Schemes and scams! We read about them every day.
You’ve probably heard the term “Ponzi” a number of times, but do you know what it means and how to protect yourself?
Ponzi scheme = “a fraudulent investing scam that promises high rates of return at little risk to investors. The scheme generates returns for older investors by acquiring new investors.” (Investopedia)
Charles Ponzi, the first scammer
In Ponzi schemes one man gathers and distributes funds, allowing early investors to benefit from the funds of new investors. Charles Ponzi, a Bostonian, was the first to perpetrate the scam. Ponzis differ from pyramid schemes in which each investor recruits and benefits from his own new investors. However, both Ponzis and pyramids eventually unravel. (Investopedia)
An L.A. Ponzi
Bernie Madoff, perhaps the most infamous Ponzi scammer, targeted wealthy individuals. It’s even more tragic when investors are middle-class and near retirement age. A CNN Money article (4-23-11), reported a Ponzi scheme that targeted Los Angeles bus drivers’ retirement funds. Many of the victims were left indigent at an age when they could not find work.
A Charlotte Ponzi
Sentenced to 22 years in prison, Charlotte Ponzi artist Sidney Hanson targeted the elderly. North Carolina Secretary of State Elaine Marshall said Hanson’s scam was “crafted to appeal to victims through their deeply held religious beliefs.” (Charlotte Observer)
Microsoft Network Money offers 5 tips for avoiding Ponzi schemes:
1. “Make sure your money advisor is legit”
Ask friends and relatives for recommendations; then check the advisor’s credentials through organizations like National Association of Personal Financial Advisors.
2. “Dig Deep”
Ask to see the advisor’s ADV Form, Part II to check on his background, services and fees. Check for complaints with the state securities regulator. For info on this, see North American Securities Administrators Association (NASAA).
3. “Understand the difference between a manager and a custodian”
A custodian is in possession of your account and issues statements of transactions. A manager executes transactions. “Frauds almost always occur when those two things [custody and management] are put together,” says Tim Kochis, chief executive of Aspiriant, a wealth management company.
4.”Be skeptical of pitches for exotic or obscure products”
5. “Be especially vigilant if you’re nearing retirement”
(read the entire MSN article for more details.)
Our mothers and fathers were right when they said, “If it looks too good to be true, it probably is!”