Diana Clement: Investment rats know how to bait a trap

Thousands of Kiwis have lost their financial shirts. Many couldn't spot a rat until they were bitten fair and square in the rear end. "He was such a nice man", "he said all the right things", "my adviser recommended the company" and so on. The reasons people put tens and even hundreds of thousands of dollars with these companies were sometimes unbelievable.

I decided to look at a few of them. How often do you hear or read that a company is: The trusted name in ... when I smell a rat it's often because the company in question has used highly questionable marketing speak. If it needs to claim it's the "trusted name" in XY or Z, investors should ask more questions. Trusted by whom? Another classic is the lies, lies and statistics approach to selling financial services products.

Companies that use statistics and marketing speak to sell poor value products or scams rely on our inability to tell truth from falsehood. We're a trusting nation and assume people are telling the truth, not fabricating lies.

Some weeks back, I was working on an article about investing in gold. I'd seen an advert on TV from BullionBuyer.co.nz "New Zealand's trusted name in bullion trading".

Having never heard of Bullion Buyer (aka Grace Holdings), I did some basic internet sleuthing and it didn't take long to confirm my suspicions.

The company was only formed last year and the company's "asset allocation specialist" Gus Geldman just happened to be facing charges in the United States for falsely identifying himself as a securities broker to entice investors to give him money.

A colleague, Karyn Scherer, wrote an article about Geldman's involvement in Bullion Buyer in the Business Herald a few weeks later that can be read here: http://tinyurl.com/3flp5ao.

I would, quite frankly, do that sort of search before handing over a large sum of money to any company, even an authorised financial adviser - although they are now regulated.

You can find out a lot about a company director by looking at his or her past directorships on companies.govt.nz.

Guaranteed. The word "guarantee" is real sucker tucker.

People think they can earn good returns without any risk.

This week, I found property number 1607171 advertised on Realestate.co.nz as "government guaranteed investment". Sound too good to be true?

The reality is that the investment isn't guaranteed by the government as this advert from Don Ha Real Estate would suggest.

There is a lease on the property to Housing New Zealand (HNZ), that guarantees the rent, not the investment. There's no "guarantee" that this property can't go down in value or be impossible to sell for whatever reason. The advert for property 1480866 advertised by Lodge Real Estate (Hamilton) is even worse.

It just talks about guaranteed investment without mentioning at all it is the rent that is "guaranteed", not the investment.

Needless to say there are a large number of disgruntled owners of rental houses leased to HNZ who are not happy with the return on their investment from this type of property.

Flash names. Names mean nothing. Some of the failed finance companies deliberately chose posh English-sounding names to convince potential customers that they were a trusted name, old money, dependable, and all that, even though they were Johnny-come-latelys offering risky investments.

Having a posh company name meant diddly squat.

They were small companies with a few private directors and no track record.

In the case of Bridgecorp, founder Rod Petricevic had a history of losing money. His Sweetwaters music festival business had crashed and burned in his younger years leaving debtors out of pocket and, in the 1980s, Petricevic was behind Euro-National, "a large and complicated financial services group" (sound familiar?) which collapsed spectacularly.

Free lunches. If you're offered something free, ask questions. Offers such as free investment plans, seminars, holidays or other freebie are classic sucker bait. Education workshops are nothing more than sales pitches, that are often pushing poor-value products on innocent people because they can't sell them to wise investors. Even worse, they can be fronts for scams.

Urgency. The only reason anyone in the financial services or related industries will encourage you to "act quick" is to ensure you don't have the time to find out the truth about them or their company.

This urgency is usually related to an investment in a bubble. Will you be poor for the rest of your life if you don't take up this offer? Not on your Nelly.

Bubbles attract riff-raff. There are those who look for ways to make money out of the latest investment fad. They can spot a quick dollar.

Currently it's gold. When property was the in thing, these people were offering to find property, manage it, teach or mentor you about property investing.

Beware the glitter of gold

Gold investing hit the headlines in recent weeks when former head of Telecom Theresa Gattung went public to say that she had made millions by investing in gold.

Gattung may be smiling about her profit, but will anyone buying now turn a profit? Those who do well are usually those who buy before the frenzy, such as Gattung.

Although gold hit a high of US$1900 ($2487) an ounce earlier this year, it has since slipped back to trade at about US$1600 an ounce this week.

The gold price typically rises when sentiment in the economy and financial markets is low. If you're holding real gold it can be a hedge against inflation - or, as some believe, the collapse of the Western economic system as we know it.

Thanks to the Herald's investigation into Grace Holdings (Bullionbuyer.co.nz), I wasn't able to publish my column when I wrote it. But some warnings about investing in gold are still timely as rodents scuttle in to prise people from their hard-earned money.

When something like gold trading is advertised on prime-time television, it's time to ask if it's in a bubble.

There is a real case to be made for seeking independent professional advice before handing money over to anyone trading precious metals. Despite what the carefully worded adverts suggest, no market continues in an uninterrupted trajectory upwards. Sooner or later there will be tears.

If you're simply buying gold or precious metals bars that are delivered immediately, your risk isn't too great. The market may fall, but you can hold the gold until it regains its value.

If you choose leveraged gold buying where you are borrowing to trade gold on markets, your risk is amplified.

Even if leveraged buying was as safe as it sounds in marketing speak - and it's not - I certainly wouldn't be handing large chunks of money over to a company that isn't regulated by anything like the Financial Markets Authority.