Investment Schemes.

Connie Bruwer from PC Bruwer and Partners advises on this important topic.

Question:  For the last few weeks there have been many investment schemes that look very attractive. People fall for it and the question arises what type of people fall for it?

Connie:  I think there are two groups of people. On the one hand, some can not say no to the opportunity to earn an extra few percentage points from an investment. And then there are those for whom this extra return would be almost essential for survival. These are people who simply do not have enough capital from which they can earn enough returns to make a living. Sadly it is usually older people. They are so credulous. When I speak to them, they will tell me that the person who suggested this investment opportunity to them was such a good man/woman. I have heard countless times that they felt that the person might as well have been their son or daughter. He or she looks so trustworthy. And maybe they are. Maybe they aren’t aware that they are selling a scheme. Or am I too naïve again?

Question:  How can someone who presents him-/herself as a financial advisor not know the product? Or just ask themselves how the type of returns paid by the promoters of the scheme, can be achieved? And oh, the commission is so attractive.  Let’s think a little about the nature of the schemes. It’s either an investment in one or the other preference share that has something to do with an overseas investment or precious metals or modern derivative financial instruments.

Connie:  The most careful of the schemes pay an interest rate or a return which makes one wonder if a smart investor might not also be able to fetch this rate. Perhaps 18% per year in these circumstances. The money market pay between 5% and 6%. Usually they speak of a guarantee. Or maybe in the sales action they refer to the historical returns. Usually I will insist on a written guarantee of the well-known institution in whose name this wonderful investment is sold or a guarantee of a well-known institution.

Question: People will still remember the Master Bond Schemes and others of the 1980s, and more recently the Sharemax and Pic schemes. In the latest case, we had to do with a guarantee containing life insurance policies and share certificates in some unlisted entity. Here are two scenarios that we can discuss. Connie, what are the two scenarios?

Connie:  In the one case the investor received more than 18 months exceptionally good returns on his investment, and I was approached when the monthly income stream dried up. The income stream was in the order of 2% per month! When I explained to the person that we are going to struggle to achieve 1% per month, he was stunned because then he would not be able to cover his monthly liabilities.

In the second case, the person just received a certificate and a copy of a life insurance policy in exchange for her R2 million. And now two months later she is waiting for one or the other payment that is stuck overseas before the client can earn an income from her investment.

There was recently a famous Sunday newspaper that advertised investment opportunities where 5% per month could be earned from a diamond mining opportunity. The advertisement stated that no opportunists should apply.

Question:  My question to all the promoters and marketers of this scheme would be if it is so easy to make money from the scheme, why don’t you just lend your money at the bank to make it happen?

Connie:  A typical example is the income funds that were sold a few years ago with great promises. Income funds will usually bring in a little better income than the money market, but as we’ve seen in the past year or so, this is not always the case. Sometimes, and as it happened in the previous three years, the money market funds do good, and in some cases even outperform the income funds by four or five percentage points. This happens when inflation and interest rates drop. It was then that brokers proposed this safe investment, that had a guaranteed return of 15%, to unsuspecting and gullible people. If it was so safe everyone had to surely borrow money from the bank at 12% and re-invest it at 15%. Then everyone would always be happy and could have a carefree walk on the beach daily. My thought for today is: If something is too good to be true, then it usually is.