This is how we filter investment opportunities

Posted on March 26, 2012 · Posted in Rob Pelling - Blog

By Chris Wandel.

Interviewing Rob Pelling, Business Development Manager of Davenport Wealth Management, I am looking to understand how investment opportunities make it through our net before being put forward to our clients.

Chris: When we are approached with investment opportunities, what is the first stage for your due dilligence process, the proverbial litmus test?

Rob: Firstly, is it something that I feel we don’t currently offer, can the product potentially deliver something new?

For example, can it offer a more secure or less risky investment, could it be stronger than something else we carry? Or could it be as strong as something we already carry (we are selective about the amount of investment opportunities we carry, because if one product fulfils a purpose, I don’t need 5 similar investments all doing the same thing.) If we have a product that is strong for income or capital growth, it’s good to have two or three but I don’t need 5 or 6.

Chris: So you line them up in terms of outcome and then pick the strongest of the available investment opportunities?

Rob: Yes, but we pick a combination of the strongest, coupled jointly with a provider that we feel we can work well with and will actively help investors throughout the term of the investment, not just the weeks before they invest.

Also a provider that truly respects the fact that some investors are trusting them with a large part of their wealth and potentially their future income and lifestyle.

I wouldn’t want to work with a company that took that lightly, and I feel most do.

I often come across companies who are only interested in getting an investor to part with their money and if the investment doesn’t work – well that’s too bad, after all it was the clients choice to invest wasn’t it?

I genuinely despise this attitude but it seems to be common in this industry.

Chris: So it’s like a Jekyl and Hyde situation then? They’re nice before they’ve got your money, but don’t care afterwards?

Rob: No not like that, just a case of their primary aim is to convince you to invest from a product providers viewpoint. Some will do anything to get your money and tell you that the investment opportunities they offer are the safest and best out there and there’s no way they can fail.

Most agents out there are only interested in you buying something from them and preferably the one that makes the highest commission and if it goes wrong, most, but not all will just say,’it’s not our fault the investment failed, we’re just an agent’.

Yes, you could say that we at Davenport are just an agent too, and of course we’re bound to say we have the client’s best interests at heart, the only thing we can offer is the ability to talk to any one of our existing clients or read the testimonials on our website which we are very proud of.

We also like all those considering our investment opportunities to come to one of our wealth seminars because we often have some of our sales agents and existing clients present so hopefully, by meeting other investors in person, the new clients feels more comfortable about the transparency of the company and the products we sell.

None of our testimonials are from “Mrs Smith from Dagenham” who you’ll never get to meet in person. Almost all our testimonials are from other local and national business communities that have online profiles to give those testimonials credibility.

Chris: So, going back to the first stage of how we vet investment opportunities, lets recap this.
First you’ll know straight away whether or not a product is worth considering based on what we already offer.
If it can’t offer something better or complimentary to what we already have than it is unlikely that we would move it forward?

Rob: Yes, although I would still have a quick look at most products to get see if they offered a potential genuine investment or whether they are just another one of the many investment opportunities created to purloin peoples money?

Chris: How many of those have you seen?

Rob: Loads, I could see anything up to 20 a month.

I do feel that, in recent times, a lot of companies have realised that creating an investment opportunity is virtually a risk free way of trying a business idea. Traditionally a company would need to have a sound business model, go to a traditional banking house and have to convince somebody to lend them many millions, put everything they own on the line and provide adequate security for that loan. This way, the company must take responsibility or risk losing everything.

Nowadays a number of people have cottoned on to the fact that now they can create an investment product to fund a business idea they may have. All they then need to do in a lot of cases is convince a number of people in need of extra income to become property resellers.

These people don’t really need to have any true business structure, finance knowledge or background. It’s a simple business plan: Offer the resellers great commissions (paid out of the investor’s money) then have them run around finding investors to put in anything from 10k to 100k each, either in cash or potentially out of a pension in the form of a SIPP.

The “investment fund” now has sufficient monies to try the business idea, risking the client’s hard earned money and with no real tangible security in place. If it doesn’t work, apart from maybe a few years of their life, they haven’t lost anything, in fact they’ve probably even been taking a wage out of the money.

Chris: If there are such great investment opportunities that are able to pay back up to 10%, then why don’t they just go to a bank and take out a loan for 6% and keep 4% for themselves?

Rob: Mostly because the bank won’t lend on anything without some form of security. The other thing to remember is that even if the company did obtain a bank loan, at some stage they would have to repay it. By borrowing the money from investors (risk free for them) in most cases they don’t need to offer a true exit strategy.

Chris: What does that mean?

Rob: It means that in reality they never actually have to pay back the money they “borrowed” from the investors. In effect it’s an interest only lifetime loan which is a very, very cheap way of borrowing money. Even if they pay a high interest rate, the exit is usually to sell your investment on to another investor, hopefully for a profit, however, all that’s happening is that the original “loan” is passing from one investor to another.

Chris: So it’s like buying a house and never having to pay back the capital.

