Stay Alert For Charlatans

By David McEwen

Monday 10th September 2001

Investment advisers operate under a light-handed regime in this country. Anyone can start offering advice and charge investors for the privilege.

Compare this with Australia, where some unfortunate individual recently went to jail for persistently giving share tips on a website without having an investment adviser's licence.

While most advisers are experienced and ethical, investors need to be aware that occasionally they may come across an out-and-out charlatan who could misuse or make off with client's funds. Since capital protection is the number one priority for investors, this obviously should be avoided at all costs.

Therefore, in the interests of minimising pain to investors' back pockets, here are a few adviser tools and practices that need to be taken with a grain or ten of salt.

- Forecasts

Predicting the future is an uncertain business. As the fine print often says, past performance is no guarantee of future returns. People who make a living out of investing others' money find that the higher the returns they suggest they can make, the more people want to invest with them. Therefore, the incentive is to look through rose tinted glasses. Be especially wary of suggestions that returns are certain or guaranteed.

- Graphs

Like statistics, graphs can easily be manipulated to produce a desired result. I went to a presentation this week where a funds management company was trying to show how badly managed funds do relative to index funds (which it happened to be marketing). The bar graph on screen showed the managed funds bar was only half the size of the index funds bar. However, the graph started at 12% rather than 0%, which made the
difference between the two look substantial. If the full graph starting at zero had been shown, the bars would have looked almost identical.

- Cold Calls

Investors these days are beset by friendly salesmen calling with exclusive tips about the next sure winner. In the vast majority of cases, these people are working against the investor's best interest. At best they are hawking shares in no-hoper companies or ruinously expensive software programmes. At worst they are fraudsters who will steal your money. Always ask yourself the question, "If this deal is so good, why are salespeople spending all their time calling strangers instead of investing in it themselves?"

- Over complexity

Many advisers have a tendency to rattle off complex ratios or show pages of computer-generated calculations to their clients. While many are attempting to do the best for their clients, others may well be trying to justify their existence, and their fees, by showing how difficult it is to invest wisely. Investors should live by the principle that, if they don't understand an investment, then they won't get involved until they do.

Moves are afoot to tighten up laws regarding investment advisers. The Securities Commission has issued a paper on law reform and is calling for submissions.

"We consider that the present law can be improved by clearer and more complete rules about disclosure, stronger rules for dealing with matters such as fraud or conduct which is likely to deceive, mislead or confuse and more practical provisions for enforcement," it says.

Anything that helps investors with the difficult job of preserving and growing their capital is welcome.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. He is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. He can be reached by email at davidm@mcewen.co.nz or by mail care of this newspaper.

Comments from our readers

No comments yet