The scary finding was that he was fairly confident that the top two search results were both investment scams. The series was informative not just because it highlighted current scams, but because it also explored our natural tendency to trust and how scammers use this against us.
Unfortunately, this isn’t an academic matter. Recently I was in conversation with a lawyer in Central Otago who relayed a situation where a client had been scammed by an individual who purported to help clients locate and then place the most competitive term deposit rates.
This seemed a plausible business operation and they weren’t offering excessive rates of return that might normally trigger alarm. Sadly, the capital disappeared overseas without any hope of recovery.
In June 2019 I addressed the issue of investment fraud in a column titled, "Seven questions you should ask your financial adviser". That column suggested audit-type questions that you could ask of an existing adviser.
In this column I thought it would be helpful to revisit this topic, but with the aim of identifying red flags in the pre-screening and implementation stages of the investment process, i.e. before your capital is transferred to another party.
1. How did the interaction come about?
While cold calling still occurs in the financial services sector, in most legitimate cases there will be a reason for the contact and contact will usually be preceded by a written communication. An email gives you an opportunity to look into the email address, individual and company. If the contact is completely unsolicited then this should be viewed as a red flag.
2. Have you checked the Financial Markets Authority’s (FMA) warnings and alerts page?
The FMA is the government agency responsible for financial regulation in New Zealand. On its website, www. fma.govt.nz, you can find a weekly scam warning update and a list of various companies that are, or have recently been, operating illegally in New Zealand. However, they are quick to point out that the name of companies perpetrating scams change frequently.
3. Have you searched the individual on the Financial Services Providers Register (FSPR)?
Anyone who gives regulated financial advice to retail clients must hold, or operate under, a Financial Advice Provider full licence. As a consequence, they will be listed on the FSPR, fsp-register.companiesoffice.govt.nz. If you cannot find them on the FSPR, this is an absolute red flag.
4. Does the individual work for the organisations that they purport to represent?
You would think that this would be an easy question to answer. However, scammers have been known to assume the identities of legitimate individuals. Try making contact with that individual through an independent source rather than the number, email address or even the website provided by them.
5. Where are you depositing your investment capital?
The key matter here is to always make sure that your investment capital is being deposited into a trust account held with a New Zealand institution and involving a New Zealand bank. This is because a trust account operates under strict reconciliation and audit requirements.
Funds within a trust account are held separately from the operational bank account of a business. While it may be appropriate that any fees you are paying are paid into the advisory firm's business bank account, the investment capital should never be.
6. Who holds the ownership of the investments?
The separation of roles and responsibilities plays an important part in protecting your money against fraud. In pooled investments like managed funds and KiwiSaver, the underlying investments are not held in your name, but they are held by an independent custodian (e.g. The New Zealand Guardian Trust Company Limited) which acts as the supervisor, or which is appointed by the supervisor.
The supervisor's role is to hold the assets on trust and to supervise the manager's performance of its functions and its obligations as issuer. The important point here is that there is clear separation between the assets that the investor owns and the person or organisation that is providing investment management services.
Under this structure, even if the investment manager fails financially, they cannot call on client assets to support themselves as they are held by the custodian and, as such, they are out of reach.
Whether explicitly agreed or not, the basis of investing is that you are prepared to take on some risk to earn a higher return than you might receive otherwise. In this process, some variability of return is inevitable. However, the risk that you cannot afford to take on is fraud risk where the total loss of capital is highly likely.
It might sound old-fashioned, but even in an increasingly digital world there are some services that I would prefer to access by meeting face to face with a real person. For me, investment and financial planning services are in this category. Meeting with a real person does not mean that you are immune to the possibility of being scammed but I suggest that it drastically reduces your chances.
— Peter Ashworth is a principal of New Zealand Funds Management Ltd and is a Dunedin-based financial adviser. The opinions expressed in this column are his own and not necessarily that of his employer. His disclosure statements are available on request and free of charge.
