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Ponzi Schemes: The Old Con Re-emerges by Beth Jones, RLP®

We've been hearing a lot about Ponzi schemes, the Bernard Madoff scandal being the largest in recent history. Many people don't really know what a Ponzi scheme is and how to avoid becoming a victim of one.

Charles Ponzi gained notoriety when, in the 1920s, he stole millions from investors in what is believed to be the first and most well-known of these crimes. The elements of Ponzi's original scam are similar to the swindles of today:

  • Ponzi told investors that, by taking advantage of the differences in U.S. and foreign currencies used to buy and sell international mail coupons, he could provide a 40-percent return in only 90 days. This was a dramatically greater return than the 5-percent return investors could earn in a bank savings account.
  • While new investors kept money coming in, that money was the only source Ponzi had to pay off existing investors, as he made no effort to generate legitimate profits.

Fortunately, there are steps you can take to ensure that the professionals you work with possess the integrity that was irrelevant to Mr. Ponzi.

Spotting a fraud

Do your own due diligence. These tips are geared toward forming relationships with financial professionals, but they can be applied to any type of engagement in which you trust someone with your money. Be sure to use a combination of these 10 precautions:

  1. Remember, if it sounds too good to be true, it probably is. Be wary of such words as guaranteed or risk-free, as well as of products that promise higher than average returns, which may translate into 4-10% depending upon the product, timeline and market.
  2. Be wary of high-pressure tactics designed to make you act fast—not think. Look for red flags like once-in-a-lifetime or can't-miss opportunity, and anything or anyone pushing you to act now. Reputable Investment Advisors will give you time to carefully review and investigate any proposed investment strategies.
  3. Avoid writing checks payable to an individual or an unknown company. You should always make checks for investments payable to your account, not an individual. Never invest with cash or traveler's checks, and don’t do business with anyone who suggests that you do.
  4. Don't be afraid to ask questions and review legal documents. Request a copy of the Form ADV Part II, the investment advisory agreement, and a prospectus of any investment. Be sure to pay attention to the fine print and disclosures on these materials, which are required by law.
  5. Research any affiliates who are the associates of the advisor. Take the time to review the website and material of any affiliate organization. Most important, find out who is the custodian of your assets, and review the organization prior to investing. Here again I recommend an independent firm. The more checks and balances, the better.
  6. Conduct a thorough background check. Review the broker's or advisor's public record on or www.sec gov. Avoid anyone who has had multiple customer complaints or regulatory problems or, who has switched firms repeatedly (at least three changes in a five-year period).
  7. Check to see if the firm has a website, and review it. This is a basic step you can take to ensure that you are partnering with an advisor who's put some resources into his or her business. It's especially useful in combination with the other tips here.
  8. Rely on recommendations from friends or professionals you trust, especially when they have long-standing relationships with the individual you are considering. Do a Google search.
  9. Get it in writing. Be skeptical of any investment opportunity, strategy, or statements that are not backed up in writing. The more detail you can get, the better to make an informed decision.
  10. Do a “gut” check. Although this may not be scientific; you “know” when something just doesn’t feel right for you. Did they ask questions about you and your life, or did they just sell you a product?

The bottom line is you should control your financial future. The time you put into vetting potential professional partners is one investment that can legitimately promise a great return.

Beth Jones, RLP® is a Registered Life Planner and Financial Consultant with Third Eye Associates, Ltd, a Registered Investment Adviser located at 38 Spring Lake Road in Red Hook, NY. She can be reached at 845-752-2216 or Securities offered through Commonwealth Financial Network, Member FINRA/SIPC.

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