The Financial Intermediaries Association of Southern Africa (FIA) would like to warn consumers against wasting their money on so-called ‘get rich quick’ schemes.
“Wealth is generated through hard work and smart investing and there is no way that you will turn a few hundred rand into a fortune over a few months – those who try soon find themselves out of pocket,” says Justus van Pletzen, CEO of the FIA.
He adds that consumers should treat any offer of an above market return on their investment with suspicion regardless of whether this return is promised in cash, interest, income or capital gains. This advice comes at a time when the South African Reserve Bank is investigating more illegal deposit taking scams than ever before.
South African consumers have been exposed to numerous ‘get rich quick’ schemes over the decades. These range from the doomed-to-fail pyramid schemes of the 1990s that saw ‘victims’ clamouring to get friends and family involved to the more technical, but equally flawed, Ponzi schemes that have dominated recent headlines.
Ponzi schemes were named after Charles Ponzi who operated an investment (sic) scheme in Boston in the 1920s. He told his ‘investors’ that he could make huge returns for them by buying and re-selling international postal-reply coupons; but he did exactly the opposite. The unsuspecting public (some 30000 individuals) parted with more than $8 million over seven months before the scheme collapsed in a heap.
The common feature of a ‘get rich quick’ scheme is a promise of an unrealistic return while the common emotions driving a consumer’s decision to participate in such schemes include desperation, greed and the fear of missing out. “One of the saddest things about local scams is that they often lure in the old and vulnerable who are desperate to supplement declining retirement incomes due to the current low interest rate environment,” says Van Pletzen.
The mere promise of a great return is enough to lure some consumers to part with their hard-earned cash; but the perfect Ponzi must do two more things. First, it must be able to demonstrate that the unrealistic return is being achieved and second, it must have a clever explanation as to how the scheme generates so much more return than mainstream asset managers or banks.
Ponzi – like every Ponzi scheme creator since – realised that the best way to market his scheme was by word of mouth and that positive word of mouth was guaranteed if a handful of ‘investors’ made money. The secret to a successful Ponzi is therefore to make sure that some of the participants are handsomely rewarded – and boast about their windfall.
Another trick is to create a believable ‘hook’ or story that explains the massive returns on offer. The Tannenbaum Ponzi – rumoured to have cost wealthy South Africans around R13 billion – convinced participants that they were earning money by buying chemicals and on-selling these to pharmaceutical manufacturers at huge mark-ups. The scam was backed up by authentic-looking documents and a network of connected and high net worth individuals who unwittingly (and sometimes knowingly) encouraged their peers to join.
Why do Ponzi’s collapse? The short answer is that they simply run out of money. “Ponzi’s don’t create money – instead they depend almost entirely on receiving an ever-increasing flow of ‘fresh’ cash from new depositors to cover operating expenses and refund participants,” he says.
When Ponzi schemes go under – and they always do – the crooks that operate them are quick to blame the regulatory authorities for the financial losses that consumers suffer. They argue that the scheme would have been just fine if the regulator had kept its ‘hands’ off. Ironically the consumers end up badmouthing the very regulator that has stepped in to minimise their losses.
“It is sad that poorly educated consumers believe that their losses are due to the regulator’s intervention rather than to the illegal and unsustainable nature of the scam they have poured their savings into,” says Van Pletzen. “And it is just as sad that ordinary South Africans are so quick to part with their cash for the promise of an impossible future pay-out.”
He adds that Ponzi-schemes appeal to consumers regardless of their class or education, with the rich and the poor, the educated and the uneducated all falling for these scams almost daily. The FIA’s message to South African consumers is to realise that there is no magic fix to poverty – to accept that there is no way to create money out of thin air – and to understand that the only way to become wealthy is through hard work and sensible saving over a long period of time.
If you believe the ‘smoke and mirrors’ schemes that these snake oil salesmen offer then you will get exactly what you deserve, a bag full of nothing. Don’t become a ‘sucker’ by chasing the promise of a fast ‘buck’; but rather be a saver or investor who builds wealth over time for future generations.