Investors nowadays are being offered an increasing range of off the wall products.
From wine and diamonds to holiday resorts, store pods and carparks, these products promise high returns, often “guaranteed” for the first years and a further “developer buyback option” effective after a certain period of time.
However, the investments do not always work out. And the word “guarantee” is often used in the loosest sense, leaving the investors stranded with a low yielding product they can’t sell to get their money back.
What’s more, when things fall apart there are no protections from the ombudsman or Financial Services Compensation Scheme (FSCS) as in many cases neither the products nor their distributors are regulated.
The problem became more prevalent in recent months as more and more older people were being targeted for their pension cash.
For instance, the regulator detected a flurry of activity following the April 2015 pension reforms, which allowed every defined contribution saver over the age of 55 to freely access their savings and spend it in any way they like, subject to normal rates of taxation.
The Financial Conduct Authority (FCA) found those over the age of 65, and with savings of £10,000 or more, were three and a half times as likely to fall victim to investment fraud as the wider population.
The National Fraud Intelligence Bureau has also warned pension savers were being targeted by “forceful salesmen” trying to sell them investments in parking spaces.
And most recently, the FCA warned advisers about the dangers of relying on introducers, saying it was “very concerned” they were having “inappropriate influence” on investment decisions, particularly where pension transfers were concerned.
One investor recently told Professional Adviser he had lost his entire pension after investing in storage pods built by a company called Store First.
Store First and its parking space equivalent Park First warned investors to beware of “unscrupulous third parties” masquerading as their agents and trying to mislead investors, in a notice put on their sites last October. The companies did not use cold-calling as a way to find new customers, they said.
The investor was sold the product with a guaranteed rental of 8% for two years and then forecast to increase there forth. He had also been left under the impression he was being offered a ‘guaranteed’ buy back in the third year, he said.
The investor – who wants to remain anonymous to avoid further stress – said he invested £150,000 in the scheme and after just 12 months the guaranteed returns stopped coming.
“They stopped paying the returns after less than a year and sent out communications saying that occupancy and rates were not being achieved which they were working to improve,” he said.
“With regard to the guaranteed buy back this was only guaranteed if the developer wanted to buy it back,” he added. “When I enquired about the status of my investment and potential sale through a local commercial property agent I was advised that the storage space I had bought for £150,000 was not even worth a tenth of that,” the man said.
I was advised that the storage space I had bought for £150,000 was not even worth a tenth of that
Group First, the parent of Store First and Park First, told PA it could not comment on individual cases but explained the returns in the first two years were contractually guaranteed and were paid in advance from the working capital of the company, making it a secure proposition.
Following on from that, returns were based on the real yields of the commercial property purchased, same as with other buy-to-let products, the company said.
It told PA the buy back option was “optional only, the decision to agree or not agree will be with our directors. If declined, the investor can always re-sell the space and we can help with this”.
In its prospectuses, Store First and Park First offer similar investor assurances: 8% returns in year one and two; guaranteed rental income; net yields projected to surpass 12% by year five; and a developer buy back option within year five of property ownership. They also say they are self-invested personal pension (SIPP) approved.
SIPP provider Dentons Pensions, which does not offer such products to its clients, said a key criteria for including alternative investments on its books was whether or not they were collective schemes.
A collective investment scheme, unlike its non-pooled equivalent, pools returns of all the products in the scheme before sharing them out to all investors equally. It is available only to sophisticated investors – those with considerable disposable capital and proven knowledge of investing.
Director of technical services Martin Tilley said: “Unregulated investments should be reserved only for sophisticated investors. The fact that there is no compensation scheme supporting them means that significant due diligence of the investment should take place before any monies are committed.
“A general rule of thumb is that any statement made in advertising or promotional literature should be treated as false until you can verify its accuracy through reliable independent means.”
He said investors should be particularly careful with non-pooled investments. “If it is not pooled ask which pod or car parking space are you getting? How close to the entrance/exit is it, how often is it used, who markets the space, who monitors the usage, how are fees collected, who audits the returns and how much does all of this cost and how does it reduce the quoted return? What is the secondary market, how easy is it to sell on the investment?,” he said.
