What emotion drives us in times when we are vulnerable that often leads to financial disaster? If you said fear, you would be almost right, that is secondary. The emotion that scammers and promoters of defective products play on is greed.
The poor, which is most of us, often have fantasies of getting a windfall. And when that fantasy is presented in writing (by email), as far-fetched as it sounds, we want to believe it. Someone in the world has written to us claiming that: a) we can help them transfer their millions to our bank account as they are receiving an inheritance, b) we have won a lottery and just need to pay some fees to receive it, or c) there are some actions of American small businesses to buy that will prove profitable.
As we’ve seen lately on Australia’s 60 Minutes and Current Affairs, these kinds of email scams are run by nasty guys in Nigeria, Thailand, and other poor nations, sometimes with links to Australia.
A trap for retirees who love fixed interest
Another type of trap is disguised as a good investment. I am referring to the promoters of unsecured notes and mortgage obligations that offer a high yield fixed interest. You may have read about the collapse of Westpoint, Fincorp and Australian Capital Reserve. There are still many other similar companies operating in Australia, all without a Morningstar rating.
The product resembles a time deposit and is promoted as a “bricks and mortar” investment. But there are still retirees who know little about the product they are investing in. They also fail to realize that their investments are barely keeping a very poorly structured company alive, where advertising takes a quarter of all profits just to attract more money to keep it afloat (as in the case of Fincorp before it was sink). Fincorp unsecured noteholders are owed a total of about $23 million, which is gone, and secured noteholders are owed a total of $178 million, and they can see about 30 cents per dollar.
While $1 billion of investor money has gone down in the collapse of the three companies, what about the remaining $8 billion in subprime obligations? If ASIC clamps down on the promotion these other companies are doing, then they too might fold like a house of cards.
While ASIC’s FIDO website has warnings about all kinds of scammers, schemes and unsafe investments, sometimes these financially unqualified companies (with their TV and newspaper advertising) and financial advisors with greedy pockets get investors’ attention first. naive.
Do not let that happen to you. Make sure what you’re investing in by doing your own research.
