“Get rich quick” schemes aren’t a new phenomenon, and yet people still get lured into these sorts of financial scams.The problem occurs when the temptation of above market return on investment outweighs well-founded suspicions. Wealth is generated through hard work and smart investing, you should be wary of ‘shortcuts’.
Besides the promise of an unrealistic return, a Ponzi scheme will do two things: it demonstrates that the unrealistic return is being achieved and provides a clever explanation as to how the scheme is able to generate such high returns.
Consumers should treat any offer of an above market return on their investment with suspicion, regardless of whether it is promised in cash, interest, income or capital gains.
Here are three signs that may signal a Ponzi or pyramid scheme:
Abnormally high returns
Schemes that purport especially high returns and use terms such as “guaranteed return” should be treated with scepticism. While the concept of higher risk for higher returns is fundamentally understood by a large percentage of the public, they can’t discern when the returns are “abnormally high”.
South African investors can expect around 7.0% a year in cash (low risk) or 15% a year in the stock market (high risk) over five years. Any opportunity that promises a return that is higher than what the country’s top asset managers can generate is implausible.
Vague business models
Some financial crooks will claim that their business or investment models are confidential or too complex for you to understand. Before investing you should understand how returns are being generated. Steer clear of investments based on vague business models.
Any investment that requires you to recruit more participants in order to generate a return should be a clear warning sign. This is a classic characteristic of both Pyramid and Ponzi schemes. Eventually there won’t be any new participants and the entire system will collapse.
The best protection when making an investment it to engage with a licensed financial adviser, as they are subject to rules and regulations put in place specifically to protect consumers. Remember that no return is ever “guaranteed” in the world of investments and that even the most modest of investments carry some risk.
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