November 1, 2008
 By Bruce Cameron
When investment markets run into trouble and returns start to tumble, unscrupulous people flogging high-risk products and scam artists come out to play. And their main targets are too often pensioners and people on fixed incomes.
Pensioners are the main target because most retire without sufficient cash and start to feel the pressure when markets turn, as they have, and they also experience the effects of negative real interest rates (nominal rates less inflation).
Let me remind you about Jack Milne, the fraudster who spent a year in jail for his scam PSC Guaranteed Growth Fund. Milne launched this so-called investment in 2001 when markets were volatile, claiming that only he could provide decent returns. The rest of the investment industry, he implied, was useless.
And Milne falsely claimed that everyone's investment would be guaranteed by then listed company Tigon, headed by Pietermaritzburg-based Gary Porritt, who still faces criminal charges for his alleged part in the scam.
Pensioners who do not have guaranteed pensions are particularly vulnerable to scamsters. They may have discretionary investments or an investment-linked living annuity in which they take all the investment risk. If these investments have a high exposure to shares, a pensioner could be in trouble in the current turmoil.
One of the temptations is to seek out investments that "promise" better returns. The problem is that too often they do not deliver.
Next week I will cover in more detail how pensioners who do not have guaranteed annuities should deal with the current meltdown. This week I will concentrate on how to spot a scam.
It is not that a whole lot of new scams and high-risk products have suddenly sprung up. But they will come and people will be suckered. The purpose of this column is to warn you that you need to be wary.
Most of these high-risk and/or scam products take the legal form of unlisted companies.
Hard-sell tactics are employed and you will be promised much, including guarantees on your capital. You will be told by slick sales people the offer is limited both in time and in the number of people to whom it is offered. You will be asked about how badly your current investments are doing.
Increasingly, high-risk and scam investment products are structured through dubious offshore jurisdictions, which have lax regulations.
These are all signals that the product is high risk.
So here are some simple rules:
1 Do not deal with someone who is not registered with the Financial Services Board (FSB) as a financial services provider (FSP) or an agent of an FSP. Although this is not a guarantee that you will not be given bad advice, at least action can be taken if there is a problem.
You can check with the FSB by going to its website, www.fsb.co.za, clicking the "FAIS" link at the top right-hand side of the page and then clicking "Search for financial services providers". You can also phone the FSB's call centre on 0800 110 443 or send an email to info@fsb.co.za.
You must always check, because a scamster will merely claim to be registered.
2 Ensure that the product or product provider is regulated by the FSB.
3 Always insist that you receive everything in writing. This rule applies particularly to any guarantees on your capital and your returns.
4 Be extremely wary if the promised returns are above the prime interest rate (currently 15.5 percent).
5 Never be rushed into anything and never invest if you are not permitted to take away documents to study at your leisure or to refer to an expert, such as a lawyer.
6 Always insist on receiving in writing a list of all costs, as well as commissions or any other payments the person who sells you the product will receive.
Treat with great care any pro-duct in which the costs, including commissions or fees paid to the sales person, are more than six percent initial and two percent annual. Be highly suspicious if the commissions or fees are more than three percent a year.
7 If you still wish to invest in an unregistered product, such as one that is structured through an unlisted company, invest no more than five percent of your money. In that way you will not lose your all.
8 Be wary of unlisted companies. An unlisted company is the quickest way to get around the many protections provided for investors. It is not that all unlisted companies are duds. Many successful companies start as unlisted companies. But they are given a bad name by those people who wish to separate you from your money.
If you invest in an unlisted company, you must:
Ensure the company is registered in South Africa. Have your lawyer or accountant check for you. Avoid foreign-registered unlisted companies like the plague.
Insist on receiving a copy of a prospectus, which should contain all the details of the company and its products. If you do not understand the prospectus, don't invest.
Check the details in the pros-pectus, and determine whether the banks or brokers listed exist and if they are involved with the company.
Be careful of grandiose, vague generalisations and jargon, such as shares in a company that is developing alternate energy resources for global sustainable development projects.
Regard promises that your returns will dramatically improve because the company will list in the near future as a warning sign that a scam is afoot.
Check whether the company has a track record.
9 Be wary of property syndication schemes. Many schemes being marketed nowadays have very complex, unlisted company structures that separate you from having any direct claim on the property if things go sour.
Most have extremely high costs and pay excessive commission and fees to sales people. Such costs could be camouflaged relatively easily while property prices were increasing by 20 percent a year. However, now that property is in the doldrums, the riskiness of property syndications is likely to be exposed rapidly.
In the end, if it sounds too good to be true, it will be too good to be true.
The formal sector is also exploiting people
Despite a raft of legislation in recent years, of which the Financial Advisory and Intermediary Services (FAIS) Act is the most important, it is still very much a case of "Buyer Beware".
The numerous unfortunate reports in Personal Finance today and last week highlight how bad the situation is. Last week the Insurance Sector Education and Training Authority confirmed information Personal Finance had received of financial advisers cheating to obtain the required qualifications, often with a wink from training organisations and employers.
Add to this:
Metropolitan Life baulking at paying up for money that was stolen from pensioners in the Ovation scam when it allowed Ovation to use its life assurance licence to issue the pension products.
Old Mutual, as a licenced financial service provider, now refusing to take responsibility for the activities of one of its agents.
The continued mis-selling of contractual high cost, life assurance investment and retirement products with significant penalties, when a person, through no fault of their own, can no longer afford to pay premiums or contributions.
This is the formal sector exploiting individuals. This is unacceptable and the authorities must intervene, and intervene rapidly, if the FAIS Act, in particular, is not to lie in tatters, with no credibility. If it requires amending legislation, this should be done forthwith.
A bright light is the Financial Planning Institute, which oversees the highest professional qualification for financial planners - the Certified Financial Planner accreditation - and is showing that it has the guts and determination to ensure its members abide by its code of conduct.
Cameron is the author of Retire Right, which is now in its second edition (Zebra Press).
  
 
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