Retirement Investment Products (RIP) offers a full package of retirement planning services and a diverse line of retirement investments that have varying degrees of risk. With the investment products available at RIP, investors can form retirement funds with any level of risk preferred – from risk-free to extremely risky. RIP’s reputation in the investment community is impeccable because the service agents who advise clients are required to fully inform their clients of the risk possibilities that exist for any investment position, whether it is recommended by an agent or requested by a client. Since 1980, RIP has built a $60 billion investment portfolio of retirement funds, which makes it one of the largest providers of superannuation funds in Australia.

You work for RIP as an investment analyst. One of your responsibilities is to help form recommendations for the retirement fund managers to evaluate when making investment decisions. Recently, Howard, a close friend from university who now works for Sun Investments, a large brokerage company, called to tell you about a new investment that is expected to earn very high returns during the next few years. The investment is called a ‘Piggyback Asset Investment Device’ or PAID for short. Howard told you that he really does not know what this acronym means or how the investment is constructed, but all the reports he has read indicate that PAIDs should be a hot investment in the future, so the returns should be very handsome for those who get in now. The one piece of information he did offer was that a PAID is a rather complex investment that consists of a combination of securities with values based on numerous debt instruments issued by government agencies, including the State of South Australia Treasury, the State of Queensland Treasury and so on.

Howard made it clear that he would like you to consider recommending to RIP that PAIDs be purchased through Sun Investments. The commissions from such a deal would bail him and his family out of a financial crisis that resulted from bad luck with their investments in the 2008 financial markets. Howard has indicated that somehow, he would reward you if RIP invests in PAIDs through Sun because, in his words, ‘You would literally be saving my life’. You told Howard you would think about it and call him back.

Further investigation into PAIDs has yielded little additional information beyond what was previously provided by Howard. The new investment is intriguing because its expected return is extremely high compared with similar investments. Earlier this morning, you called Howard to quiz him a little more about the return expectations and to try to get an idea concerning the riskiness of PAIDs. Howard was unable to adequately explain the risk associated with the investment, although he reminded you that the debt of Australian federal, state and territorial government agencies is involved. As he says, ‘How much risk is there with government agencies?’

The PAIDs are very enticing because RIP can attract more clients if it can increase the return offered on its investments. If you recommend the new investment and the higher returns pan out, you will earn a very sizable commission. In addition, you will be helping Howard out of his financial situation because his commissions will be substantial if the PAIDs are purchased through Sun Investments.

(a). What is an ethical dilemma?

(b). Would you make such investment or recommend the PAIDs to RIP’s clients for investment?

(c). Discuss the pitfalls of making investments that look too good to be true.