Lessons from the Banksia collapse

$660 million of investors capital at risk

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published October 26, 2012 11:42 am AEDT

Thousands of Victorians could potentially face the total loss of their investments, after financing group, Banksia Securities was put into the hands of administrators.

Banksia owes approximately $660 million to investors, which it on lent to borrowers mainly to purchase property. As the company doesn't own a banking licence, investors who bought debentures in the company are not protected by a deposit guarantee.

That could see property developers reliant on funding from Banksia face credit issues, while the collapse of the company could see investors shy away from non-bank financial services companies.

That, of course, would be good news for the big four banks, Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC).

The collapse follows a string of high profile non-bank financial company collapses, including Storm Financial, which went into administration in 2009, and Opes Prime, a securities lending and stockbroking firm that went bust in 2008, owing $630 million. Investment group MFS Limited imploded in January 2008, with investors and many shareholders losing millions.

The failure of Banksia Securities (and the others) illustrates that investors need to be aware of the risks of what they are investing in.

If you don't fully understand what the company does, it's not a good idea to invest in it.
If the returns are higher than can usually be obtained, it's probably too good to be true.
While you may trust your financial advisor to do the right thing by you, it's still the investor's responsibility to make sure that you understand where your funds have been directed, and understand what the risks are for each investment.
Investors need to be aware of what guarantees, if any, exist, should the company fail.
Companies that invest in mortgages are inherently risky, with risk of default by borrowers, as well as falls in property prices.

The Foolish bottom line

We sincerely hope that investors get most , if not all of their funds back. For Foolish investors looking for higher than average returns – don't forget the maxim "buyer beware".

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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