Rob: When you look at it like that, it’s a risk free way of trying a business isn’t it?

Chris: Yes, completely but surely if you own the land as an investor you have some sort of security?

Rob: Investors will be offered things which I consider to be purely marketing tools, such as the land being unencumbered, and yes it might well be but don’t let that give you any true comfort that your investment is truly safe in any way. I think it’s a genuine plus and almost a necessity but if your property doesn’t get built, the green oil tree doesn’t get planted, your property can’t bring in the income, the bamboo trees don’t produce due to adverse weather conditions, flooding, natural disasters etc, you’re only ever potentially going to get back any money if that land can still be sold in effect for a high profit over what was paid for it in the beginning, which is unlikely as 9 times out of 10 it will be a fire sale.

Chris: Right, so owning land as an asset provides some security but not a great deal because in the event of the investment failing what is the land really worth on it’s own ?

Rob: I’ll give you an example of such a situation:
I buy a property investment and put down a small deposit such as say 30%, let’s now look at how much of that actually ends up going into my property.

If, they offer their top agents 12% commission on the total property price that’s £12,000 gone.

They then need to pay their internal staff, offices, marketing, travel expenses to and from the “investment opportunity”, and that’s before they pay themselves anything (you can bet they will). Potentially out of your £30,000 there may only be as little as £10,000 left to fund the building or planting of your investment.

If the balance is only due on completion you need to look at how the developer can fund the building of your investment.
You need to ensure that the developer is not over stretching themselves just to make more sales to keep the marketing machine going. You also need to ensure that they are genuinely financially strong and can demonstrate to you exactly how your deposit and stage payments, if any, can actually fund a completed product.

This is why we are happy to work with such companies as The Resort Group and their investments in Cape Verde, and have had an independent accountant check out how financially stable the company is, and how financially robust their business model is.

The fact that they can now show a completed resort, producing yields in line with projections, where others are still selling multiple resorts that are yet to actually deliver a completed product or produce yields to their investors is testimony to our ethos and the due diligence process which we carry out on behalf of our investors.

Our objective is to ensure, as best as possible, that any investments we offer are ones that we genuinely believe will be completed and in turn deliver good, long term returns to our investors.

It’s also important that investors aren’t afraid of higher deposits, because this can sometimes lead to more successful projects. If the developer doesn’t have big enough deposits and cashflow to make the investment work then there is an increased possibility that the investor could lose their deposit.

I would encourage our investors to understand this and be happy to put larger deposits into a financially secure company that we believe can deliver rather than make a smaller investment into a company that may not have adequate funds of cashflow to produce a finished product.

Ok so you’ve given a fairly specific example there, but let’s get a bit more generic.

Chris: In summary, you are looking for the following things before approving a Davenport product:

  • A specific fulfilment type, this could be yield, medium to long term, capital growth etc.
  • A developer/company that has a strong ethical code and works well with investors, preferably with a proven track record of delivery
  • A strong business model.
  • A robust investment process that protects the investor from losing their monies to high commission rates and other costs associated with marketing the investment.

Is that about right?

Rob: Yes those certainly are the first stages of the process and sometimes this can be done in seconds, such as a flyer emailed to me recently for investment opportunities and the headline read: ‘We have ten million pounds for you to earn”.

Well, there you go, if that’s their headline and what the company feel will catch my attention then they’re very much mistaken. I’ll have no desire to work with them because all they’re interested in is, as I mentioned above, people with no idea what they’re doing who are simply chasing your money to earn the commission.

Another one of the investment opportunities I saw was along similar lines and when I carried out my due diligence their guarantees really aren’t guarantees at all, which is often the case. They are simply hopes and and good intentions for the future if the investment works, if it doesn’t they can’t uphold the guarantees that you believe are protecting your investment.

This might seem really obvious, but most people just don’t see it, both agents and investors, are drawn in by clever marketing and salesmen.

Having finished the long due diligence process the end result was that they’d offered me a much higher commission rate to sell the product thinking this would sway me to offer it to my investors.

All this would mean is that even less money would be going into the investment and in effect weakening the chance of them having the cashflow to deliver a finished product and provide the promised returns to the investor.

However what I am happy to do is sell the product at the lower commission rate but make sure that any of Davenport’s investors have a clear understanding of my views on the investment opportunities we offer and where I believe the risks lie. The fact that the guarantees offered can only be achieved if the investment opportunity produces the level of income they hope it will in the future, and that even if the resort is successful it may not be successful enough to produce the guarantees which were offered in the marketing.

If one of our clients invests with this knowledge in hand then I would be happy for them to do so but I cannot have Davenport selling such a product based on, and only on, the developer’s own claims and marketing material.

It’s then up to the product provider to decide if they’re happy for me to sell their investment opportunities in this way or not and it’s worth noting that sometimes they would rather we didn’t!

Chris: Because they know that they won’t like the way we expose the product on our site?

Rob: Exactly. This is was what led to the creation and development of the Davenport product rating to make sure that our investors understand the investment opportunities that we offer clearly, right from the outset.