Wealth in Practice: Non-standard investments - what lessons can we learn?

Wealth in Practice - May Edition

Moneycube's Wealth in Practice newsletter provides insights, resources and tips for professional advisors in Ireland. From the financial experts at Moneycube, it features opinions, technical updates, and a focus on wealth and pensions to help you advise your clients.

This month:?Non-standard investments - what lessons can we learn?

It’s been a tricky few weeks for investors in non-standard investments in Ireland, with no fewer than three troubled investment firms in the spotlight.

What happened??

The jailing last Friday of four former staff of Custom House Capital brought back memories of the business which collapsed in 2011.?The liquidator concluded that Custom House Capital €61 million of investors’ funds had been improperly diverted.?And while they forecast that an estimated €39 million of that will eventually be returned to investors, it’s more than a decade too late for many of them.?Custom House Capital’s clients invested an average of €93,000, mainly via pensions.?The court heard of the ruined retirements, health problems and other stresses that had resulted.

At the same time, renewable energy firm Solar 21, which raised a reported €209 million from Irish investors, is proposing a corporate restructure whereby investors “if the restructuring is successfully implemented the investors are likely to receive 61.2 per cent of what they are owed or 80 per cent of what they invested,” according to a report in the Irish Times on 8 May.

Thirdly, healthcare to renewables investment business Blackbee Investments Limited had provisional liquidators appointed following a court application by the Central Bank in order to protect investors.?Around €180 million of assets, held by 1,700 clients, are at stake, the court was told.

What links these situations?

It’s important to make clear that the problems at Custom House Capital, Solar 21, and Blackbee Investments have different origins and not all involve fraud.?But in their own ways each will have caused great stress and material financial losses to investors.

Perhaps the most useful lesson is to identify some warning signs that could help investors avoid similar situations in the future.?Here are three:

1.??????Excessive fees and sales incentives

Solar 21, for example, paid investment advisors fees of 6-8% depending on the volume of funds they placed there when it raised funds in 2017.?If you invested €100,000 (the minimum), your advisor got paid at least €6,000.?That created a very strong incentive for advisors to push the products.

In fact, it’s reported that ￡26m was paid out in fundraising fees.

In the context of a €209 million project it’s hard to see how the projects could make reasonable returns without taking excessive risks with this level of payout from the very start.?

Aside from the impact that fees have on returns, the long-term effect of excessive fees reduces the credibility that financial professionals provide value to their clients and leads to consumers being less inclined to trust professional advisors.

2.?????Promises of excessive returns

Beware the notion of ‘a deal’ in the world of investments.?Done well, most investing should be fairly boring.?But so-called ‘Structured products’, where your money is being ploughed into a wider property transaction or biomass construction project or whatever go to our lizard brain’s sense of getting in on a deal.

If it sounds too good to be true, it probably is. The Solar 21 project mentioned above promised a return of 25% at the end of 3 years, if not before.?Considering the fees being taken out along the way, that was carried substantial risk from the very beginning.

3.?????Lack of communication or missed investor repayments

A key test of project-based investments is whether they do what they say they will do, and in particular, their ability to meet the planned repayment schedule.?Missed repayments are a key warning sign.?In the case of Blackbee, for example, the Central Bank informed the High Court this month that the company was “currently failing to communicate appropriately with its clients and their brokers with respect to maturity defaults arising on certain alternative investments”.

At Moneycube we’ve long stated that the view the for most investors, high-quality, professionally managed, liquid investment funds, with transparent disclosure of costs, should be the cornerstone of most people’s investment strategy.

With that in mind, now seems a good time to revisit one of our classic articles from the archive concerning structured products which offer so-called capital protection. You can read the full article published in September 2017 here.

We would be happy to meet with you to discuss ways in which we can support you and your clients with their wealth and employee benefits. Drop us a line at [email protected]