"High returns, with no risk", this statement headlines a dozen ads in the papers every week. What sort of investments are being advertised here? Well lots of them would be trading systems, some would be dodgy tax schemes, probably the majority of them would be real estate seminars but overall you can be sure that there would be plenty of finance brokers advertising in there as well.

There is no such thing as high returns with low risk. Banks employ risk assessors that check out prospective loan applicants to ensure that they give loans only to people who are able to meet their obligations. Bank loans are quite inexpensive, especially when you are able to back up your application with a decent stock of assets as a guarantee that you can pay the bank back.

Of course lots of people who probably could afford to repay the bank miss out because, as the joke goes, before the bank will lend you money you must first prove that you don't need it. Plenty of entrepreneurs go to banks every day with grand visions of making their idea a business reality, but conservative banks turn them away. It isn't good business to employ specialised risk underwriters to pick up an extra 1% of business, in this case it is more in the banks best interest to turn away applicants with complicated and risky loan needs.

A really determined entrepreneur may approach a venture capital firm, but this has a downside in that the venture capital guys will want shares in your company and you might end up only owning a small portion of your business, secondly venture capitalists insist on high risk premiums and will thus expect to receive a very large chunk of the profits in return for their investment. If you don't want to sell your business at rock bottom prices, you'll need to borrow money, but as I've said the banks can't or won't help you.

Enter the finance broker, someone with hopefully a better idea of how to assess credit risk in business applicants and real estate deals, to pick up the business that the banks reject. Of course the broker is in a pretty nice position here, he can find money for the applicant but take a large risk premium for his troubles. The banks called the entrepreneur high risk, but if you remember the article in the shares FAQ on discounting, you charge a high interest rate if you want to take on a high risk.

By all means many people who the banks turn away could easily pay off their debts, but at the same time the majority couldn't. The finance broker's job is to match together investors and entrepreneurs so that someone who wants to earn an income from their money could lend it to someone who needs it and will pay that income. This is all fine so far.

What troubles the finance broking industry is that there is always going to be the chance that an entrepreneur could collude with a finance broker to get the money even when his credit record is dismal, or his business second rate, by hiding the negatives from investors in order to make the deal look less risky.

The use of volatility as a synonym for investment risk certainly helps here, a failing entrepreneur will keep up payments right up to the point where he goes broke, ensuring a zero volatility fixed rate of 10%. To many who fear the stock market or other traded investments, mortgages are the ultimate low volatility strategy, income is predetermined, the risks of default are harder to fathom than the daily roller coaster of stock movements, hence the risk is harder to understand, particularly when the investment seems to be backed by individuals with impressive credentials, or a portfolio of solid real estate assets.

Why would anyone pay a higher interest rate than they have to? Why pay more than a bank loan? Because the banks won't touch them. Someone in desperate need of being bailed out of a sticky situation will pay huge interest rates to gain a temporary reprieve. The higher the interest rate, the higher the risk premium. There is a high risk premium because there is a high risk. Of course some high risk investments pay off, and at the same time "junk bond" investors make a career out of analysing the credit worthiness of the issuers of high yielding bonds, hoping to find the securities that may well be able to meet their obligations after all, trying to sift through the garbage as it were to find the diamonds.

I am not saying that the finance broking industry itself is dodgy, just that the higher yielding mortgages are high risk. There are many in the industry that try to market an interest paying security as riskless, when in fact the risk is great. Many less sophisticated investors, usually people who don't understand the stock market and are very risk adverse, are cajoled into financing mortgages for reckless entrepreneurs and property speculators with the promise that the interest payments are going to be regular, safe, and backed by substantial assets.

The promise of high returns with low risk is as sure a sign as any that an investment is dodgy. High returning assets always contain an element of risk, the supply of under rated mortgages is definitely limited, when a professional finds such gems he doesn't need to take out advertisements in the paper because he will always have a ready market for such things with his regular clientele. At the very least the "low risk" claim is a sign that the individual concerned is trying to conceal the risks of the investment, which ought to be a red warning light for anyone with a trace of incredulity in them.