Avoid getting suckered

2009-07-29 00:00

“IF it seems too good to be true, it probably is.”

This is one of the key messages from financial services experts to city investors who are crying out for advice on how to avoid becoming a victim of a financial scam, following allegations this week that Pietermaritzburg insurance broker Mike Hale swindled as much as R10 million from clients and apparently skipped the country with his clients’ investments.

Colin Long, director of Consolidated Financial Planning (KZN), told The Witness that investors should begin by checking whether the service provider has an FSP (financial services provider) licence.

“This is issued by the FSB [Financial Services Board] to service providers who want to render a financial service.

“The FSB will only issue the licence once they have determined that the service provider … is ‘fit and proper’.

“This means that the service provider has the minimum required education levels; is financially sound and has no previous criminal record. The FSB website will tell you whether the service provider has an FSP licence,” Long said.

He said a financial planner who carries the CFP (certified financial planner) designation or trademark, an internationally recognised trademark, on his/her business card is the most qualified financial planner.

Long, who is a certified financial planner, added that if a service provider guarantees returns that are higher than the after-tax rate on a fixed deposit or money market account, one needs to investigate further.

“[U.S. Ponzi scheme operator Bernard] Madoff guaranteed returns of one percent per month, which is not in itself excessive, but it is not the norm … no one else was providing guaranteed returns that were even close to this.”

Long said clients can approach a number of organisations, including professional bodies and regulators, in order to report service providers.

These include the FSB, the Long-term Insurance Ombud, the Financial Advisory and Intermediary Services Ombud and the Pension Funds Adjudicator.

kavith@witness.co.za

• Make sure that he/she has a landline telephone and does not only operate from a cellphone.

• Make sure that he/she provides a business address.

• Request references from previous clients.

• If he/she charges fees in excess of five percent of the amount of money to be invested, investigate.

• A client should never pay into the account of a financial services provider, except fees for services.

 

PIETERMARITZBURG-BASED Independent Certified Financial Planner Cedric Wilmans has some advice:

Rule 1. The Investment Adage

Anything out of line with current interest rates, even by two or three percent, must be treated with suspicion.

Rule 2: Diversify

This means not putting all your eggs in one basket.

Rule 3: Do Your Homework

The first thing to check is whether the product is regulated.

Regulated products include bank savings accounts; retirement products; endowment policies; securities listed on an investment exchange (shares and bonds); and collective investment schemes (which include unit trusts; exchange traded funds and participation mortgage bonds). If the investment falls within the ambit of regulated products, make sure it is registered.

Ensure that you receive proof of the investment via a statement or policy document from the financial institution who issued the investment plan.

Rule 4: Avoid the Complex

If you do not understand an investment and where the money is coming from, don’t invest.

Rule 5: Understand Asset Classes and Products

Before investing one cent, you need to decide whether you want capital growth or an income or both. You then need to know which asset classes will provide what you want. The main asset classes are cash, bonds, shares and property.

Rule 6: Understand Risk

Start by asking whether you can afford to lose your capital, not how much you think you might make on your capital.

Rule 7: Investment is for the long term

Trying to make short-term profits by attempting to do things such as time your investments to coincide with market rises, or invest in schemes that offer exceptional returns, is gambling.

Rule 8: A Sound Financial Plan

Work out how much money you need based on how you want to live your life and then structure your investments around those needs.

Rule 9: Get Sound Advice

Sound advice comes from a properly qualified financial planner … not a product “flogger”.

Rule 10. Don’t Victimise Yourself

Don’t be a victim of the two worst enemies of investors: fear and greed.

Pietermaritzburg, 2009: Impresario Chris Hodgkins left SA on July 6, apparently for a job in Abu Dhabi, with about R260 000 in ticket sales from the Concert in the Park and leaving R130 000 in debts.

SA, 2009: Businessman Barry Tannenbaum is accused of conning investors out of as much as R10 billion. Tannenbaum is now in Australia and has no intention of returning. Lawyers and investigators say Tannenbaum lured hundreds of investors, including top businessmen, with the promise of annual returns as high as 200% linked to pharmaceutical imports.

KZN, 2009: Hillcrest-based investment company Edwafin Holdings (Proprietary) Limited is provisionally liquidated. Edwafin is a public company with some R200 million worth of investors’ funds. Investors included scores of elderly people from the KZN Midlands who put hundreds of thousands — and in some cases, millions — of rands into Edwafin. In June 2009, liquidators found the company’s coffers empty, with over R228 million in liabilities.

New York, 2009: Financier Bernard Madoff, sentenced to 150 years in prison, admitted to defrauding thousands of investors amounting to as much as $65 billion. He was convicted of operating a Ponzi scheme, in which earlier investors are paid with money from later investors.

SA, 2007: Financial services company Fidentia and (subsidiary) Fidentia Asset Management hit the headlines after allegations that more than R650 million of investors’ money could not be traced. A significant portion of the money is owed to widows and orphans of members of the Mineworkers’ Provident Fund. Fidentia boss J. Arthur Brown is charged with fraud and money laundering.

SA, 2006: A fraud perpetrated by directors of the Leaderguard group of companies comes to light, in which more than R300 million of investors’ money was lost in fraudulent foreign currency transactions.

Pietermaritzburg, 2002-03:

R150 million of about 3 000 investors’ funds allegedly disappeared. Gary Porritt and Sue Bennett, former directors of the now collapsed financial services company Tigon, face charges of fraud, tax evasion, share manipulation and racketeering.

SA, 1990: The Masterbond saga involved investments of more than 22 000 investors with investments of about R600 million. It is understood that Masterbond pretended that it was registered with the Reserve Bank. — WR.

A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. The Ponzi scheme usually offers returns that other investments cannot guarantee in order to entice new investors, in the form of short-term returns that are either abnormally high or unusually consistent. The Ponzi scheme generates returns for older investors by acquiring new investors. The scheme is named after Charles Ponzi, a clerk in Boston who used the technique in 1919.

— Investopedia-Wikipedia

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