Call 1300 200 340

What to ask your financial advisor when they say it’s too risky.

string(167) "By [post_author_posts_link] on [post_date] in [post_categories before=""] [post_edit]"

What to ask your financial advisor if they say "it's too risky"

Have you ever considered an investment opportunity only to get the last minute jitters before pulling out? Perhaps, something just did not feel right or your advisor said: "it's too risky".

Balancing independent advice with one's own insights and experience is a common ability my wealthier clients seem to have. But if the advice is based on personal bias and a lack of experience, it can get very costly. Here's a lesson for us all...

As we move towards the end of our latest capital raising (offering another 30% over 12-14 months), I was contacted by a prospective investor. Let's call him "David".  David is in the latter part of his working career and he is a little worried his investments are not on track to deliver the sort of carefree financial freedom he wants.

David has been following our small residential development projects for about 5 years now and told me he was impressed by all the feedback and results. 

We spent many hours discussing the merits of the project including the various mechanisms for reducing risk despite the outsized returns on offer. David was also excited that we'd just paid a 30% return to our phase 1 investors in the same project. The project now has a pedigree.

Despite all the merits of the offer and our previous successes, I did not hear back from David.

I kept wondering, what is holding him back: nerves...inexperience... fear...?


 Eventually, I called David back. I asked him why he was still reluctant to proceed considering his recent enthusiasm. Finally, he reluctantly said,

"Michael, my financial advisor told me it's too risky".


David had seemed so excited about investing $100,000 after noting we'd just repaid the capital and a 30% (annualised) return to the stage 1 investors in this project. It had already delivered as promised and David seemed excited to be part of the next stage. He said he wished he'd invested in the first stage as his $100k would now be $130k.

So what had changed? Especially after he said,

My $100,000 is currently sitting in the bank "doing nothing"


With the low interest rate earning him a net loss after inflation and tax, he knew it was time to do something when David called, he said his Financial Advisor spent a few minutes looking at the offer document and very quickly decided the investment was "too risky"

By this stage I would normally have said, "oh well, maybe the next offer will be better for you David" and just moved on. But I sensed David was not getting impartial advice.

His advisor had not been specific about what risks bothered him. He made no mention of what risk mitigation measures he thought were good. For example, the 30% fixed return on $2,5m invested will be $300,000 paid in priority from a total projected profit of just over $10m. This means the first $300,000 is quarantined for investors. So if the homesites in this small land subdivision had to be discounted, for whatever reason, and profits were eroded considerably; the very first sales making up the first $300k in profit will be paid to the investors.

That's an example of numerous, unique, risk mitigation mechanisms built into this offer that David's advisor would not have been aware of.

In the back of my mind I was thinking it's time David changed his Financial Advisor, but instead I urged David go back to him with a few pertinent questions to gauge his level of knowledge and experience:

  • Why do you think this offer is too risky for me? - risk is relative to the individual investors circumstances and risk appetite.
  • What exactly are the specific risks that concern you? - by understanding each risk, the more relevant risks can be quantified and put into perspective.
  • What risk mitigation do you see in place to reduce these risks? - there are mechanisms that can reduce known risks and if the advisor is not aware of them then...YES....it's too risky.
  • What risk mitigation would make the risks more acceptable? - If they say it's too risky after having outlined why, then the next question is to ask what risk mitigation measures would make the investment more suitable. If you advisor shines on this question - keep them.

To be clear, this is not an attack on Financial Advisors. I work with a number of fee-for-service Financial Planners who understand the exact nature of these wholesale, private market offers. And because they mostly charge a fee for service, and do not take commissions, much of the personal bias is eliminated. Fee-for-service Financial Planners sometimes invest in these more sophisticated offers themselves which means they get to understand the risks first hand.

Like David's advisor and In my experience, most Planners are restricted to offering off-the-shelf financial products offered via their financial services licensee which means ​they rarely have access to these off market, private offers that were once restricted to the "big end of town".

David then asked me if I wouldn't mind discussing the built-in risk mitigation in this offer with his Financial Advisor. I said I'd be glad to ....

... but, first, I asked David a few more questions about his Financial Advisor...

"How is he paid - commission or fixed fee?"

David confirmed he was paid a commission for recommending managed funds.  David did agree that it's unlikely, therefore, that this particular advisor was thinking about David's best interest as was subsequently confirmed below.

"Has he invested in private market offers like this before?"

David confirmed that his advisor had NOT invested in off-market  small 'co-development' projects  himself which means he simply could not have analysed the offer in a meaningful way in such a short space of time.

"Is he restricted by what investments he can recommend?"

As I mentioned, David confirmed that his advisor cannot offer these sorts of investments so he has had little to no experience in assessing the risks and assumptions behind the proposal. In fact, immediately after saying this investment was too risky, he offered David an alternative investment. Obviously this did not escape David.

"It's human nature to say "it's too risky" when you don't understand the risks".

By now it was obvious to me that this particular "Advisor" had no clue about how to evaluate an investment like this. His immediate response was to say "too risky" and hopefully save face by not declaring his ignorance or personal bias . At least this approach almost guarantees David will not lose his capital by continuing to leave it in the the bank. 

One thing for sure though - this approach might protect his capital - but investing is all about putting said capital to work and growing it above and beyond inflation.

I reminded David that I have a number of investors who invested $100,000 and have just had $130,000 returned. How do you think he felt when he compared this to his $101,500 balance: a $1,500 increase in equity on his $100k compared to $30,000?

What's more, most of my '$100,000' investors have reinvested their (now) $130,000 into the next phase of the project - taking their original $100k to $169,000 when the project ends in about 14 months. 

One thing I can say... at least David seeks independent advice. The big question is who is giving the advice and what experience do they have? I certainly don't want a "lead ball teaching me to swim".

"David", if you're reading this - you can put your application form in here. It's quick and easy.

I'd love to hear your thoughts. Agree? Disagree? Want more information:

michael@hotspotcentral.com.au

Author: Michael Fuller

Michael created Boomscore to identify the country’s hottest investment suburbs so you don't have to spend countless hours searching, sorting and analysing vast amounts of property information. Michael also connects investors with  highly profitable, private market investment opportunities with an exceptional track record so far.
Michael can be contacted on michael@hotspotcentral.com.au

Current Filters

woo_filter_post_meta

Array
(
    [0] => WP_Hook::__set_state(array(
   'callbacks' => 
  array (
    0 => 
    array (
      'wpc_filter_post_meta' => 
      array (
        'function' => 'wpc_filter_post_meta',
        'accepted_args' => 1,
      ),
    ),
    12 => 
    array (
      '' . "\0" . 'lambda_19' => 
      array (
        'function' => '' . "\0" . 'lambda_19',
        'accepted_args' => 1,
      ),
    ),
    20 => 
    array (
      'woo_portfolio_post_meta' => 
      array (
        'function' => 'woo_portfolio_post_meta',
        'accepted_args' => 1,
      ),
      'do_shortcode' => 
      array (
        'function' => 'do_shortcode',
        'accepted_args' => 1,
      ),
    ),
  ),
   'iterations' => 
  array (
  ),
   'current_priority' => 
  array (
  ),
   'nesting_level' => 0,
   'doing_action' => false,
))
)