About six months ago Eureka Report published a story about the unquestionably seedy underside of fixed-interest investments, Fixed Yields can be Costly . The story focused on Fincorp, a provider of “unsecured notes”, which had fundamental flaws in its structure.
Now Fincorp is in crisis. After Perth-based First Capital pulled out of a plan to buy the company in recent days, Fincorp management called in administrators KordaMentha. The reasons for the failure of Fincorp will come out over time, although the criticism that I made in the article last October – related-party loans, capitalising interest, high-risk property construction assets – will no doubt feature as causes of the collapse.
Initial reports suggest that there are 8000 small investors who will be affected, twice the number caught in the Westpoint collapse, with a total at risk of $300 million. The impact on these people as they start retirement or plan for retirement will be significant.
There is a common theme between Westpoint and Fincorp, and that is the aggressive marketing that was employed by the promoters behind both schemes. At Westpoint “distribution” was through commission-based financial planners. At Fincorp it was through direct advertising campaigns, including press, radio and website advertising – especially on commercial radio stations such as 2GB in Sydney.
There is another key marketing plank in both schemes: the way returns were advertised carefully hid the reality of investment risk. The schemes advertised fixed-income returns paid on a regular basis, not dissimilar to a cash account return. This hid the reality that the underlying investments of these schemes were related to property construction projects. Property construction – especially if it is linked to the promoters raising the money in the first place – is a risky investment in anyone’s language.
The reality is this: an investment scheme offering high returns must be high risk; there is no getting around this. This reality hardly comes through in their advertising campaigns, where the regular income is highlighted to such an extent that people can’t help but see these as the idea “one stop” investment solution. A 10% income return paid monthly when bank accounts are offering 6% – it seems like the ideal solution.
The rule that risk and return are linked should protect all investors from high-yielding fixed-interest investments, share trading program scams and property investment spruikers.
It seems, however, that occasional bouts of greed or a lack of financial understanding get in the way of such common sense.
There will be a lot of huffing and puffing about ASIC’s role in protecting consumers as the Fincorp collapse is considered. ASIC’s record on Fincorp is strong: they have once stepped in to withdraw a prospectus that did not properly outline risks and have continually warned consumers about the risks of high-yielding fixed-interest investments. If there is a failure with ASIC it would seem to lie in the resources that it is given to deliver its message because it has been vocal and consistent in warning of the risks of Fincorp-style investments.