Publication Date : 24-02-2013
If an investment product promising sky-high returns with virtually zero risk sounds too good to be true, that is because it very often is.
There have been numerous cases lately of Singaporeans losing money invested with companies that have since run into trouble.
One recent example is the gold buyback scheme operated by Genneva Gold, which left more than 10,000 investors stranded last year and is now being investigated by the police.
In a typical gold buyback scheme, investors buy gold from a company at a premium of 20 per cent to 30 per cent over the market price of gold. The company then promises to buy the gold back at an even higher price after a few months.
Another gold buyback firm, The Gold Guarantee, also the subject of a police probe, stopped making payments to investors last month and its founder has been uncontactable.
Seah Seng Choon, executive director of consumer watchdog the Consumers Association of Singapore (Case), said it received 43 complaints about investments last year.
This year, it has had about 10 complaints to date.
Most of the complaints are about gold buyback schemes, purchases of overseas land or properties for investment, wine investment and investment-related courses, he said.
But despite the complaints, alternative investments still hold some appeal in today's low interest rate environment.
Open the newspapers and you might see advertisements for free property investment seminars, free foreign exchange trading courses and even swiftlet farming in East Malaysia.
The company behind the swiftlet farming scheme, Global Asset Advisory, offers a guaranteed minimum return of 10,000 ringgit (US$3,200) every year for the first three years of investment. It also claims that after 10 years, the annual returns could be as high as 90 per cent.
Investors pay the company a fixed sum of money that will ostensibly be used to set up a temporary structure that is designed to be suitable for edible-nest swiftlets to build their nests in.
These swiftlets are free roaming and there is no guarantee that they will choose to build nests in any particular structure.
Assuming the investor's building does garner some swiftlet nests, the company will harvest the nests and sell them to birds' nest distributors. It will take a cut of the profit.
The main risk appears to be that an investor's building may not get any swiftlet nests at all, but Global Asset Advisory claims that it knows where swiftlets are more likely to frequent.
It is nearly impossible to know at the outset whether this attractive scheme is genuine.
So how can regular retail investors search for healthy yields but avoid falling into possible traps?
First, there is a difference between "failed investments" and "scam investments", even though consumers tend to lump the two together, said Loh Chiu Weng, an investment analyst at independent financial adviser Providend.
On the one hand, a "failed investment" is loosely defined as a genuine investment scheme that may not have panned out as desired, such as Lehman minibonds.
A scam is a fraudulent scheme where there is minimal or even no actual investment taking place, such as Ponzi schemes, Loh said.
"The complaints we usually hear from our clients who have suffered are largely a result of inadequate knowledge of the product and methodology, which is why their investments have failed without them knowing why."
Ms Beh Hsia Wa, director of the bullion and futures division at UOB Group, said that when it comes to gold buyback schemes, some companies "do not tell investors how they generate the returns".
"Therefore, customers are unable to assess what the risks are and how sustainable the returns are."
She added: "Investors should put their money with a trustworthy institution. They should also be wary of frequently used pressure sales tactics that can lead to emotional decisions."
These tactics include investment seminars, Internet promotions and cold calls.
Loh said investors should ask themselves why investment seminars are offered gratis when there is no such thing as a free lunch.
Ms Beh added: "Be careful of phone calls about amazing investment opportunities which may not actually exist. Investors should not give their personal details over the phone.
"Before focusing on the gains, make sure you understand how much money you could potentially lose."
In general, experts said that the key is to carefully and sceptically evaluate investments before putting in money.
"Fraudsters prey on their victims' greed and often misrepresent products, painting returns as better than they actually are and underplaying risks. They also typically use pressure tactics to force an immediate purchase," said Richard Moore, managing director of financial crime and security services in DBS' group compliance unit.
"Consumers should not rush into buying products that they are not familiar with."
Experts also said investors should be especially wary when told that an investment can give them guaranteed returns but has low risk at the same time, which is the biggest red flag.
"There really is no such thing aseasy money, because all of uswould have made it rich ifitwasso easy," said Alfred Chia, chief executive of financial advisory firm SingCapital.
Vasu Menon, vice-president of wealth management for Singapore at OCBC Bank, said returns that seem unrealistic often may not be achievable, or may actually come with a greater deal of risk than initially described.
"They should be extra careful if the returns are attractive and guaranteed because it's extremely difficult for a product provider to offer such guaranteed returns, given the current low interest rate environment and volatile financial markets," he said.
Providend's Loh said a realistic expectation of returns for a non-guaranteed conservative investment is 4 per cent a year under current market conditions.
"Anything higher should trigger a red flag."
Another error is to blindly believe recommendations from friends or family members, particularly if they are not investment experts.
Said SingCapital's Chia: "Too many investors go into an investment scam because they trusted the friend who recommended it - and the friend himself was scammed into believing the deal."
Even if the product does not claim to achieve extraordinary returns for minimal risk, investors should still walk away from it if they do not fully understand how the product works.
"The best defence for any investor is a healthy dose of scepticism. Investors should not be afraid to ask questions, even if we are afraid that the question may make us look stupid. Rather, we should treat this as an educational exercise," Loh said.
Menon said: "If they are unable to fully comprehend a product, especially the potential risk and returns and its characteristics, or if they have doubts, it's best to walk away from it.
" It is also important not just to ask how you can buy the product, but also how you can sell the product and if there is a ready and liquid market for it."
The Monetary Authority of Singapore (MAS) has an investor alert list on its website which keeps track of unlicensed entities.
Seah said complaints about investments are not under the purview of Case, but Case officers can still advise on the possible course of action or refer the consumers to the relevant authorities.
Consumers can also look up the financial institutions directory to check if the company they intend to deal with is regulated by the MAS.
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