Smart Investor Malaysia

Financial Scams : Fear, Greed & Ignorance

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I still remember a business owner who asked my team to create his portfolio to make sure he would have enough money for his retirement. We advised that he could earn solid returns from a diversified global portfolio based on his financial profile.

He was assured that part of the strategy drawn up for him would spin out a good amount of cash on a regular basis. I convinced him to “buy” some sleeping pills and take a slightly higher level of volatility to achieve better capital growth.

A week after the meeting, he came back and said he was no longer interested in my portfolio because he had found a much better opportunity elsewhere. He said that a financial salesperson had explained to him that he could make more profit with lesser risk if he took another investment product.

All That Glitters Is Not Gold

scams financial

A few years later, the same business owner revealed to me that the investment he had bought into performed terribly. It turned out to be more volatile than he had thought. It is no consolation to realize that he, along with others who had also bought into that product without taking a balanced look at all the facts, will suffer.

Remember all those expensive, slickly produced advertisements boasting market beating ratings and top quartiles? Contrary to what nearly everyone believes, you do not make money buying an investment just because it “looks good” on the surface.

Yeah, everyone is going to get rich washing Mercedes, and BMWs. How about slogans like “You can become a millionaire in three years”, “You can turn your financial dreams into reality”, “Amazing, fabulous, unbelievable strategies for building massive wealth”, “You can invest with the world’s blue chip funds with as little as…,” and so on?

Life is not all sunshine and lollipops. There will always be financial salespeople with sketchy reputation or those who will put their own interests before their clients. They are usually well spoken and persistent and like to target the most naive and least informed investors.

I have no desire to offend anyone. Speaking from my experiences, it is commonly believed that those working in the sales department of bigger institutions are compensated well because they make money for investors. Yet, some of their clients are getting worn down. Some are still losing money or making very little money after so many years.

Taking Advantage

scams financial

I have seen investors saddled with unnecessary charges and lengthy lock-up periods. It is good for the seller but not the poor investor buying it. Some of these investors have absolutely no idea how badly they are being ripped off. Anyone with eyes and a brain knows what I mean.

So, you have been told not to worry just because your investment is being managed by the captain who has been dealing with multi millions or billions for a long time. Well, so what? Someone used to share with me that some fund managers should not be allowed to run a grocery store, let alone operate a billion-dollar investment vehicle.

Sorry to throw up at your party. There are some fund managers with poorer track records and far less skill but are managing far more money. Yet, some other great managers slip under the public’s radar because of the lack of publicity.

In my work, I love to find managers who have some limited capacity, so the big boys cannot compete against them. It is about sustainably higher returns for investors, not scale. Big is not beautiful here.

Many of you out there have been scammed, in one way or another, at some stage. Beware of financial schemes or money games guaranteeing anything from a few percent to double-digit returns within a few weeks or months. Financial scams are so popular because they take advantage of people’s fear, greed and ignorance.

The whole idea behind a scheme is that they do not want you to understand anything. Anyone can make any story out of thin air which is absolute nonsense. The fraudster allays your fears and provokes your greed, they entrap you by befriending you, and they say the investment is riskless then they talk about returns.

Betraying Your Trust

scams financial

Some of the victims are professional business people because they are intelligent, they think they should understand what they are being told, so they go along with it. The people who sell them are often someone whom they know for a long time.

Fraudsters and operators of financial scams sometimes target business groups in order to find their victims. In some cases, members have innocently encouraged each other to put money into such schemes. Run like hell if someone is pressuring you to make a decision at any financial events.

Most of the modern schemes are versions of old frauds, first committed more than 100 years ago. They are known as Ponzi Schemes after a 19th century fraudster named Charles Ponzi who was offering a 50% return on investment in just 45 days.

Fraudster draws victims in by honouring the agreed interest for the first few installments, then drawing more and more money from them as they start to believe they are on to a sure thing. It is like “robbing Peter to pay Paul” as the fraudster pays the initial interest payments with the investments from other victims who have fallen for the scheme.

Always open your eyes. If you leave your head in the sand and ignore it, you are only going to be victimised.

About the Author

YH Wong has over two decades of experience in the financial services industry. His clients include high net worth investors and boutique institutions such as family offices and investment partnerships in the region. He is currently a senior partner with Satori Consultancy Ltd, a financial services company regulated by the Mauritian Financial Services Commission. He can be reached at yhwong@satoriconsultancy.com.

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