Securities Commission Warning on Misleading Advertising

In last week’s column, we made reference to an investment that was aiming at providing investors with a 50% return over a five year time frame, providing an equivalent of a 10% per year return.  We felt that this was a misleading advertising practice.  We were not the only ones to be critical of Hanover, in the way they were promoting their new investment opportunity. 

Last Friday, the Securities Commission sent out an email alert stating “The Securities Commission has prohibited some advertisements for a new unit trust offered by Hanover Funds Management Limited because they are likely to mislead or confuse investors about the potential returns”. 

From the Securities Commission website, we can read the following: “The prohibited advertisements for Hanover Protected Investments Global Growth Fund units are those which say the investment
 has a 10% potential return; or
 has a 50% potential return without clearly stating that the possible returns on the investment at maturity are 50% or zero. 

"The way the returns on these securities are structured is unusual," Chairman Jane Diplock says.  "Therefore they should be described clearly and precisely to avoid being misleading or confusing.  The prohibited advertisements are not sufficiently clear and precise."

Hanover has cooperated with the Commission and agreed to write to all investors who subscribed to the fund to make sure they correctly understand the returns under the fund.  They will be offered their money back.

Investors are likely to believe from the advertisements that the return is potentially greater than is actually the case.  Even if they receive the 50% return at the end of five years, this equates to less than a 10% annualised return on the investment.  They may receive zero return.”

This was one of the very few occasions in New Zealand when a structured investment product has been distributed primarily directly to investors.  Historically, these types of investments, usually ones offering more attractive features than this particular one, have been distributed through investment advisers and share brokers.  Instead the target market was primarily traditional secured debenture investors who often deal directly with finance companies. 

Investors, especially direct investors, need to be very careful when selecting investments.  Buying investments in some ways can be like buying medicine.  Some medicines are sold off the shelf in supermarkets; some are sold in pharmacies where you can obtain some limited advice, as it is built into the retail price, whereas the more effective medicines are invariably only available on prescription once your condition has been diagnosed by a qualified doctor.