“Only if you can get answers that satisfy every question should you part with your money. If you have any concerns at all, walk away.”
Any statement made in advertising or promotional literature should be treated as false until you can verify its accuracy through reliable independent means
Park First confirmed its parking spaces were sold to investors on an individual basis, meaning an investors’ returns depend on the performance of the individual investment, if rental income is bad, the returns dry up. Store First operates on the same principle.
The company badged this as a positive feature. It meant the investor “maintains control of his investment. He can do what he likes with it. He can rent it, sell it, mortgage it or use it,” it said.
Group First said its products were designed to offer investors a way to access commercial property, which they normally would not have.
It said: “We are totally confident that if someone’s portfolio would benefit from having within it some element of commercial property then our products represent an excellent investment.
“To most people, the commercial property market is off limits as far as investment is concerned because the entry level is too high. However, with our Store Pods they can start investing from as little as £3,750.”
Parking spaces can be bought for £20,000, according to the company’s prospectus.
Group First recognised commercial property was not suitable for every investor. The firm said it told its clients to seek advice from an independent financial adviser.
So, what do advisers think?
None of the advisers PA spoke to appeared keen on recommending the types of products, partly because they are unregulated but also because, they said, it was “impossible” to do meaningful due diligence on them.
“Simply speaking I wouldn’t consider the investments because they are likely to be unregulated and typically undiverse. I, therefore, don’t see why our clients need to take the risk,” said Dobson and Hodge financial services director Paul Stocks.
Appleton Gerrard financial planner Kusal Ariyawansa added: “When it comes to investing, the vast majority of retail investors should seek simplicity with the main guarantee being the investment and adviser are authorised and regulated with back up possible from the FSCS.
“There is no guarantee with car parking spaces. Just a promise from some company. Even for the high net worth portfolios I advise on these are a non-starter.”
Adelp Financial Solutions director Michael McLintock said he had been approached by a firm offering investments in car parking spaces at Glasgow Airport and decided to not get involved.
“I was offered a big fat commission and my clients would get guaranteed returns of 8%,” he said. “When I pressed further on how the guarantee was provided and what happens if the parking spaces are empty for a period of time I was met by flannel and bluster.
“It reminded me of what was bad about the financial services industry 20 years ago when I started out. For that reason we would have nothing to do with such schemes or any other unregulated investment opportunity,” he said.
I was offered a big fat commission and my clients would get guaranteed returns of 8%
Rowley Turton Chartered financial planner Scott Gallacher said he was “extremely sceptical” about unpooled unregulated products in particular.
“The usual questions and caveats come to mind: How is it valued? What is the associated cost? How can I access this investment? How will I exit this investment? Does it even exist?” he said.
IFS Wealth & Pensions Chartered adviser Ricky Chan said he would not recommend the investments in 99.9% of cases, however would consider the option for a very small fraction of clients.
He said: “I’m reserving that 0.1% for when there is a ‘very special’ case – say an innovative unregulated product with a proven long-term track record that may be used to diversify a very large client portfolio. It may have additional benefits or tax incentives that more mainstream options don’t have.”
However, he added: “The client must also have sufficiently high attitude to risk, capacity for investment loss, and also excellent investment experience and knowledge. Even in such circumstances, I’d imagine that these products would only form a very small percentage (less than 5%) of the overall portfolio.”
Chan also said: “From an adviser’s perspective, these investments carry huge future liability risks and so would affect PII and the [regulatory] levy for the industry.”
His brother and business partner Alan Chan said the problem was it was “impossible to do any meaningful due diligence on such investment schemes”.
Fellow adviser Mark Dean Wealth Management managing director Dean Mullally explained: “There is no method for comparison to other similar products like there is with funds, ETFs or investment trusts, so it is virtually impossible to evidence that as an IFA I have researched the whole of market and recommended the best product available.
“Basically, any decent IFA would stay well away from recommending [such an] investment to one of their clients.”
Most IFAs appear concerned about the nature of unregulated products in general, regardless of product or investor type. This is not to say all such investments are scams or doomed to fail.
However, advisers suggested there are enough regulated alternatives for investors to choose from to be able to rule out unregulated unpooled investments altogether. ‘Not worth the risk’, they said.