Consumers should treat any offer of an above market return on their investment with suspicion, regardless of whether it is promised in cash, interest, income or capital gains, warns Justus van Pletzen, CEO of the Financial Intermediaries Association of Southern Africa (FIA).
FIA would like to warn consumers against “wasting their money on so-called ‘get rich quick’ schemes”.
“Wealth is generated through hard work and smart investing and there is no way that you will turn a few hundred rand into a fortune over a few months – those who try soon find themselves out of pocket,” says Van Pletzen.
He says the SA Reserve Bank (Sarb) is investigating more illegal deposit taking scams than ever before.
The common feature of a “get rich quick” scheme is a promise of an unrealistic return while the common emotions driving a consumer’s decision to participate in such schemes include desperation, greed and the fear of missing out.
The perfect Ponzi scheme must do two more things: It must be able to demonstrate that the unrealistic return is being achieved and it must have a clever explanation as to how the scheme generates so much more return than mainstream asset managers or banks.
“One of the saddest things about local scams is that they often lure in the old and vulnerable who are desperate to supplement declining retirement incomes due to the current low interest rate environment,” says Van Pletzen.
He provides six red flags that may signal a Ponzi or pyramid scam:
Abnormally high returns
Steer clear of investment schemes that offer abnormally high returns – and treat the phrase “guaranteed return” with a measure of suspicion too.
Consumers usually understand the concept of higher risk for higher returns as this is a fundamental principle of investing. But consumers do not understand that the returns being offered by Ponzi or Pyramid scheme crooks are way off the charts.
For example, South African investors can expect around 7.0% a year in cash (low risk) or 15% a year in the stock market (high risk) over five years. You should be highly suspicious of any product or opportunity that promises a return that is higher than the country’s top asset managers can generate.
Remember that no return is ever “guaranteed” in the world of investments and that even the most modest of investments carry some risk. The guaranteed products offered by large and respected financial institutions are based on solid actuarial models and involve a complex trade-off between risk and reward.
Vague business models
Steer clear of investment schemes that are based on vague business or investment models.
Before you invest you should make sure that you understand how the returns are generated.
You should never fall for claims from the Ponzi crooks that the investment or business model is “confidential” or “too complex” for you to understand. The bottom line is that if you do not understand the product you should not invest.
Avoid investment schemes that rely on you bringing in more participants in order to generate a return.
This is a classic trait of both Pyramid and Ponzi schemes, with the former requiring you to bring in additional participants to qualify for any return.
Legitimate investment tools do not require you to bring in more participants. It is also common knowledge that new participants to a scheme will eventually dry up, resulting in a total collapse or implosion of the scheme.
Steer clear of investment schemes that place you under undue pressure to invest.
If you are being pressured to make the initial investment – or are frequently encouraged to increase the size of your investment – then beware.
Complex foreign exchange
Take care when considering offshore investments that rely on complex foreign exchange transactions and shifting money across borders.
All of the warning signs given above are compounded when the opportunity requires your cash to be taken offshore into banks that are outside of the South African regulator’s reach.
Too good to be true
If it is too good to be true, it usually is.
Any investment with a high rate of return that is says to be “guaranteed” should be treated with suspicion – if it looks too good to be true, it usually is.
“People who plan carefully for their financial futures are less likely to fall victim to a Ponzi or Pyramid scheme, because they have more realistic return expectations and a better understanding of how the savings and investments industry works,” says Van Pletzen.
“The desperation that lures many older persons into ‘get rich quick’ schemes can be avoided by saving sensibly throughout you working years and reaching retirement with enough to support yourself through retirement.”
In his view the best protection when making an investment is to transact with a reputable financial institution with assistance from a licensed financial adviser, financial planner or insurance broker.
“In this way you can transact in confidence because both the financial services provider and adviser must be registered with or licensed by the Financial Services Board (FSB) and subject to the many rules and regulations put in place specifically to protect consumers,” he says.