Navigating the risks: recognising the red flags of alternative investment scams

Many of us have a broad understanding of conventional investments, such as shares, bonds and property. But alternative investments, such as art, gold coins and whisky, have gained popularity recently and are much less familiar.

At Schroders Personal Wealth, one of our investment principles is diversification. This simply means not putting all of your investment eggs in one basket. The idea is to spread your risk exposure by holding different investments and asset classes (an asset class is a group of investments that have similar characteristics).

In a diversified portfolio, investments that perform well might balance or outweigh other investments that may not be performing as well. This could help provide a degree of protection against major losses to your investments.

Please note that Schroders Personal Wealth do not offer alternative investments.

One way to diversify your portfolio is to hold alternative investments. But these often have low liquidity, meaning they can be difficult to buy or sell quickly and easily. As a result, a portfolio with relatively high holdings in alternative investments could be comparatively risky.

Types of alternative investments

There are generally two types of alternative investments: tangible and intangible.

Tangible investments are physical: you can see, feel and touch them. These include such things as collectables (rare wine, coins, stamps, fine art and vintage cars) or real assets (transportation and land).

On the other hand, intangible investments cannot be touched, as they have no physical presence, but they do have monetary value. Examples include private equity (investments in private companies or public companies that intend to go private and not be listed on public stock exchanges) and hedge funds (which use a wide range of investment strategies to potentially generate high returns on investment).

Recognising red flags

With the surge of interest in alternative investments comes a concerning increase in scams. It’s important to educate yourself on the following potential pitfalls and red flags when considering alternative investments.

Unrealistic returns

As the saying goes, if it sounds too good to be true, it probably is. Be wary of investments promising consistently high returns without corresponding risks. Unrealistic profit projections can often be a telltale sign of a potential scam.

Lack of regulation

Alternative assets may not be subject to the same regulatory scrutiny as traditional investments nor are they covered by the Financial Services Compensation Scheme. Make sure you thoroughly research and understand the regulatory environment of the specific asset class before investing.

Pressure tactics

Scammers often use high-pressure tactics to rush you into making quick decisions, generally with multiple calls and emails. Ensure you take your time, do thorough research, and consult with an FCA (Financial Conduct Authority) registered financial adviser before committing to any alternative investment.

Opaque valuations

There are clear and established ways to value traditional assets such as shares, bonds and property. You can consider it a red flag if there are no transparent valuation methods for a particular investment. You should seek investments with clear, well-established valuation processes, as this minimises the risk of fraud.

Limited information

If the investment opportunity lacks detailed and easily accessible information, then it’s important to proceed with caution. Legitimate opportunities should provide comprehensive details about the asset, its market and associated risks.

Complex structures

Investments with unnecessarily complex structures or unclear ownership arrangements may be hiding potential risks or be designed to conceal fraudulent activities. Simplified, transparent structures are generally more trustworthy.

Unsolicited approaches

You should be very sceptical of unsolicited investment offers, especially those that arrive through cold calls, emails or social media. Legitimate investment opportunities are typically explored through established channels.

Check backgrounds and credentials

Research the backgrounds and credentials of the individuals or firms offering the investment. Legitimate professionals and organisations should have a good track record and verifiable credentials.

You can visit who-called.co.uk which allows you to input the phone number you have been called from to see what other consumers think or have experienced. This is often a good way to spot a potential scam.

Another check you can perform easily is by visiting Companies House. By inputting the company registration number you can look up the company to discover key information. Look to answer questions such as:

• Is it a new company?

• Are the directors very young?

• What do the filed accounts look like? (A reputational firm would have reasonable profits in their accounts).

Secrecy surrounding the investment

If there’s an insistence on keeping details confidential, telling you not to talk to family or friends about it, or a lack of willingness to provide transparent information, you should exercise caution. Openness and transparency are key elements of trustworthy investments.

Protecting yourself against fraud

Please contact us if you think you have been a victim of fraud, have received unsolicited contact using the name of Schroders Personal Wealth or Schroders (our parent company), or have any other concerns.

You can contact our Financial Crime Prevention team by calling 0800 640 4161 or emailing fraudandfinancialcrime@spw.com.

Alternatively, you can report fraud or cybercrime to Action Fraud using their online reporting service any time of the day or night. They also provide help and advice over the phone through by calling 0300 123 2040.