Investment Scams - Too Good To Be True? - Free Financial Advice for Australians

How would you like 12% return on your money "guaranteed"? Oh, and by the way your advisor is paid 7-8% commission upfront also, and other feeders at the trough get a few more percentage points

Sound too good to be true? Well it is.

If you haven't been aware of the WestPoint debacle you have been lucky or overseas. Millions of dollars raised from Mums, Dads, pensioners, soccer clubs and Investors have been lost. Well, maybe there is a few cents in the dollar to be recovered. Many of these investors were placed in this Mezzanine Finance style investment by their advisors. Unfortunately, it allegedly turns out they were given promissory notes and no guarantee

Who is to blame? Well, the courts will ultimately decide but it's probably a combination of many. Westpoint certainly didn't intend to lose money through its property developments. The promoters and advisors certainly didn't want to see their clients lose money. And the investors most certainly didn't invest their money to see it vanish. However a combination of bad management, greed and market conditions has seen many reputations in tatters and millions of dollars gone.

When large institutions present to Advisors there is an assumption that the Institution is above board. When the institutions are placed on a large Securities Dealer Group's preferred list the advisor, as well, feels safe to recommend the product. Presumably these products and providers have been researched by an independent organisation. Unfortunately where there is money there is greed.

It is hard to believe that commission to the advisor didn't influence their decision to place funds in Westpoint.

It is also difficult to accept that the risk adverse pensioner would be placed in a high risk investment.

We all have short memories, remember Estate Mortgages, Pyramid Building Society et al.

75% of Advisors are now owned by the large Financial Institutions and product distribution is the name of the game. It's changing and advice is gradually getting better. But when advisors are offered huge incentives to place clients' money into products, greed seems to outweigh this sound advice.

So when it sounds too good to be true...

Beware of scams
Apart from investors losing their money in mismanaged organisations, there are investments that are simply scams. There are millions of dollars invested by some people in fraudulent scams every year. Many of these scams are PONZI schemes, named after Charles Ponzi, a man with a remarkable criminal career in the USA in the 1920's. This term has been used to describe pyramid arrangements whereby the perpetrator makes payments to investors from the proceeds of their original investment or from further investors rather than from profits of the underlying business venture, as the investors expected.

This gives investors the impression that a legitimate profit-making business or investment opportunity exists, They then tell all their friends and on it goes. They all feel very privileged until the music stops and then the Con Man usually disappears or starts another scheme. (Some people conned by Ponzi who lost money were also enticed back a second time . you guessed it they lost their money again

Australian Securities and Investment Commission (ASIC) are on the look out for scams and fraud. They give The Pie In The Sky award each year known as "The Pits". And the winner of 2006 The Pits award is as follows.

'Pie In The Sky' winner for 2006 (courtesy of ASIC website)

ASIC's award for 2006 goes to an illegal investment scheme promoted through wealth seminars throughout Australia. Operated by Mr Craig McKim, Pegasus Leveraged Options Group (Pegasus) lured approximately 90 unsuspecting investors and raised $3.7 million. Over $2.1 million of the funds raised were lost in personal gambling and other personal expenses by Mr McKim.

In the case of the Pegasus scheme, the NSW Supreme Court found investors were promised returns of up to 8% a week - figures described by the Court as 'astronomical'. Investors were even issued with a Certificate of Guarantee by a fictitious 'International Investment and Securities Commission'.

Mr McKim was jailed in October 2005.

According to ANZ's 2005 financial literacy report , 85% of Australians know that high returns mean high risk, but some 47% would still be willing to invest their money in something offering well above market rates of return.

'The higher the return, the higher the risk. Get rich quick schemes promise the world, but usually end in tears.

'The serious purpose behind these awards is to warn the public. Pie-in-the-sky financial schemes still devastate far too many people. They frequently use sophisticated props and hard sell techniques that lure even financially experienced people,' she warned.

'Deal with licensed Australian businesses, because that way your rights are better protected if something goes wrong.

FIDO also has a list of illegal schemes where ASIC has taken action in the courts, obtained court orders and when those involved were identified in court.

(Courtesy of ASIC)

As humorous or fascinating some of this may be for us to read the result is millions of dollars lost and untold human misery for the duped investor who unsuspectingly put their money into these Schemes.

And you know it won't stop. There will be a PITS winner next year and the year after etc.. People will continue to be conned by too good to be true stories.

Make sure you use a licensed adviser. This is what we do for a living. Successful investing takes time, work and management. Don't think you can do it part time.

The most successful people on the planet have coaches. The most astute investors have Advisers.

Investment Scams - Too Good To Be True?

When its too Good to be True?

Sound too good to be true? Well it is.

So when it sounds too good to be true...

'Pie In The Sky' winner for 2006 (courtesy of ASIC website)

Article originally published in November 2008.

Venn Williams - Halogen Pty Ltd