Investment scams and how to spot them

Protect yourself and your hard-earned money

We are all familiar with the old English proverb, “A fool and his money are soon parted.” We also know that the road to riches is paved with hard work, dedication and diligence with our savings – so why do so many of us still fall for the all-too-familiar get-rich-quick scheme?

Each year, thousands of people lose millions of rands in investment scams. The advancement in digital communications and the internet make these kinds of scams more common and harder to identify, making it easy to be the next victim. But knowing how to recognise these investment scams is the first step in protecting yourself and your money.

How to recognise an investment scam

Each year, thousands of people lose millions of rands in investment scams.

·           Investing in any product that offers an attractively high return with a minimum level of risk to capital is a major indicator that you should run for the hills and avoid it.  

·          Upfront payment needed: no reputable or legitimate investment company will force you to make a payment upfront, without first giving you the necessary time required to peruse the investment opportunity.

·          An unsolicited request for your private information: these requests can either come via phone or in an email. Check the company details and phone them directly to verify these details. Remember that a glossy brochure or website is not evidence that an offer is a good investment or even a real deal.

Ponzi schemes on the rise in South Africa

Ponzi schemes have been increasing in South Africa due to the ailing economy and financial pressures placed on consumers, making them vulnerable and easy to prey on.

According to the Bank Supervision Department Annual Report for 2016, the South African Reserve Bank (SARB) investigated 27 money scams in 2016 and resolved 63 investigations from previous years. To know how to avoid being scammed through a Ponzi scheme, you have to understand how it works.

What exactly is a Ponzi scheme?

Named after the person who first made these schemes infamous, Charles Ponzi, these schemes are operated by tricksters and seemingly legitimate businesses that will invite you to invest in a scheme or business. The operator promises you unrealistically large returns on your investment in a short period of time.

These schemes depend on enticing a steady flow of investors, whose money goes to pay off promises made to earlier investors. Any such scheme will inevitably collapse, as it is impossible to find new investors to keep the scheme going.

Ponzi scheme red flags to look out for:

·           Be wary of schemes that offer returns that are unrealistically higher than those offered by authorised financial services providers, such as reputable banks.

·           Be wary of schemes that are not registered as authorised financial service providers. Ask for their financial services provider (FSP) number and verify the number with the Financial Services Board.

·           Be wary of companies that aren’t willing to explain exactly where your money is invested and share proof of your investment in the form of an investment policy document.

When choosing a moneymaking opportunity, always do your homework thoroughly. Take your time and remember that you didn’t save your money overnight – it took time. Free advice is available from registered financial advisors. Speak to your bank manager or financial advisor about the best investment products for your needs. If you want to realise reasonable financial returns from your investments, you must be patient.

Always remember the golden rule of investing: if it sounds too good to be true, it probably is.