Cape Town - The report by the National Consumer Commission (NCC) that it is investigating nine suspected Ponzi schemes highlights the need to teach consumers about the realities of investing and to scrutinise advice from unaccredited sources, says Karin Muller, the head of growth market solutions at Sanlam.
Despite the increasing incidents and the SA Reserve Bank’s (SARB) recent initiative to increase awareness, South African investors continue to fall victim to pyramid or Ponzi schemes. As the NCC reports that the new modus operandi for some of these schemes is to sell items such as travel vouchers or bottled water to hide that they are Ponzi schemes; identifying them can be difficult.
Muller says with many South Africans, in particular retirees, struggling to make ends meet, Ponzi schemes that promises huge returns with no risk are finding easy targets. Between 2010 and 2014 financial years, the Bank Supervision Department of the SARB investigated 119 Ponzi schemes. According to its 2014 annual report, 18 new schemes were initiated in 2014 alone.
“There is no specific type of person who falls prey to these scams,” says Muller.
“Making bad investment choices is often a case of trusting the wrong people. These scamsters can really instill trust and give people hope. The key is to not buy into these promises without fully understanding how these operators achieve their alleged returns.”
How to recognise these schemes?
Both Ponzi and pyramid schemes use the money received from new investors to pay the original investors – a case of robbing Peter to pay Paul. A pyramid scheme has the additional condition that members have to recruit new investors. The common and golden thread among all of them is they promise a return far superior to that of the financial market, at a very low risk.
“There’s no investment that can promise 15% or 30% returns without risk. There is always a risk-return trade-off when you invest, especially in assets that can potentially have a higher return,” says Muller.
When approached by any investment operator or financial adviser, don’t be afraid to ask questions and insist on clear, simple answers, says Muller.
“Find out if they’re registered with the Financial Services Board (FSB). What are their qualifications? Can they show proof of these? What exactly is being promised? What returns will I receive? How will my money be invested, and where? How will the adviser be remunerated? Can I withdraw my investment later, and how?”
The problems often start when people want to withdraw their money, she says.
According to the SARB, in most cases, when a matter is reported to them, the funds in the Ponzi schemes are already depleted or the scheme is insolvent. Investors often only complain when they are no longer receiving their promised returns.
Muller says you must entrust your funds to a person or an institution that has shown that it can consistently deliver returns over an extended period of time.
“There are a variety of regulated investment products available in the market. By investing in regulated investment products – such as unit trusts or policies – you are investing in products that have an enormous amount of governance. Your investment decisions should be structured according to your needs and risk tolerance – is it for retirement, or for the short or long term? A professional financial adviser will be able to assist,” she says.
* This press release was published as received.
Sanlam Personal Finance