How to Avoid Dodgy Investment Schemes

Investment decisions you don’t proceed with will likely be more important than ones you do.
Over the years the industry has suffered some high profile collapses of companies and investment schemes that have done irreparable damage to retirees' savings.  Some of these have been genuine businesses that didn’t survive the GFC.  However, others were doomed to failure and were structured to benefit the promoters, not the investors.

There are similarities between many of the investment schemes that have failed.  So what are some characteristics of these dodgy schemes, and how can you avoid falling into the trap of investing in them?

Large Up-front Commissions

Large up-front fees or commissions are not solely the domain of investment schemes, but are a common element.  The Managed Investment Schemes, such as plantation trees, would often pay flat commissions of 10% regardless of the amounts invested.  If you were to invest $200,000, that would equate to a fee for the adviser of $20,000.  In normal circumstances, a fee on an investment of this amount would be 2-3% ($4,000 - $6,000) at the higher end, and require a lot more work for the adviser.

Any product that has to pay out that sort of commission to “encourage” the promotion to clients requires a little more investigation as to why it is needed in the first place!


Focus on Tax Minimisation

I can almost picture you shaking your head in disbelief to this statement.  Isn't reducing your tax the whole reason for investing?  Who doesn't hate paying tax?

Yes we all would like to pay less, no question.  However, focusing on the tax reduction qualities of an investment opportunity, and not the likelihood of actually getting a decent return for the risk involved, is a fundamental flaw in our approach to investing.  Reducing tax should be a side benefit, not the main reason for investing.  And if you are an adviser selling a product with massive up-front tax benefits, it is the easiest sale in the world.  Advisers will ask you, “Would you prefer to pay the tax man or would you prefer to put that money into an investment?”  Well – of course I would!!

Sales Process of the Financial Planner

If you are not familiar with how different financial planning groups operate, it is extremely difficult to tell the style of business you are dealing with and what their reputation is like.  It is easier with builders say, because you can see the end result, but this is not so obvious for financial planners.

However, there are flags that may alert you to when you are dealing with groups promoting schemes. They are as follows:

How Was Contact First Made?

There are a number of scheme operators who have a very slick process and their whole business model is run along these lines;
- Potential investors are tele-marketed to attend a seminar.  The seminar is often very “tax” focused which pushes all the right buttons and leads to a Financial Plan that may recommend negative gearing into property for example.
-Co-incidentally, the same company has a property development arm and the units that are sold to you are owned by the same company, with the price paid later proving to be a little over the odds you should have paid.   If these groups and the advice they give are any good, they should be getting enough business from referrals rather than resorting to telemarketing.

The Interview Process

During the interview process there will be some more subtle signs that you need to be aware of that may indicate an investment product/scheme promotion rather than genuine, personalised financial advice.

Firstly, how much time is given by the adviser to get to know your financial situation and your own attitudes to investing?  And when it comes to talking about investment options, are you allowed to give your own opinion and thoughts and are different options properly explored or do you feel like you are being guided down a certain route? Are you are being pushed into one particular direction or solution?

Do you feel that importance is placed on all aspects of your affairs, or that a lot of time is spent on one area in particular?  For example, is tax minimisation pushed heavily?

The lesson is- If you are in a room full of people from different backgrounds and walks of life, and everyone seems to be getting the same advice and the same solutions, beware.

And if it looks just a little too good to be true, well you know the rest!

High Return/Low Risk

This is investment nirvana, a higher return on investment A than investment B, but with lower risk!

I’m sure you are aware of the basic investment rule, the higher the return the higher the risk.  I assume most people by now would.  Then why do we keep getting sucked into things based on a divergence to this golden rule?  The problem is we are inherently greedy and this often overrides common sense.  A greedy financial adviser combined with a greedy investor is a terrible combination, but an all too common one!


Most dodgy investment schemes pray on two key motivations:
1. Our desire to pay less tax
2. Our desire for a quick, easy buck

Both are understandable factors, but should not be determining ones when choosing the investment strategy that is right for you.