Imagine the horror of learning that your life savings of £1.4m had turned into £14,000. That you had been fooled by a financial trickster who ran a Ponzi scheme that saw you unwittingly place all of your life savings with a guy that you trusted, that seemed to be doing the right things and making the right noises. Today you know that he was found guilty and will be serving time in prison, but this does not feel like justice.
As a financial planner, I am always interested in these stories. I am left wondering, why is it that clients trust me – apart from Terence Freeman’s obvious deceipt, how can a client tell if I am actually any different?
There are tell-tale signs – the most important being that I am regulated which means that I am a registered individual with the FSA as is my firm. As such I have to take out professional indemnity insurance in the event of a claim for bad advice (all adviser firms have to have this). Like most industry-wide regulators the FSA has flaws. However, it is a watchdog with teeth – issuing fines to firms in 2010 of £85m (a record). The FSA are there to ensure that rules are upheld, that practices are improved and that the standard of advice is lifted ever higher. All good stuff.
However these people seemingly ignored or did not understand that someone not regulated by the FSA is automatically malpracticing if acting as an “adviser”. So There are two points to make here – firstly that people still have a poor understanding of the financial services industry and regulation. Secondly, that the lure of high returns means that some people stop asking questions.
This a story as old as time itself – human nature will tend to overlook or ignore the “how” if the magic works. A Ponzi scheme is the equivalent of financial illusion. It appears that returns are going upwards (despite every piece of economic news) – in practice all that happens is that the newer investors are receiving income or growth from the money that new investors put into the scheme (unknowingly). In steps Mr Maddof and now Mr Freeman all in the footsteps of Charles Ponzi who set up the first enormous scheme in the US in the 1920’s – though obviously not the first financial scam.
I have to admit that I really don’t know quite how people make decisions that lead them to forget the basic truths that they know. I leave to those that know better than me about how people think – the psychology of money is something that Dr Maria Nemeth has spent most of her adult life studying and now teaches or coaches financial advisers to help their clients to focus on what is truly important. She has some very valuable insights that advisers would be very well advised to consider.
In terms of spotting a financial con, here are some questions to ask yourself.
1.If it sounds too good to be true, it probably isn’t true.
2. Is the company regulated?
3. What is it that appeals about the investment being offered?
4. How do the historic returns compare with the relevant market?
5. Is the data evidence reliable?
6. Who audits the fund?
7. How do they do what they do?
8. How come they are able to reproduce results that no one else can with consistency?
9. Who do the financial valuations / statements come from? can they be verified?
10. Are you being pressured into investing?
Most people take years to to build up their wealth and I am intrigued as to what makes them hand it all over to someone promising something that in reality we all know is not possible – otherwise everyone would be doing the same thing.
The list could go on… but actually things like the “advisers” qualifications and employment history are probably not that helpful. Just because someone has managed millions for a large Bank does not make them good at it or trustworthy – does it?
Here is the golden rule: whoever has the gold makes the rules
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