Too good to be true?

2011-04-16 10:37

A financial adviser recently told me the story of a client of his who admitted to him that she had handed over R500 000 to a man who ­promised her a 2.5% ­return per month. That equates to 30% a year – more than triple what the bank could offer.

All she had from the company was a name, a cellphone number and an address in Sea Point, Cape Town. She was retired and did not have sufficient capital to provide her with a decent income and thought that the deal was an answer to her prayers.

After having invested the amount, she received an income for a few months. As with most of these schemes, there is usually some real investment behind them and some may even have websites and literature explaining the investment.

But once you need your money, the plan starts to unravel. ­After she withdrew R250 000, the monthly payments suddenly stopped and the company disappeared. Her financial future is more dire than ever before. And the sad reality is that in most cases, it is people who have the least to lose that end up losing everything in these types of bogus schemes.

But these schemes also feed on greed, and this is where they catch people with a lot of ­money. An example would be the famous Ponzi scheme run by Barry Tannenbaum which took some of South Africa’s wealthiest people for a ride.

In another example, the ­Financial Advisory and Intermediary Services ombudsman recently ruled against an adviser who had convinced his ­clients to invest in an unlisted company called Garek, on the promise that the company was to list soon and that the share price would increase from R2.50 a share to R20 a share.

The adviser had made in the region of R4.5 million in commission, flogging the scheme to various investors. Of the R74 million received, only R299 000 was left in the firm, according to a report by the department of trade and industry.

In hindsight, it may be ­obvious but we as consumers let our emotions get in the way. Here are five red flags you need to be aware of before investing:

Is it too good to be true?
1 Eunice Sibiya, head of consumer education at FNB, says the starting point is to compare it to a bank account. If a bank account is paying 6% and the investment is promising 20%, then you have to question where that extra money is coming from.

The financial industry talks about a risk-free return which is the interest rate paid by banks. Any return above that is taking some form of risk. The stock market has higher returns but in the short term, risks are higher.

If you understand the risk, that is fine, but be aware that no one can guarantee you a return higher than a bank deposit because somewhere risk is being taken and so there can be no guarantee.

Is it registered with the FSB?
2 If it’s not registered with the Financial Services Board, it means it is not regulated and the risk increases.

According to the Financial Advisory and Intermediary Services (Fais) ombudsman, a registered financial adviser may not give advice on a product that is not a defined financial product.

If he or she does, they are clearly acting in contravention of the Fais Act and you would have recourse with the Fais ombudsman. But that does not mean the adviser would always have the money to repay you as in the Garek case.

Are you being rushed?
3 Sibiya says no matter what story they give you, if you are being rushed they are up to no good.

Ask to see everything in writing first and take a few days to read the information and make sure you understand it. If they are not prepared to do that, just say goodbye and hang up.

Never agree to anything telephonically unless you have read the information first and also, never give your banking details to someone who has called you out of the blue.

Is it a secret?
4 One of Sibiya’s staff members received an investment call and was told not to mention “this great deal” to anyone else as she was one of a few fortunate people to be told about it. Nonsense. If it was such a great scheme the salesperson would be telling the world and signing up more people.

This was exactly the tactic that the advisers in the Garek and Tannenbaum schemes used – playing to people’s idea that they were part of an exclusive club.

Do they sound legitimate?
5 The scam artist may pretend to call you from a call centre or a stockbroking firm and will have noises in the background to make it sound legitimate. Always ask for a phone number and call back a few days later.

Sibiya says in such cases, fraudsters may have hijacked a phone number and so if you call back immediately they will answer, but it is unlikely their operation will still be in place a few days later. Also ask for a physical address.

If they are close by, take a drive and make sure they exist. Meet at their offices – meetings at your home or in a public place should raise suspicion. If you have internet access, check the firm and investment – see if people have posted grievances.

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