Before 1990, when there was little legislation to protect consumers of financial services, there were very few known scams. But since 2000, in an environment that is highly regulated and when legislation is more punitive than ever, more and more consumers are being caught in scams.
Gerrit Viljoen suggests this tells us more about consumers than about fraudsters.
Although anyone can be taken in by a scam, some people are more prone to being scammed than others, he says.
Viljoen, the head of Pretoria-based Ultima Financial Planners and the 2003 Financial Planner of the Year. Viljoen, who has the Certified Financial Planner accreditation, spoke at the recent series of meetings of the acsis/Personal Finance Financial Planning Club.
Viljoen says if you categorise consumers according to their investment behaviour, there are those who exhibit good behaviour, those whose behaviour is average, those whose behaviour is poor and those who will get drawn into a scam.
* People who exhibit good investment behaviour are planners. They start to plan their finances in their 20s; they place a high value on eliminating debt; they use the right investment vehicles; they take a long-term view on investing; and they are rational in their decision-making and investment strategies.
* Average investors start to plan their finances in their 30s. They tend to remain in debt; they use average to poor investment vehicles; they switch between investments regularly, because they are always in search of “something better”; and they make haphazard decisions about investments.
* Poor investors neglect to plan and invest properly. They never become debt-free; they use poor investment vehicles; they are always looking for “miracle” investments; and they make emotional and erratic decisions.
* People who fall for scams tend to lack the desire to plan but live for the moment. They are on the look-out for “a get-rick-quick scheme” and believe they are going to “get lucky”. If they do not get caught in a scam, they might even start one. They blame others for their “bad luck”, and they are emotionally unstable.
Viljoen says consumers who get caught in scams fall for the bait, which usually takes one or all of the following forms:
* The lure of “getting rich quickly”;
* The testimony of a friend who has invested and scored;
* The promise of “a never-to-be-repeated opportunity”;
* The “chance of a lifetime” to invest in a business with “unbelievable” potential or returns; and/or
* An offer that leaves them feeling incredibly special.
Viljoen says scamsters use subtle deception to exploit defective investment behaviour. A person who is a poor decision-maker and who lacks knowledge and understanding is the perfect target.
“If you don’t understand it, don’t invest in it,” he says.
However, Viljoen says, it is not always that easy to avoid falling for a scam.
He says consumers are rendered vulnerable for some obvious reasons, which include:
* Cautious greed. All investors are “cautiously greedy”, because they want to make money without effort.
* The desire for instant gratification.
* Ignorance and lack of education.
* A rising standard of living and debt.
* Belonging to the “sandwich generation”. These are people who are supporting both their children and their parents.
Viljoen says the less-obvious reasons we fall for scams include:
* A change in perceptions due to a change in circumstances. For example, he says, your planning might be on track but suddenly you get retrenched.
“Whereas the day before you did not have a problem in the world, all of a sudden your financial outlook has changed drastically, and this changes your perception of what is going to happen in future.
“You are anxious and worried that you will not be able to live securely in future and now look for ‘miracle’ investments that will enable you to reach your goals,” Viljoen says.
* The nagging suspicion that you are losing out and could be doing better.
* Analysis paralysis. The frustration that results from being unable to make a decision can prompt the most cautious person to do the unthinkable and make a rash, disastrous decision.
The good news, Viljoen says, is that there is a winning formula to investing, and it has not changed – which may be why some people find it so hard to apply.
“Do the basics right consistently over a long period of time, using the right investment vehicles at the right price. There is nothing else that will give you a winning result. It won’t shoot the lights out, but it will get you there,” he says.
Investment planning is very much about making provision for retirement, Viljoen says.
Once you retire, you need your money to work for you, which is why you need to start saving early to maximise the benefits of compound growth, he says.
To highlight the benefit of starting early, and the price of delaying saving, Viljoen provides the example of an investment with a maturity value of R10 million that has been earning an annual return of 12 percent.
* If you had invested for 40 years, your own contributions would constitute only about R400 000, and the remaining R9.6 million would be derived from investment growth;
* If you had invested for 30 years, your own contributions would constitute about R1.1 million, and the remaining R8.9 million would have come from investment growth;
* If you had invested for 25 years, you would have contributed R1.7 million, and the remaining R8.3 million would have come from investment growth;
* If you had invested for 15 years, your contribution would be about R3.6 million; and
* If you had invested for only 10 years, your contribution would have a whopping R6.8 million, whereas only about R3.2 million would have come from investment growth.
Viljoen concludes: “The winning formula is very easy but somehow very difficult to apply. And your behaviour as an investor will determine whether you are independent or dependent in retirement.”
TALES FROM THE TRENCHES
With a career in financial planning that spans almost three decades, Gerrit Viljoen has seen many people fall for scams – including some of his former clients. He shares some of their stories.
Mr Pienaar and “the lucky parking bay”
Mr Pienaar, an engineer, was a highly analytical man. He had R25 000 in surplus assets to invest. But before Mr Pienaar would make a decision, he wanted all the information that Viljoen could give him, along with guarantees on everything. After three or four months of negotiations, and overcome with analysis paralysis, Mr Pienaar decided not to invest the money.
Six months later, Viljoen called Mr Pienaar to find out how he was doing, and was told the following sorry story: “One day while in Pretoria on business, Mr Pienaar had pulled into a parking lot at the municipality. He was no sooner out of his car when he was approached by someone congratulating him on securing a ‘lucky parking bay’. For his good fortune, Mr Pienaar was offered the opportunity to double his money. Without any guarantees, he parted with R25 000 in the blink of an eye – and lost every cent of it,” Viljoen says.
Mr Betterbuck and the “guaranteed growth” fund
Jack Milne ran a business teaching people how to invest on the stock exchange. When his company, Progressive Systems College (PSC), started to take strain, Milne took advice from – and went into business with – Gary Porritt. The two established an unlisted company, the PSC Guaranteed Growth Fund (PSCGGF), which was set up to side-step the law.
Investors – drawn largely from Milne’s extensive client base – were lured by the offer of exceptional returns, with the promise of huge returns once the company listed.
One of those investors was Mr Betterbuck, a client of Viljoen's who withdrew from a unit trust investment to invest in Milne’s “better fund”. He also wanted Ultima to market PSCGGF to its clients so that his investment could stay with the firm, but Viljoen declined.
Less than a year later, PSCGGF imploded, leaving many thousands of investors, including Mr Betterbuck, high and dry.
“Colonel Sanders” – not so finger-licking good
Viljoen calls this investor Colonel Sanders after the founder of Kentucky Fried Chicken, who, at age 65, used his first social security cheque to launch what is now one of the world’s biggest brands.
But unlike the successful American entrepreneur, Viljoen’s Colonel Sanders took a gamble with his meagre pension benefit that did not pay off. He fell for an apparent foreign investment in unlisted shares allegedly guaranteed by Chase Manhattan Bank in the United States. Taken in by the promise of a monthly return of five percent, the investor blindly handed over R75 000 and lost all of it.