The recent controversy at Davy and the ongoing Dolphin Trust saga has left many investors worried. The Davy case – which saw the stockbroker fined €4.1m following the involvement of 16 of its then employees in a bond deal scandal in 2014 – has raised serious questions about the extent to which investment firms can be relied on to act in the best interests of clients.
eparately, about 1,800 Irish investors who invested more than €107m in Dolphin Trust have little hope of ever seeing their money again after the company, which is now known as the German Property Group, collapsed into insolvency last year. Dolphin Trust is not regulated by the Central Bank.
These cases – along with previous controversies such as the collapses of Custom House Capital in October 2011 and W&R Morrogh in 2001 – show just how vulnerable investors can be when they entrust their money to a firm.
So what steps can you take as an investor to ensure you're putting your money in the right place – and with a firm that will act in your best interests?
Avoid loan notes
A loan note is essentially an IOU where one party owes money to another. It is an unregulated investment where the borrower (the company seeking the loan) promises to repay the loan – and usually, a handsome interest rate – to the lender (the investor). The Irish investors facing losses on their Dolphin Trust investments had put their money into loan notes.
“Loan notes issued by small companies seem to offer higher returns but are very high risk and not suitable for most consumers,” said Tony Gilhawley, a Dublin actuary with over 40 years experience in the life assurance and pensions industry. “Many consumers have lost all their money after putting it into loan notes. Avoid loan notes sold by private companies.”
Loan notes are often used to raise money for investment projects, including commercial or residential property projects.
As loan notes are unregulated, you are not entitled to any compensation under the State’s Investor Compensation Scheme if you invest in these products and something goes wrong. This is the case even if the broker that sold you the product is regulated.
Steer clear of any investment which involves lending your money to an unregulated private company, advised Gilhawley.
Only deal with regulated firms and brokers
Be sure that any broker, adviser or investment firm you are dealing with is regulated by the Central Bank – or a similar regulator in the European Economic Area. By doing so, you will be dealing with a firm or broker that should be following the rules laid down by law – and you should also have comeback if things go wrong.
“Under consumer and investor protection law, when regulated firms provide clients with investment advice or make investment decisions on behalf of clients, they must act in the client’s best interests at all times and they must make sure that the product they recommend suits clients, including by conducting a thorough assessment of an individual’s situation and needs,” said a spokeswoman for the Central Bank.
To find out if a firm is regulated in Ireland, check the Central Bank's register of authorised firms.
Don’t invest in unregulated products
Even if the broker or firm you are dealing with is regulated, some of the products being sold by it may not be. Do not invest in unregulated products as you will have little, if any, recourse if things go wrong.
“Ask the adviser if he or she is subject to Central Bank conduct of business rules when selling the investment product,” said Gilhawley. “If not, be very careful as it means the investment is unregulated. Regulated advisers are not regulated by the Central Bank when selling unregulated investments.”
Be aware that the commission paid to a broker to sell an unregulated product could be much higher than the commission paid on regulated products. Brokers must clearly inform clients when they are being offered unregulated products, according to the Central Bank.
The blurred line between regulated and unregulated investments can be very confusing and is why some investors get caught out – particularly if using a regulated broker that the consumer has dealt with, and trusted, for years.
Check if you're covered by your broker’s insurance
With professional indemnity insurance, you can sue a broker or adviser for damages if he has made mistakes or is found to have been negligent in some or all of the services that he provided to you. So find out if your broker or adviser has professional indemnity insurance for the investment he is recommending – and don't put your money into the product if it isn't covered. “If he has no professional indemnity insurance covering the sale of this investment, it means the product is unregulated and you’ll have no comeback later on if things go wrong,” said Gilhawley. “Most regulated advisers have no professional indemnity cover when selling unregulated investments.”
Gilhawley is aware of cases where regulated brokers sold unregulated investments which therefore weren't covered by the broker’s professional indemnity insurance.
Google the directors
A simple Google search could alert you to wrongdoing at a firm. “If you are being advised to invest in an unknown company, Google it and the people running it,” said Gilhawley. “They [the directors] may have been involved in the past with companies which failed.”
Do not invest with a firm run by people that have a history of serial bankruptcy or insolvency, fraud or financial irregularities.
Get a second opinion
“If unsure [about an investment], ask another adviser, friend or family member who knows about money, to review the investment,” said Gilhawley. “They may spot something you haven’t. Two pairs of eyes are better than one.”
Avoid hasty brokers
Steer clear of a broker or adviser who wants to sell you an investment without reviewing your financial circumstances and appetite for investment risk, advised Gilhawley. Even if you are asked questions about your appetite for investment risk, avoid any broker or firm that does not take any concerns you have expressed on board. “A reputable adviser will conduct a thorough analysis of your current circumstances before recommending an investment to you,” said Gilhawley. “Another red flag is if the adviser wants you to invest in an investment straight away – and does not set out in writing why the investment is suitable for you. Avoid an adviser who wants to sell you an investment at your first meeting or contact.”
Walk away from ‘out of the blue' opportunities
“Avoid an adviser you don’t know who contacts you out of the blue with an investment ‘opportunity’,” said Gilhawley. “A reputable adviser won’t contact you that way.”
Be suspicious of out-of-the-ordinary returns
Avoid products that offer returns out of line with normal investments. “If an investment is say offering a 'guaranteed' return of 7.5pc a year when banks and State Savings are providing much lower returns, be very, very careful as it’s probably too good to be true,” said Gilhawley. “There’s a catch you haven’t spotted.”
Don't invest money that you can't afford to lose
Although there are rules in place for investment firms, not everyone plays – or is bound – by those rules. “Investors should never invest money that they cannot afford to lose,” said a spokeswoman for the Central Bank.
