Oh the tragedy! On the front cover of yesterday’s edition of The West Australian newspaper was a story about a single Dad who had lost his life savings in the recent collapse of the property developer, Australian Capital Reserve. Sadly when I read such stories the empathetic part of me is quickly overrun by frustration. Quite simply this should not be happening in 2007!
Yet this massive loss of life savings in a marginal investment still occurs with alarming regularity, so I feel compelled to dedicate an article to helping prevent its occurrence – especially to you.
It is taking a lot of restraint for me not to engage in a rebuke of the traditional finger pointing at product sales representatives and financial advisers. Irrespective of the potential presence of a slick, self-motivated sales representative no-one, I repeat, no-one should lose their life savings in a marginal investment. And certainly not if they take personal responsibility for protecting what they have worked hard to earn.
In this article I will share three tips for you to ensure that this never happens to you.
Spread the love
Struth, I thought most people had heard the old adage “don’t put your eggs in one basket”. Maybe they have heard it but have a momentary lapse of memory when they see a high return being promised.
You won’t lose your entire life savings in an investment if all of your life savings aren’t in that investment.
Especially in the case of high risk, marginal investment products only invest the amount you are prepared to lose if it all goes belly up. By that I mean, per product.
The above does not strictly apply to superannuation accounts or investment wrap accounts since they are not investments. They are administration accounts that provide access to a broad basket of eggs (investments).
Think of administration accounts as being like a gym. Generally you only join one gym. But at the gym you have access to lots of different equipment you can use to boost your fitness and health. Use of the equipment boosts your health, not the gym.
I mention this exception since I have encountered many people who think that diversifying their investments means having lots of superannuation accounts. That is not the case. Like gyms, you generally have one superannuation account within which you use several investments to boost your wealth.
Guarantee Equals Red Flag
Whenever I see “guarantee” anywhere near investment related information a massive circle of red flags pops up around me. Those red flags tell me that I must dig deeper and find out:
- Exactly what is being guaranteed?
- The circumstances under which the guarantee is valid and when it is voided.
- The cost of the guarantee
- How is the guarantee being facilitated? (e.g. if a guaranteed income, where is that income being earned so that it can be paid to investors)
- Who is providing the guarantee and how robust are they?
- Is there any research available form a reputable, independent source?
Except for the last point, all of the above information must be included in a Product Disclosure Statement (PDS) and provided to retail investors. So if you want to avoid losing your life savings read Product Disclosure Statements before investing.
By law the Product Disclosure Statement is big because it is designed to ensure you have most if not all the information about the product to avoid making an investment that is inappropriate for you.
If you don’t know that you could lose all of your money (or some other undesirable outcome) and you don’t know because you didn’t read the Product Disclosure Statement in full then the main person to blame for the outcome is…..
If the product is not legally regulated and doesn’t have a Product Disclosure Statement then don’t invest.
Get a Third Opinion
If you feel you don’t understand the Product Disclosure Statement then pay for at least one expert and independent opinion from a licensed Financial Adviser.
If a doctor told you that you had a terminal illness would you seek a second opinion?
For many people losing their entire life savings could be terminal. So before committing yourself to a potential life sentence seek a second opinion from an expert.
And, if after reading this article and the Product Disclosure Statement you still want to invest your life savings in one product then seek three expert and licensed opinions.
For financial advice this is how this tip may work in practical terms:
- Pay one adviser for comprehensive advice on the appropriateness of the product to your circumstances and goals
- Pay at least one other adviser for a comprehensive review of the first adviser’s advice. Give them the original Statement of Advice and pay them a fixed fee to review the appropriateness of the advice to you.
- Before acting ensure that you confirm any discrepancies or queries with the original adviser as there probably is a very good reason for the discrepancy.
Be open and upfront with all of the advisers about the process so they know where they stand and will deliver what you need from each of them. Aim to ultimately work with the original adviser unless any discrepancies are unable to be answered to your satisfaction.
Throw a Life Buoy
It should probably be me on the front cover of the newspaper with tears in my eyes – lamenting the crying shame that the financial literacy message is not getting through. Can you think of any of your loved ones who you don’t want to see lose their life savings? If so, please throw them a life buoy by forwarding this article to them. Even encourage them to subscribe so that they benefit from the fortnightly reminder of life saving behaviours.