In investing, there's no free lunch. That's why investors shouldn't be seduced by newspaper advertisements touting high yields on securities they may not understand and that may cost them money, experts say.
"We see a lot of that," said Ronald Long, district administrator in the Securities and Exchange Commission's Philadelphia office. "Falling interest rates in government guaranteed debt and money market funds, and the falling stock market, are causing investors to look elsewhere for returns."
Some issuers are turning to the Internet or brokers to sell securities to individual investors, rather than using investment banks to sell to professional investors.
Ominously, though, experts find that more issuers are turning to newspapers to tempt individuals--often retirees who can't take big risks--with very high-yielding securities. Many offer the alluring but vague promise of a "guarantee."
With U.S. stocks in a yearlong slump and money market mutual funds yielding less than 3.5%, said fund tracker IMoneyNet Inc., such ads can look enticing, especially those touting double-digit yields.
Some issuers and securities are highly regulated and legitimate. Others aren't. And many are dangerous.
"The risk you may need to incur may be substantially greater than what a traditional income investor can handle," said David Bendix, president of Bendix Financial Group in Garden City, N.Y.
Securities like ones offered by American Business Financial Services Inc. may be appealing. The Bala Cynwyd, Pa., business and consumer lender recently advertised an "Investment Opportunity!" in the Washington Post, offering subordinated "investment notes" yielding as much as 10.57%.
Unlike many ads, this one said in bold letters that the notes are not insured or guaranteed. It also said the company was making the offering only by prospectus. That prospectus, filed with the SEC, makes clear that some federal bank regulations won't protect note holders and that, unlike for many bonds, the notes have "no established trading market."
Other issuers, though, are less regulated. Their ads often are placed by independent insurance brokers.
"Unfortunately, the insurers or solicitors often take the word of people who market the notes, and who cannot find financing by traditional means," said Joseph Borg, director of the Alabama Securities Commission who is soon to be president of the North American Securities Administrators Assn.
He added: "If the investor sees the word 'guarantee' and it's not a bank CD, a state or government bond or certain types of fixed insurance annuities, run."
Experts said plowing through those book-length prospectuses is essential. The SEC's Long referred to a 1999 case involving Welco Securities Inc., also of Bala Cynwyd, which the SEC said defrauded risk-averse investors of $60 million.
"Investors poured tons of money into a company which, had you read the prospectus closely, you could have figured out needed the money to pay off prior investors," he said.
An investment with a big yield isn't always too good to be true. The vast majority of issuers of high-yielding "junk" bonds, for example, never default.
Borg said investors should ensure that an issuer is licensed and that it and its securities are properly registered. "If you don't understand the company or what it does, or its securities, chances are you shouldn't be buying," he said.