Nick Bruining: There’s a name for returns on an investment that sound too good to be true - risky

With share markets in decline and interest rates trending lower, it should come as no surprise that questionable “safe” fixed interest rate investments are again popping up on social media.

Facebook, Instagram and other platforms are hammering seniors and others with claims of low-risk investments promising returns that are 2 to 4 per cent higher than the rates on offer from government-backed bank accounts.

It has been some time since a fixed interest fund collapsed. But, sadly, a collapse is as inevitable as a re-run of The Sound of Music on daytime TV.

To understand the potential risks, it is critical to understand where your invested money ends up because that ultimately determines how safe your money is.

As thousands of people have discovered before you, when the proverbial hits the fan the return of your invested money becomes more important than the returns on your money. Those same people lost some — or all — of their life’s savings by chasing that extra per cent or two.

While overly simplified, the world of money works a little like this.

Let’s take your kids or grandkids, who decide to buy a house. Banks, finance brokers and others borrow money from you, paying you interest for the use of that money. The grandies now borrow the same money from your bank which is paying you, say, 4 per cent a year in a term deposit.

With a 2 per cent profit mark-up, the bank effectively “sells” that money back to your loved ones for 6 per cent a year.

Time marches on.

Your 4 per cent term deposit matures about the time an ad pops up on Facebook, promising you a return of 6 per cent on your money. They’ll often use clever terms like “term account” which sucks you into thinking it must be like a term deposit.

It isn’t.

Assuming our glossy brochure company works on a similar profit margin to a bank, it in turn will need to sell the money for 8 per cent or more.

Like anything in life, no one wants to pay more than they need to. Especially when it comes to money. If your grandies can borrow money at 6 per cent with just a 5 per cent deposit, who in their right mind would want to pay 8 per cent a year? No one.

The only people who are forced to pay 8 per cent are the people the banks aren’t interested in lending money to. There’s a simple word for that kind of borrower: Risky.

That’s who your money is ultimately with.

In the case of banks, the return of the money they borrow from you is backed by the Federal Government’s Financial Claims Scheme. That security means most investors are happy to receive a slightly lower interest rate because their money is 100 per cent safe.

Only banks, building societies, credit unions and online banks registered in Australia as Authorised Deposit-Taking Institutions with the Australian Prudential Regulating Authority have that guarantee.

No one else does. No one. Period.

That means, depart from a bank and you are completely relying on the people to whom you’ve given your money to look after things.

Sure, they’ll have an expensive glossy brochure. Sure, they’ll have smiling people just like you on the website. But don’t get sucked in. The devil is in the detail of the 57 pages or so you’ll be asked to sign up to.

In among the pages you’ll see it spelt out: “The return of your capital is not guaranteed. You risk losing all or part of your money”.

Investment professionals do use fixed interest investments, but not this rubbish.

Superannuation funds generally use tradeable fixed interest investments called government and corporate bonds and, always, a big mix across a large range of investments. The research into the riskiness of each individual investment goes much deeper than a search on Google.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association