Any IFA must be able to tell his or her clients what they could or should invest in, what is good and suitable. An incident yesterday brought home to me the reverse principle i.e. that equally advisers must tell clients what they definitely should not invest in. Yesterday I had a call out of the blue from a prospective client who wanted a second opinion on a fixed rate bond she had come across. She was considering transferring an ISA cash pot in excess of £50,000 into the product for a higher interest rate. The one year bond offered a 2.5% p.a. interest rate and the three year version 4% p.a. compounded.
My contact categorically wanted to take no risk with her money. She was savvy and had done her homework, having questioned the product provider and talked to her accountant but there were one or two things she was not sure about. We talked around some of these issues and agreed she would e-mail me the plan document to review. It was a professionally produced 21 page PDF with the exact logo of a major investment company. It detailed the product including the risk warnings, a Q&A section, small print and a client agreement. It listed all the details for making complaints including the Financial Ombudsman Service. To the untrained eye it was very plausible and a legitimate investment but the content and style of writing raised a lot of red flags for me. I concluded it was a scam and informed my prospective client. Later in the day she e-mailed me with an FCA warning that had just been published the day before of a clone company imitating the investment house. Interestingly when I had searched for such warnings only an historic one from 2011 came up.
There are several lessons to learn here. Fraudsters are getting cleverer and their scams are more sophisticated. This was much more compelling than the so called “boiler room” scams – the high pressured sales calls about investing in shares whose price is about to rocket. The prospectus was carefully crafted and the interest rates offered were not ludicrously high, which raises immediate suspicion. Just how can you get a 6% or 7% p.a. guaranteed return with interest rates so low? However the prospectus had holes in it from a regulatory and technical perspective. Sometimes I bemoan how complex financial products, taxation and regulation is but this incident has made me realise that complexity has its value. It is very difficult to create a perfect scam investment and fool an investment professional or IFA. I have decided that I am not going to publish the tell-tale flaws to avoid educating any potential scammers reading this blog on how to avoid them.
With interest rates on cash being so low scams of this sort will attract plenty of investors who act without advice. As per the recent Government advice, we need to be alert.