The Financial Intermediaries Association of South Africa (FIA) are warning consumers about so-called ‘get rich quick’ schemes.”
Justus van Pletzen, CEO of the FIA stressed that there is no such thing as a ‘get rich quick scheme, as any form of saving to accumulate wealth would need to be long term.
“The FIA’s message to South African consumers is to realise that there is no magic fix to poverty, to accept that there is no way to create money out of air, and to understand that the only way to become wealthy is through hard work and sensible saving over a long period of time,” said FIA.
Van Pletzen added: “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.”
In the past, South Africans have fallen for a number of ‘get rich quick schemes’. These include various pyramid schemes, as well as Ponzi schemes.
The FIA explained: “Both Ponzi and Pyramid schemes promise unrealistic returns to investors. The distinguishing feature between the two ‘scam’ types is how the participants believe the return will be generated.
“Participants in a Ponzi scheme believe that they are earning their ‘return’ from an underlying investment (a unique product, an investment in a ground-breaking technology, or a trading opportunity), while participants in a Pyramid scheme are aware that they have to recruit new participants to make money.”
The scams
Van Pletzen noted: “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.”
The FIA pointed out that for many people, the promise of a good return on their initial investment is enough to entice them to invest in the scheme.
To further entice ‘investors’, the people behind successful Ponzi schemes demonstrate that the unrealistic return that they are advertising is achievable. The FIA said: “The secret to a successful Ponzi scheme is therefore to make sure that some of the participants are handsomely rewarded, and boast about their windfall.”
In addition to demonstrating that the returns are achievable, Ponzi schemes also have to have a believable story that explains how the scheme is able to generate a lot more return than other asset managers and banks.
However, despite all these tricks that the masterminds behind Ponzi schemes use to draw in investors, the FIA highlighted that at the end these schemes always collapse as they are unsustainable.
The same can be said for pyramid schemes, which rely on the influx of new participants to sustain it. Eventually there will be no new participants, and the scheme will collapse.
Tips for identifying scams
Van Pletzen suggests that consumers be suspicious of any schemes that offer them an above market return on their investments, regardless of what form this return takes, for example cash, interest, income or capital gains.
To determine if an investment is offering an above market return, the FIA suggest looking at ten year returns from various asset managers. If the scheme is offering a higher return rate, you should be suspicious.
Gareth Stokes, communications manager at the FIA, provides the following example. “A Ponzi scheme invites investors to invest R1000 with the promise of a R2000 return in six months (i.e. double your money in half-a-year). This represents an annual return of 200%, which is impossible in any formal investment, so the only way the Ponzi can meet this promise is to find the extra R1000 from another (new) investor.
“In contrast, R1000 invested in a top share portfolio would only grow to around R1100 over six months. A promise of 50%, 100% or more over a few months is way over the industry average and therefore unrealistic.”
The FIA revealed that there are five possible signs that may identify a Ponzi or pyramid scheme.
1. Stay clear of investment schemes that offer unusually high returns: “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,” said the FIA.
2. Steer clear of schemes that are based on unclear or vague business and investment models: It is important that you understand how the returns of your investment are generated before you invest. The FIA emphasised: “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.”
3. Avoid investment schemes that rely on you bringing in more participants in order to generate a return: A legitimate investment tool will not require a consumer to bring in more investors. If the scheme is based on the influx of new participants, it will eventually collapse, as you will run out of new investors.
4. Steer clear of investment schemes that place you under undue pressure to invest: According to FIA, if you are pressurised into investing in a scheme, or are frequently encouraged to increase the size of your investment, “beware.”
5. Finally, remember that if it’s too good to be true, it usually is: Any investment that offers a ‘guaranteed’ high rate of return should be treated with suspicion.
Van Pletzen added: “Your 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.”