Red flags for investors

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Last updated: June 18, 2024

Investing should be done with confidence, honesty and transparency. So, it’s important to know how to identify a suspicious investment scenario. We work with established, renowned and trusted fund managers. We know what looks good, and therefore what we’d avoid. This blog explains the red flags that signpost an investment to walk away from, to help you make decisions you are comfortable with.

These are traits we never embody at Stephen Eve and actually pride ourselves on being the opposite of all of these.

7 red flags investors should look out for

1. Unregistered individuals and/or companies

The Financial Conduct Authority (FCA) is responsible for sanctioning UK approved funds as well as overseeing and approving changes throughout the lifecycle of the fund.

Checking that a fund is registered with the FCA is a good first step in understanding how credible it is.

Secondly, you should verify the credentials of any individual or company offering financial advice to ensure they are authorised to do so. Also check if they're registered with the FCA (Financial Conduct Authority) for peace of mind.

Unlike other countries, in the UK, the title of financial adviser or planner can be used by anyone and you aren’t required to be licensed to implement financial plans. Not something we can say we agree with!

To ensure you receive a high quality service, we would advise working with a Chartered Financial Planner who is a member of the Personal Finance Society (leading professional body for the financial planning community).

All Chartered Financial Planners have completed degree-level qualifications and have at least five years’ relevant professional experience. They are also required to evidence adherence to the code of a valid Statement of Professional Standing. This confirms that they are professionally qualified, adhere to a code of ethics, and commit to ongoing professional development.

2. Lack of documentation

Cutting out the paper trail is a big red flag. Compliance and regulation are integral parts of safe investing to protect the customer.

As we’ve mentioned above, FCA registered funds, financial planning firms, and Chartered Financial Planners need to adhere to a code of ethics including a consumer duty policy. That means paperwork and records should be kept to show the right thing is being done by the customer.

If someone is doing things ‘off record’, it’s a sign to be wary of what they are proposing.

3. Guarantees

Nothing in life is guaranteed, especially not investment returns. What we can do is base investment portfolios on evidence, theory and research and work with trusted global fund managers with a positive track record. However, a good financial advisor or fund manager would never promise a return as they understand that the market fluctuates.

A long-term approach including a diversified portfolio will ordinarily generate a substantial return and you can read about that here. Nonetheless, it requires a level-head and alignment to your goals to reap those rewards, and human behaviour can’t be guaranteed, something you can also read about here.

4. Proposing unrealistic returns

If a fund has massively outperformed in the past, it is worth checking the level of risk taken by the fund manager or investor. As a general rule, the greater the potential returns, the higher the level of risk. This does mean that there is also a higher risk of loss in future. So, whilst the fund may have prospered previously, there is a chance of substantial decline going forward.

‘Too good to be true’ returns are often just that. They are broadly based on luck, and timing the market at the right time but, ultimately, timing the market is an almost impossible task.

We don’t believe we can predict the future and in taking unnecessary risks – history shows that a diverse investment portfolio reduces financial risk and that’s why our philosophy is based on sound evidence and theory.

Rather than relying on one person who tries to ‘beat the market’, we work with trusted global fund managers on a long-term approach.

Research shows that missing only the 10 best days in the market over 20 years reduces returns by more than half.* An unnecessary risk.

You can read more about a diversified, evidence-based investment approach here.

5. Pushy salespeople & pressure to make a decision

If someone is rushing you to buy something, it begs the question – why does it need such pressure to be sold? If it was truly so good, wouldn’t it speak for itself? If the quality of the product or service was high, and the price felt right, you’d buy it even if someone wasn’t pushing you to.

If a salesperson is overly keen for you to buy their product, it could mean they are concerned more with the sale than your satisfaction. Something to be aware of when it comes to investing.

6. Promotional offers

e.g. Discounted rates, the use of ‘exclusive’ & ‘one time only’

A decent fund will never be ‘on offer’. Trusted fund managers know the value of their product, the returns it can make for investors, and therefore are comfortable with the fees they charge. If you see an investment linked to a promotion such as discounted fees or an exclusive deal then consider why they need to market it in that way to gain uptake.

7. No statistics or proof of previous performance

Many of us now rely on reviews or statistics when purchasing, we’re far more likely to part with our money if a product or service has been rated highly or shown to perform well. Investing is no different. A good fund provider and investment manager or financial planner will be able to show you a track record of how the fund has performed. If not, how can you have confidence in investing your money into it?

Ask whoever you are investing with for proof of past performance. Although this does not guarantee future results, if the fund has performed well over a substantial period of time, it provides you with reassurance and is likely to be safer than a fund that is not evidence-backed.

We have several statistics, reports and graphs we can share about global equity funds, please just ask if you are interested and we can share them via email, text/WhatsApp, or meet in person to talk them through.

Investing isn’t something to be afraid of

Whilst we have covered some points to be cautious of on your investment journey, we hope you do not encounter professionals or companies who demonstrate any of them. Many financial advisers and fund managers are trust-worthy people who want to do the best by their clients. However, as in any industry, it pays to know who you can and can’t trust, so we hope these points help you to have confidence in your decision-making.

If you would like to talk anything through about your investments or are considering investing money then all of our initial meetings are at our expense and we’d be happy to discuss your financial plan with you.

*Visual Capitalist - Timing the Market Chart

This content is for information purposes and should not be treated as financial advice. We would always recommend speaking to a professional before making decisions regarding your wealth. The value of investments can fall as well as rise and you may not get back the amount originally invested. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. Even a long-term investment approach cannot guarantee a profit.