Question

I am a 73-year-old widow. I own my house and have an investment in an endowment policy. This policy matures in two years’ time and I intend using the proceeds to supplement my pension, which has not kept pace with inflation.

My financial adviser contacted me and suggested that I take out a loan against this policy and invest the proceeds in an investment opportunity that he has come across. This investment opportunity is a new company that will be listed on the stock exchange. He anticipates that my investment will grow by 50% in six months. He is so confident in this investment that he has invested R2-million of his own money in it.

What should I do?

Answer

Over the years I have come across a number of instances like this in which pensioners are offered returns that are way better than those available in the market.

In this instance it is an initial public offering of a share, but I have seen schemes involving property developments, diamonds and crypto-currencies. Though there may be merit in them, it is important that you enter the transaction with as much information as possible so you do not lose your money.

The truth is, if it looks too good to be true, there is a good chance that it is. The salesperson may say that the investment is a low-risk one, but it rarely is.  

All investments are a balance of risk and return. The riskier the investment, the higher the potential return. The more secure the investment, the lower the return. If you leave your money in the bank, it will be very safe, but your returns will be low. If you invest on the stock market, your returns should be better, but you do stand the chance of losing your money.

It is therefore important that you understand the level of risk of an investment. I usually take my clients through a questionnaire in which we unpack these issues so we can understand if you are a conservative, moderate or aggressive investor. This will help me select the type of investment that is aligned with your natural risk tolerance.

I then look at your personal circumstances before recommending an investment type. For example, if you are retired and have limited capital, I would probably recommend a more conservative investment even if you are a naturally aggressive investor. If there is a massive downturn in the market (like we saw last year), you do not have the time or the means to recoup your losses. But if you are young and investing for retirement, we can afford to be aggressive because short-term market downturns will have very little impact on overall investment.

High-risk and high-return investments are not generally recommended for pensioners, who are not in a position to lose all their money. So what can you, or anyone else who is faced with a similar situation, do to protect yourself?   

I would recommend that you do the following:

Check that the broker is registered with the FSCA. Go to FSCA.co.za and check that the broker is registered by drilling down into the list of regulated entities. (You would need the individual’s ID number to do this.)  On the website, you will also see who the compliance officer is. If there are any problems in the future, you can raise them with the compliance officer.

Check that the entity taking the investment is registered with the FSCA. This can also be found on the FSCA website.

Ask the adviser to provide you with a comprehensive record of advice. This record of advice is required of all registered financial planners for any investment that they make for a client.

It should contain the following:

What is the risk profile of the client and does the risk profile of this investment match that risk profile? If there is a discrepancy, how will this affect the client?

What reward is the salesperson receiving for this investment? Here the salesperson would be required to declare the amount of commission that he is receiving.

Do not feel embarrassed about asking for this information. The consultant is obliged to provide it and it is important that you do not make a costly mistake.

So, to answer your question: an investment that offers a 50% return over six months has to have a measure of risk that is commensurate with the return. As a pensioner, you must be careful about placing too much of your current capital at risk. You do not have the means to generate additional capital should the investment fail. Run the checks that I recommended above and see if your financial adviser’s record of advice makes sense.