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Common red flags to watch out for before giving your money to investment funds

16 July 2021  

In the wake of an increase in fraudulent investment funds, investor confidence in Kenya seems to be waning by the day. Every so often, media carries stories of investors who have lost their hard-earned money through fraudulent investment funds crafted to deliberately swindle them.

Kenyans are no longer sure which investment fund is trustworthy enough for them to invest in. They also do not know which funds are licensed and regulated by the regulatory authorities.

More than ever before, Kenyan investors need to be educated and to be given the right information on how to approach investment funds, and professionals to use, if they are to avoid premium tears later.

It is important that investors be made aware early enough, and in a consistent manner, of critical investment fraud red flags before investing their hard-earned money.

Some of the more common red flags include unlicensed investment people involved in managing investment funds, extraordinarily higher returns than market rate that sound too good to be true, lack of details or understanding of the type of investments in the investment fund and lack of adherence to risk management practices. Another red flag is investing money with unlicensed and unregulated funds.

Let’s focus on why investors must be keen on ensuring licensed investment professionals are managing the investment funds.

There are myriad investment funds who will convince prospective investors that they have licensed investment professionals involved in managing the investment funds when that is not the case.

More often than not, Kenyans are always in a rush to make money and trust these funds with unlicensed individuals either because they know them or they were introduced to them by trusted persons.

As such, they never do due diligence to check the professional credentials of the purported “professionals”, trusting that the funds will be able to get them super returns as promised.

In Kenya, the Institute of Certified Investment and Financial Analysts (ICIFA) is the only professional body mandated by the Investment and Financial Analysts Act, No. 13 of 2015 (IFA Act) to register and license investment and financial professionals both in public and private sectors.

In accordance with section 20 and 21 of the IFA Act, persons who offer investment advice, particularly heads of investment departments and in the practice of investment and financial analysis, are required to be registered by ICIFA.

The practising members of ICIFA are duly recognised by law as registered and licensed investment professionals.

It is critical for the investing public to note that ICIFA members are required to comply with the standards of professional competence and ethical practice in accordance with the ICIFA code of ethics and, therefore, enhance professionalism in the management of investment funds and boost investor confidence.

Investors must be vigilant and extremely cautious when putting money in investment funds managed by unregistered and unlicensed individuals due to the high risk of lack of accountability and integrity in managing and controlling investors’ funds.

ICIFA members who manage investment funds are required to follow ethical and professional standards.

In the event of any complaints from investors, ICIFA has in place disciplinary mechanisms to inquire into its members’ professional misconduct in accordance with section 26 of the IFA Act.

Given that the investment market in Kenya has become quite vibrant, with some players in the market promising high and sometimes unrealistic returns, investors must now start asking hard questions about the credentials of purported professionals before investing in various investment funds.

Most important, Kenyans must ask if the investment fund is managed by registered and licensed investment professionals, and demand proof.

If the investment fund is unable to provide details of investment professionals involved in managing the fund and is unable to give proof of registration by ICIFA, this is a red flag. Investors can also approach ICIFA to verify if the investment fund has licensed investment professionals involved in the management of the fund.

ICIFA’s mandate includes ensuring that licensed investment professionals are involved in managing investment funds thus safeguarding Kenyans’ investments.

Article by FA Diana Muriuki-Maina, CEO, Institute of Certified Investment and Financial Analysts (ICIFA)