In an extremely low interest rate environment, regulators are warning investors about pitches promising high yields with low risk.
In the wake of the U.S. Federal Reserve Board’s announcement that it expects interest rates to remain low until at least late 2014, the North American Securities Administrators Association is cautioning investors to beware of risky or outright fraudulent investments promising higher yields or returns.
Jack Herstein, NASAA president and assistant director of the Nebraska Department of Banking & Finance Bureau of Securities, said that state and provincial securities regulators are concerned that individuals who depend on fixed income investments, particularly seniors, may be tempted to turn away from their slower growing but safe investments to alternative investments without understanding the risks and terms.
“Investors running away from low yields on fixed investment products risk stumbling into the arms of unscrupulous salespeople promising low risk and high returns,” Herstein said. “Don’t chase the offer of high yield or returns into a dead-end investment.”
Herstein noted that yield-starved investors may be more easily enticed into fraudulent schemes that can be cloaked as private placement offerings, promissory notes, securitized life settlement contracts and investments in energy, precious metals and distressed real estate, all of which are contained in NASAA’s current list of the top investor traps.
NASAA stresses that investors must remember that investments with higher yields or returns carry a higher risk; the lower the risk, the lower the return. “When evaluating any investment, it pays to remember that risk and reward go together,” Herstein said. “Anyone promising high yield or high returns with little or no risk should be approached with a high degree of skepticism.”
It reminds investors to use common sense and get a professional, third-party opinion when presented with investment opportunities that seem to offer unusually high returns. It also stresses that investors should check registration and demand adequate disclosure.