Adam Fayed, CEO of adamfayed.com.
What is an investment company? It sounds like an obvious question, but the answer does elicit different responses.
I would define an investment company as a firm that matches investors to various assets according to the risk appetite of individual investors. That means matching investors to low, medium, high and ultra-high-risk assets depending on the risk appetite of the investor in question.
Understanding Risks
Naturally, this means investors can lose money if they are higher-risk investors willing to take a chance in return for accepting risks, such as default and investment failures. This comes with the territory, and many people know that investing—and especially high-yield investing—comes with risks.
Yet despite this, I sometimes see selective memory from investors after things go wrong. I have seen people claim to have “forgotten” about the risks or that they “can’t remember” signing a risk declaration.
This is often not helped when an investment collapses or defaults, and commentators online and other advisory companies increase client doubts. They may claim that the advisory firms only sold an asset for the wrong reasons, such as high commissions, despite not having strong evidence for that claim.
Public perception of investment responsibility can be complicated. For example, the footballer Cristiano Ronaldo faced a lawsuit after “promoting” an NFT. While he is a sports star, not a financial expert, and it is widely known that NFTs are higher-risk assets, the situation highlights how complex these situations can become when investments don’t perform as hoped.
The Unknown And Known Unknowns
When things go wrong, it can result in some investors thinking that while they knew about the risks associated with the investment, they didn’t know the full picture.
In reality, we can never know the full picture with any investment, or for that matter anything in life, as there are always unknown unknowns and known unknowns. Therefore, it makes sense for advisors and other professionals to clearly explain certain concepts to clients.
When it comes to things like “capital guaranteed” and “capital protected” products, it’s important to remember that a guarantee is only as good as the person or institution giving it.
One of the common facts about private investments, such as private debt, is that they are less transparent and regulated than instruments that are listed on the stock market. An A-rated massive company might only need to pay investors 5% to 7% per year to hold their bonds, whereas private companies often need to pay 10% per year or more. This makes sense because investors are compensated for the higher risks they are taking if anything goes wrong.
People accept this when things are going well but are often less likely to accept it when things go badly—an example of selective memory. Selective memory does affect people in numerous ways when it comes to investing, including past investment performance, but I think it does need to be acknowledged when it happens.
That said, it’s also important to mention that advisory companies can be at fault through actions like poor due diligence or misrepresentation of risks.
What Advisory Companies Should Do
The question is, how should advisory companies deal with this reality? Some advisory companies just avoid higher-risk investments like crypto, private equity and private debt completely or suggest that even clients who understand the risk only invest 2% to 5% of a portfolio in them.
This is sometimes because they worry about bad online reviews if something goes wrong, despite the fact that, as I mentioned previously, online reviews don’t always have as big an impact as people assume.
Personally, I think the most important thing is transparency regarding the risks, benefits and drawbacks.
In today’s world, advisors who refuse to invest in certain investments might find that those clients invest in even riskier assets themselves. A good advisor or advisory company can at least warn clients about the risks associated with higher-risk assets more effectively than do-it-yourself (DIY) platforms.
Investment declarations warning about risk are important, and currently, investors in many jurisdictions need to confirm that they understand the risks associated with certain investments—but this doesn’t mean that such investments are risk-free or without problems.
The important thing for investors and companies is to establish transparent processes. This transparency should include mentioning default risk associated with any investment, both for ethical reasons and to guard against selective memory from investors.
Even simple emails or other messages confirming the positives and negatives associated with any product help with this transparency process if such communication mentions the default risk.
It is also important to re-assert the risks associated with fixed-return products if they mature after the term, as many investors will automatically renew these renewable two or three-year options if they see success in the first instance.
We also need to be aware that many of the larger frauds even deceived large institutional investors and governments, and fraud can also occur in the regulated space.
Ultimately, it’s important to recognize that not all risks can be foreseen, even with thorough due diligence, and there are hidden risks associated with everything in life and investing.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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