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It’s no secret that South Africans are under pressure financially – with a slow economy, increasing electricity and petrol prices and slow wage growth. Many may therefore search for ways to make their savings work harder for them, and in so doing fall prey to short-term investments that offer unusually high returns.
According to Nancy Bambo – Head of Market Content at Momentum Securities, the importance of sufficient probing of these short term investments which offer attractively high returns should not be neglected. Through the use of social engineering tactics, scammers are able to draw would-be investors into schemes by appealing to their sense of trust and appetite for good returns.
“The most common investment scams are Ponzi- or Pyramid schemes. Fraudsters may infiltrate a community via a trusted relationship with someone who has also been lured in by tempting features such as an exorbitant commission structure.”
“As the old adage goes, if it’s too good to be true, it probably is,” says Bambo. She explains that although scammers may present a good case for joining their investment using attractive statistics, investors should approach any investment opportunity promising high returns with caution.
“The risk with investment schemes of this nature is that they cannot deliver on their promise of high or triple returns, at least not sustainably. The money you invest may be used for something completely different to what you expect – which could result in you losing the initial investment, or the money is used to generate returns for earlier investors, depending on their ranking in the scheme. Once the number of existing members outweighs the number of new members joining, the scheme collapses and all the money is lost.”
Like any service that promises results that are too good to be true, there are always indicators that should make one want to ask more questions. Bambo highlights three red flags that could help to prevent investors from falling into the trap.
1. Lack of transparency
Ensure you have all the details in writing and that there is paperwork you can refer to. “Find out how the investment actually generates returns. For example, a property investment cannot offer an outside investor ‘double the returns’, guaranteed and especially in the short term. If you don’t understand how the money is generated, then this is a telltale sign.”
2. Terminology and time pressure
“If you hear or see the words ‘act now’, warning bells should start to ring. You need to do your research and exercise due-diligence with any investment. By acting in the moment you cannot make a fully informed decision.”
3. 3rd party payments
Bambo highlights that no reputable investment house will ask you to make a payment to a 3rd party without explicit reference to the investor as the beneficial owner. She explains that if the investment product is not registered or offered by an authorized financial services provider – then it is not a trusted investment opportunity.
“Investors should always do their homework and never take opinions or information at face value – don’t trust someone blindly. Get a reference, ask for a second opinion, and don’t ever feel rushed to make a decision” concludes Bambo.