We are all now very aware of the news of Banksia’s demise in the last fortnight with around 15,000 investors being affected. Half of these investors are over the age of 55 and if they are not in a position to stay in or return to the workforce, their ability to recover and replenish their investment may be lost forever.
The effect on these investors’ lives could be devastating.
The majority of investors who invested through Banksia would have done so with the prospect of generating higher interest returns for themselves. Some may have invested through this “non-bank alternative” for more altruistic reasons such as employing people in their local regional area or supporting local business and home owners with funds for them to use as borrowings. However, in this current era of low interest rates, most would be chasing the higher income return.
So what can we learn from Banksia?
The first thing is investors need to be acutely aware of what they are investing in. They need to be aware that Banksia is not a bank, therefore investors are not able to utilise the $250,000 bank guarantee afforded by the Australian Government to investors in eligible bank deposits. If investors are investing in non-bank deposits or unsecured notes, make sure you are aware of what assets are actually backing (or not backing!) your deposits.
Secondly, the basic general rule in investing is the higher the rate of return, the higher the risk you subject yourself to, in order to achieve that return. Advertising that promises guaranteed returns does not necessarily translate to capital guarantees, regardless of how safe the investment sounds.
Thirdly, the most basic test that any investment must pass for the investor is the “sleep at night test”. Regardless of what your neighbour, financial planner, taxi driver, accountant or father-in-law says, if you cannot sleep at night because you are worried about your investment, steer clear of it.
Lastly, if you do not understand where your money is invested, again, don’t invest your money there. Just go to the bank, subject your investment to the $250,000 Government guarantee and put up with the paltry 4.75% term deposit rates that are on offer. Or if you are internet savvy, check out the on-line savings account interest rates, you might squeeze out another 0.50% somewhere!
At least you will be able to sleep at night!