The insidious side of low interest rates

Many investors might be worried about a low return environment - but something far worse than a sluggish economy may threaten your personal wealth.

Amid low interest rates and volatile market conditions, criminals using fake investment schemes are an increasing risk to investors hungry for higher returns, according to a major report "Targeting Scams" released this week by the Australian Competition and Consumer Commission (ACCC).

With many investors chasing the best yields they can get - particularly SMSFs in retirement, who are reliant on investment income - attractive, high yield opportunities can seem like a tempting avenue to get higher returns.

According to the ACCC, common ploys fraudsters use to entice investors include offering high-yields, quick returns, low up-front investments, low or no risk and inside information. Often, these scams are spruiked to the unwary by telemarketers cold-calling, use slick, scripted pitches to cover any and all angles available.

One of the many sobering statistics quoted in the ACCC report was that more than 40 per cent of the reported scams were inflicted on people over 55 years old. The total number of scams reported to the ACCC's Scamwatch website was 105,200 with total scam losses exceeding $229 million last year. 

The ACCC said in reality the total will be higher as many scams go unreported.

The advice to anyone who thinks they are being targeted by such a call is simple: hang up the phone. If the person on the other end of the line can't answer a few simple questions around their organisation, like its financial services licence (AFSL) or credit licence (ACL) numbers, or their business address, then the conversation should end there.

An excellent resource for learning more about investment scams and appraising investment opportunities is ASIC's MoneySmart website. A first-line of defence with any offer is a simple check on the ASIC website that the company offering the product has an Australian financial services licence.

Illegal investment scams are at the extreme end of the spectrum, but investors should be suitably sceptical of anyone claiming to have the secret to high yields in a low-return environment. The ACCC report also warns of high-pressure sales techniques at "investment seminars" and urges investors not to sign up for anything at a seminar but rather take the time to consider and research what is being offered.

Years of investment data, such as that in the annual SPIVA scorecard, tell us that even highly-skilled and sophisticated money managers are rarely able to out-perform average market returns year-in and year-out, let alone guarantee astronomical returns.

Even if a financial product or its issuer is legitimate, any investment that promises outperformance of the market should be carefully analysed. It is likely that a high-yield product carries with it higher risk - not to mention high costs.

Although investors with a longer time horizon might be comfortable taking on a high amount of risk to ensure they have the potential to see higher returns on their investment, investors who rely on income should be wary of over-exposing their portfolio by chasing yield.

Because if something seems too good to be true, it almost certainly is.

By Robin Bowerman
Smart Investing 
Principal & Head of Retail, Vanguard Investments Australia
19 May 2016 | Retirement and superannuation