000 and then lives for 20 years (or $40,000 in premiums). The firm has spent $120,000 (plus finance costs over 20 years) to get $100,000.
That's a big loss.
Keydata
Life settlements were the basis of contracts from the now defunct Keydata whose collapse cost UK investors and financial advisers tens of millions.
Keydata, which I first warned against nearly five years ago, offered a more modest 7% return.
The advertised offer comes from a company that works from a mailbox address in Canada.
I took a peek at its website. Besides offering little other than vague stuff and no real contact details, it's full of spelling mistakes such as “merges and aquisition” instead of “mergers and acquisitions” as well as tortured English such as “adequate confidence” and “the asset management is available in over different countries”.
Well, no one's English is perfect. More seriously, where is this investment regulated and by whom?
In the UK, such a fund would need Financial Service Authority approval.
The moral of this? Treat every advert with caution no matter where it is displayed. And never forget commonsense. There are no low risk investments returning 15 to 18% each year, no matter where they are advertised.