Investors need to take more care

Increasingly complex financial products raise the risks

a woman

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Investors and investment houses are being urged to take more care in dealing with complex financial products.

Greg Medcraft, chairman of the Australian Securities and Investments Commission (ASIC) has highlighted the growth of self-managed super funds as the greatest challenge facing the regulator in the next decade.

Mr Medcraft has told The Australian that he was annoyed with the makers of financial products who did not properly consider the risks of the products and the market they were selling to. He said they needed to wise up and do the right thing, or risk facing action by legislators and the courts.

Many Australian investors currently rely on financial planners to decide which products to invest in, but the level is declining as more and more switch to self-managed super funds. That could raise the risks of investments going bad and of investors selecting inappropriate products, unless they have some financial acumen.

Even with a financial planner to guide investors, it seems complex financial products are still catching unwary souls out. That’s either due to a lack of understanding themselves by the financial planners or as cynics might suggest, a motive of feathering their own bed before their clients.

We’ve already seen the collapse of several ‘shadow-banking’ companies like LM Investment, Banksia Securities and Wickham Securities, and the subsequent massive losses faced by retirees and other investors.

Mr Medcraft says that financial innovation was driving increasing complexity in financial products, markets and technology. In the last year, we’ve seen several companies rush to issue hybrid securities, like APA Group (ASX: APA), Crown Limited (ASX: CWN), Commonwealth Bank (ASX: CBA) and Suncorp (ASX: SUN) taking advantage of investors looking for relatively-safe high yielding products. However, many of those hybrids come with 100 plus page prospectuses, that even some financial experts have trouble deciphering.

Foolish takeaway

As Mr Medcraft says, “If you don’t understand the product, don’t buy it”.

The onus is clearly on investors to understand what they or their financial planner have invested their life savings in. Despite ASIC’s tough stance, there are limits to what regulators can do. There’s no guarantee that even with ASIC involvement that investors will recover their capital, should they fall afoul of an investment gone bad.

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