There are two key things you can do to avoid a Ponzi scheme so that you or your loved ones never have to experience this writes Wealth Within founder and chief analyst Dale Gillham.
This week, I read a heartbreaking article about a grandson investing a large sum of money for his grandmother in a Ponzi scheme. Sadly, I have seen many of these schemes in my decades in the industry. So why do people fall for these scams?
Before we dive in, it's important to understand why people are attracted to these scams. No doubt you’ve heard the saying, ‘If it's too good to be true, then it probably is?’ Never has a more accurate statement been said when it comes to Ponzi schemes.
I believe the main reason people get caught in these investments is because they have no way of measuring what is too good to be true.
How much is too much?
With every Ponzi scheme, the story is the same in that we’re told we can make very good returns. But what people really hear is that they'll make a lot of money in no time with very little effort, which we know sounds too good to be true.
What happens next is that the person getting scammed makes no effort to stress test the investment through proper research or due diligence. Instead, they focus on how much they’ll make and ignore the risks. This is usually because they are asked to participate by people they trust, which could be the person running the Ponzi scheme or a friend or family member who has already invested. As a consequence, they drop their guard because they’re told they need to be quick, so they don't ‘miss out’.
If you aren't willing to do the research to pick apart the opportunity presented or you have FOMO, then, unfortunately, you might just be the type of person who could fall for a Ponzi scheme.
So, what are the two ways to avoid Ponzi schemes?
- Check that the business is registered with the Australian Securities and Investments Commission (ASIC). You should also request the company's Australian Business Number (ABN) or Australian Company Number (ACN) for further verification. You also need to verify their claims independently and question unusually high returns.
- Seek out an independent expert like an accountant or financial planner and let them look at the opportunity. If they smell something fishy, do not invest.
You need to pay attention to the warning signs that it’s too good to be true. If you suspect fraudulent activity or believe you have fallen victim to a Ponzi scheme, then report it to ASIC or the Australian Competition and Consumer watchdog.
Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au