A trusted adviser is your front line defence against investment scams

South African investors continue to fall victim to so-called Ponzi or pyramid schemes. Lured by promises of massive interest or profit they are soon fleeced of their entire “investment”.

We emphasise the word “investment” because a Ponzi or pyramid scheme cannot be classified as such. These are not investments but elaborate scams that enrich the founder while eroding investors’ capital in order to pay out unsustainable returns. As soon as new investment dries up the Ponzi scheme collapses leaving most participants severely out of pocket.

The latest scheme to hit the headlines is that of Net Income Solutions, which it is alleged collected as much as R500 million from investors through an opportunity marketed as Defencex.

Investors were promised some 2% per day on investments of five-month duration subject to a complicated points-based assessment system. They could enhance these returns by earning commission on the amounts invested by people who they introduced to the scheme.

“It is a sad fact that the majority of victims of these scams are struggling pensioners who have failed to make sufficient provision for retirement and are now looking to these get-rich-quick offerings for salvation,” says Gavin Came, Chairman of the Financial Planning Committee of the Financial Intermediaries Association of Southern Africa (FIA).

“Warning signs that you are dealing with a Ponzi scheme are that the promised returns offered are way over those achieved in bank deposits, unit trusts and other regulated savings and investment products.”

It is essential that the financial services regulators keep a close watch on questionable financial activities. “The FIA welcomes the registrar of banks’ decision to investigate the Defencex scheme and the ensuing court action,” says Came. “We are also grateful that the Western Cape High Court ordered Net Income Solutions’ bank accounts be frozen pending further submissions.”

The FIA is painfully aware that Ponzi schemes can cause harm to the reputation of intermediaries, financial services providers and regulators such as the Financial Services Board and National Treasury. “Although we cannot deny that brokers have erred by steering investors to quick money opportunities in the past, the industry has taken steps to weed out its ‘bad apples’ and mitigate the risk of similar mistakes being made going forward,” says Justus van Pletzen, CEO of the FIA.

Shortcomings in the financial advice process have been addressed by the comprehensive consumer protections introduced in the Financial Advisory and Intermediary Services Act and pending Treating Customers Fairly legislation. “Our members recently took a big step towards professionalism by successfully completing the prescribed regulatory examinations for key individuals and representatives in the financial advice industry,” he says.

Steps have also been taken to tackle financial impropriety. “The FIA recently introduced an FIA Watchdog initiative to help clean up the industry and to show both our members and the consuming public that we are serious about tackling wrongdoing in the financial advice and product provider space,” says Van Pletzen. “In so doing we demonstrate to the regulator and consumers our willingness to help to police the industry.”

Came says that the best way for consumers to sidestep the Ponzi pitfall is to discuss their proposed investments with a trusted financial adviser before committing cash to them. “An FIA intermediary will be able to see through the smoke and mirrors that are used to lure consumers in,” he says. “The value of financial advice exhibits in preventing costly mistakes as early in the investment process as possible.”

Consumers can turn to an FIA member broker for advice that will ensure that the financial products they invest in are appropriate for their long term financial needs. “An FIA member broker offers a professional service within a very tight regulatory environment,” concludes Came. “Financial advice does not guarantee that an investor will not suffer losses; but it mitigates the risk by ensuring that consumers are invested in regulated products through a regulated financial advice process.”