We often get asked by brokers about new products they’ve seen in the alternative space, namely loan notes and bonds and similar structures. Believe it or not, we’re not automatically negative - we thrive on healthy competition however bad products damage the entire industry. So we guide our brokers through the research steps that we at Accruvis follow, which often highlights reasons they wouldn’t want their clients using suchproducts.
We err on the side of caution - which has helped a lot of our clients from getting involved in schemes that have lost money or gone bust.
We assess each offering using a series of simple steps:
Commission Amounts
High initial commissions increase risk - as the amount paid to brokers needs to be recouped before any profit can be generated. It’s not uncommon to hear of initial commission rates of up to 20% - which means the remaining 80% of the investment needs to grow by 25% just to get back to the original investment amount, not to mention the operating costs which also have an impact on a company being able to meet their financial obligations to investors.
Another aspect of the commission rate in relation to the client profit - if the broker is being offered more to sell the product than the investor will get as a return, something is usually wrong.
Be suspicious of “Holes in the ground”.
Mining as an example is notoriously speculative - and usually takes place far far away where it’s impossible to even check if a mine exists, let alone whether there is anything to be mined. Major mining projects are high risk. Small, niche, independent mining rarely seems to produce the promised returns - in our experience.
Similarly, usually closer to home, building developments that offer security over the project as it’s being developed have increased risk as initially the security is literally a hole in the ground where foundations are intended. There are stronger security options.
People involved – Do the directors hold the required skills and experience to run the business, do they have credible history, are they visible and easy to find online.
Ultimately the question should always be asked - Would you trust them as individuals ?
Likewise are the professional advisers credible? Are they substantial firms or one man bands. Why wouldn’t a firm use the best possible advisers? Using quality advisers doesn’t guarantee a firms validity, but it does reduce the overall risk.
Are the company accounts audited?
Accounts come in different forms. The basic format consists of a director providing the company accountant with figures which are then formatted & submitted as accounts. If the director submits incorrect figures - by accident or design - they will most likely be entered into the accounts, giving an incorrect view of the firms position.
Independently audited accounts are significantly more reliable. External auditors (of a PLC) will examine every aspect of the company’s operations, and compile their own figures. This is then presented in a report, which the auditors carry liability and responsibility for.
This provides a huge degree of insight into the underlying firm which most investors couldn’t achieve on their own, and which is backed by independent professional experts.
Check the accounts.
Even unaudited accounts can be helpful. Firstly - are they available? If not, why not?
Secondly, accounts (filed in the U.K.) provide lots of opportunities for cross referencing. Do the directors have other companies? Are they successful companies? Are they connected to the investment company? Does money shuffle between them as loans or payments, possibly draining the investment company or pumping up its turnover falsely?
We’ve seen investments that look very worrying when you scratch below the surface of the accounts and look at the directors’ other companies and the movement of money between them all. All it takes is to go to Companies House and do some investigation as all the information is publicly available if you know how to search.
Common Sense
We routinely see investments which offer huge commission and client returns every month. The returns are so large, it begs the question - why don’t the people promoting the investment just invest their own money ?
If it grows as they’re saying it would they’d be retiring as multi millionaires in a year or two.
It doesn’t make sense….
Business plan
We’ve been around long enough to know the impact that bad investments have on the industry, which is why we are happy to help a broker assess an investment so they can then decide whether the risks meet the objectives of their clients. Numerous products and distribution networks have disappeared over the years along with investor capital, which could have been avoided by following the steps we take when assessing a products validity.