Just like a term deposit?

The long-term decline in bank term deposit rates has led to investors looking elsewhere for income. Sellers of fixed-term investment products have sought to take advantage of this need with eye-catching advertisements. But in a recent press release, Australia’s market regulator ASIC has warned consumers that these products often carry a number of major risks.

In its press release ASIC warns consumers about investment advertising that compares fixed-term investment products to bank term deposits. A surge in such marketing of fixed-term investment products in recent months has prompted ASIC to caution consumers to take care making investment decisions based on such advertising.

ASIC is monitoring such advertising and the entities involved because of reports about fixed-income products being advertised as term deposit ‘alternatives’ or ‘substitutes’, and consumers investing significant sums as a result.

ASIC views these investment products as riskier than term deposits because they may be issued by entities that are not well-capitalised, not protected by the Government’s Financial Claims Scheme, and not supervised by the Australian Prudential Regulation Authority (APRA). Some are also backed by concentrated portfolios of higher risk unlisted and illiquid assets.

ASIC recognises that many consumers may be seeking higher and regular returns on their investments during this time because of low interest rates and market volatility. But there are significant differences between bank term deposits that are relatively low-risk products and fixed-term funds and debentures offering regular, fixed distributions that are higher risk investment products.

Bank term deposits are considered relatively low risk because:

  • they are protected by the Government’s Financial Claims Scheme, also known as the Government guarantee, which guarantees the first $250,000 invested (per depositor, per bank); and
  • the ability of banks to honour their commitments to depositors is actively supervised and monitored by APRA.

ASIC Deputy Chair Karen Chester said, “If an investment product offers higher returns than a term deposit, it is more likely than not to be higher risk. In the current uncertain and volatile markets, higher risk investment products are, more than ever, not for everyone. Especially for smaller investors, be they retail or wholesale, when they are not investing as part of a diversified portfolio.

“Be wary of investments that claim to be ‘like’ a ‘term deposit’. Products spruiking even a two or three percentage point higher return than a term deposit represent significantly higher risk. We are also seeing products offering only marginally higher returns with much higher risk profiles.”

Ms Chester said, “Investment products marketed to consumers should be ‘true to label’. Products should not be marketed as having features like low risk of loss, regular returns or easy access to withdrawals unless the product issuer has reasonable grounds to believe they have and will continue to have such features through the economic cycles. Product issuers need to ensure broad statements in their product marketing reconcile with the fine print in any offer document.

“When choosing an investment product, carefully assess if the product is appropriate for your circumstances, particularly when comparing relatively low-risk products such as bank term deposits with other higher return and thus higher risk investments. If in doubt, seek independent financial advice,” she said.

Next steps

To find out more about how any of these measures may be of assistance in your individual circumstances, please contact Gordon Thoms or David Conte at Calibre Private Wealth Advisers on ph. (03) 9824 2777 or email us here.

This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial and tax/or legal advice prior to acting on this information. Before acquiring a financial product a person should obtain a Product Disclosure Statement (PDS) relating to that product and consider the contents of the PDS before making a decision about whether to acquire the product. The material contained in this document is based on information received in good faith from sources within the market, and on our understanding of legislation and Government press releases at the date of publication, which are believed to be reliable and accurate. Opinions constitute our judgment at the time of issue and are subject to change. Neither, the Licensee or any of the Oreana Group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document. Gordon Thoms and David Conte of Calibre Private Wealth Advisers are Authorised Representatives of Oreana Financial Services Limited ABN 91 607 515 122, an Australian Financial Services Licensee, Registered office at Level 7, 484 St Kilda Road, Melbourne, VIC 3004. This site is designed for Australian residents only. Nothing on this website is an offer or a solicitation of an offer to acquire any products or services, by any person or entity outside of Australia.

Liked this article? Share it!