Don’t be taken for a ride — if it sounds too good to be true, it most likely is

2014-04-02 00:00

ONE of the biggest problems with not building up savings or becoming over-indebted is you become vulnerable to conmen who promise investment returns that are too good to be true.

If you are in financial difficulty, that desperation makes you miss the warning signs.

A financial adviser recently told me a story of a client of his who came to him and admitted that she had handed over R500 000 to a man who promised her a 2,5% return per month on her money. 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 in Cape Town.

She was retired and did not have sufficient capital to provide her with a decent income and thought that this deal was an answer to her prayers.

After having invested the funds she had received an income for a few months.

As with most of these schemes there is usually some real investment behind them, 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, suddenly the monthly payments stopped and the company disappeared.

The sad reality is that in most cases it is people who have the least to lose that land up losing everything in these types of schemes.

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

In another example, the FAIS ombudsman ruled against an adviser that had convinced his clients to invest their money in an unlisted company called GAREK, on the promise that the company would list shortly and that the share price would effectively increase from R2,50 a share to R20 a share.

In reality, the adviser had made in the region of R4,5 million in commission, flogging the scheme to various investors.

Of the R74 million received from investors, only R299 000 was left in the company, according to an investigation report by the Department of Trade and Industry.

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

1. Is the deal too good to be true?

The starting point is to compare it to a bank account. If a bank account is paying six percent 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 the 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 so there can be no guarantee.

2. Is the product registered with the Financial Services Board?

If not, it means it is not regulated and the risks increase. According to the FAIS Ombuds, 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 (Financial Advisory and Intermediary Services) Act and you would have recourse with the FAIS Ombuds.

But that does not mean the adviser would always have the money to repay you as in the GAREK case.

3. Are you are being rushed into making the investment?

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

4. Is it a secret?

One of the strategies scam artists use is to tell people not to mention the “great deal” to anyone else as you are one of a few fortunate people to be told about it. Nonsense!

If it was such a great scheme the sales person would be telling the world and signing up more people.

This is exactly the tactics that the advisers in the GAREK and Tannenbaum schemes used — playing to people’s idea that they are part of an exclusive club.

5. Do they sound legitimate?

The scam artist may pretend to be calling from a call centre or stock broker and will have noises in the background to make you believe they are in a room with a group of people to make it sound legitimate. Always ask for a contact number and call back a few days later and see who answers.

Fraudsters may have hijacked a telephone number 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 it is close by take a drive and make sure it exists. In fact rather agree to meet at their offices. Meetings at your home or in a public place should raise suspicion.

If you have access to the Internet, Google the company and investment — see if it is legitimate or if people have posted grievances.

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