I hope everyone reading this column is aware current interest rates are not only low, they are almost nonexistent. When the annual interest rate on a savings account is 0.2 percent and that is not 2 percent, but 2 tenths of one percent, then low or no risk investments offering 8, 10, or 12 percent should raise a red flag.
Sadly, the alert flag is never triggered for many investors when they find what they believe to be a great investment. What is more unfortunate is the fact a neighbor or friend often was the person that introduced them to this wonderful investment. And surely the friend would not be investing in a lousy investment. Ponzi schemes count on existing investors to share openly and excitedly about the wonderful returns they are receiving in the hopes of “hooking” another fish on the promoter’s line. But, it is not just great returns; it is generally great returns with little to no risk!
Investors always want their cake and to eat it too. They want the double digit returns so the account values grow or the income they need is produced, but they also want very little risk. This is why promoters of Ponzi schemes rarely have trouble hooking prospects. They are delivering in conversation only, the ideal investment for so many investors. But it is impossible for the promoter to deliver on the results.
InvestmentNews reported the discovery of another Ponzi scheme this week in Louisiana. William J. Chaucer Jr, age 60, of Ponchatoula, La., was arrested on charges of theft and selling unregistered securities. Charges indicate potential losses may reach 11 million and include more than $400,000 being used to pay Mardi Gras expenses, $5,500 worth of plastic surgery for his wife and thousands more for the cost of his wife to compete in pageants. Many of the potential victims said they never missed getting a required payment until the business was shut down. The Ponzi scheme promoted by Chaucer was like so many others where he directed investor money into “businesses” and not the typical third party investment.
For the vast majority of investors, mutual funds or brokerage accounts will provide the best options. Additionally, these investments can be confirmed since they are generally held with third parties. It is difficult for the promoter show the investor owning shares in a Fidelity or American Funds, without the investor being able to call up Fidelity or American Funds and confirm the account and value. Having third party confirmation with known businesses is the first step in confirming the investment is real.
Many of the Ponzi schemes offers little documentation and the investment is often described as unique. The investor is also requested to make the investment check out to their business. This is the critical step for the promoter since this provides them with access to the funds to pay promised returns to investors already on the books.
The key point to remember, is the returned being “promised” reasonable in the current environment? The promise of double digit returns without risk in today’s market should be treated with skepticism.
For help with estate planning and managing investment assets, contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our website, www.goqfc.com. You will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other tools all available for free.