How you can avoid being a victim of a Ponzi Scheme

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History has seen countless shams, schemes, thefts and frauds — but how many con artists put their names into the language by their efforts? Charles Ponzi was an Italian con man who became famous (or infamous) in the 1920’s when the pyramid investment scheme he ran collapsed spectacularly. By the time the dust settled, it was clear he’s stolen $20 million from investors — the equivalent of $200 million in today’s dollars.

When the story hit the papers and the size of the scam became clear, Ponzi’s name became mud, and was forever linked to flim-flam schemes. The truth though, is that investment frauds have happened for centuries, and they are still frequent today. The most famous and largest to date was that of Bernie Madoff, who bilked investors over 30 years out of an estimated $65 billion in 2008. It’s estimated that at any given time, there are dozens of active Ponzi schemes that have yet to be exposed.

What It Is

At the heart of every classic Ponzi scheme are two things: an investment with (allegedly) an exceptionally attractive return, and a great story about just why the returns can be so extraordinary. Promissory notes are many times offered at high rates of return — so high that they should set off alarm bells among potential buyers. When an investment promises a guaranteed compounded monthly return, you can almost guarantee you are in trouble. These fraudulent promissory notes are never collateralized with anything of real value.

But the scam then must produce returns as promised for its investors, and usually, they do, for months or even many years — double digit rates of return year after year with no loss. How? With fraud, of course!

In most of these cases there is never any actual investing being done (though in some cases, there are initial attempts at legitimate investment in the short term). Instead, the “profits” come via the old “robbing from Peter to pay Paul” method. New investors’ money goes right back out the door to pay older investors, thus keeping them happily unaware that their original capital is at serious risk. Or rather, some of the money is used to pay returns to investors; much of it goes into the con artists pockets.

The long-term success of such an evil enterprise is highly dependent on the salesmanship of the con artists involved. Still, regardless of how good at selling they are, the reckoning will eventually come when too many investors want their original capital back — not just their dividends and returns. The house of cards can also collapse if too little new money is taken in to pay investors their promised returns. For example, during the financial crisis of 2007 and 2008, people went running for their capital to get them through some tough times, and investors in Bernard Madoff’s funds started trying to divest. He didn’t have nearly enough cash on hand to pay people back, nor the investments to liquidate, and his decades-long scam was exposed.

Despite all the press the Madoff case received, there are still crooks trying to use similar methods to steal your money. New schemes are uncovered every year, and usually after they are exposed, the investors manage to recoup about 5 cents on the dollar of their money. Those who might have been considered lucky enough to have gotten out before the collapse aren’t home free: bankruptcy trustees will go after them in what is called a “clawback“; even charities that received ill-gotten donations from the con artists are subject to having to reimburse of the donations.

One more subtle problem these scammers produce is that fear of them causes many people to shy away from legitimate investment opportunities. But rather than giving in to that fear, get educated instead. Here are some ways to differentiate between legitimate investments and scams.

Signs of a Possible Ponzi Scheme

  • You never receive real collateral for your investments, just promissory notes and statements
  • The rates of return you’re getting seem too good to be true (20 percent annually is generally the low end of these promises but Charles Ponzi promised 50 percent and even 100 percent rates of return)
  • You earn consistent strong returns with no losses, regardless of market behavior. There are legitimate financial products that offer and deliver stable returns with no market risk (such as some annuities) but these are backed by old, valuable companies with many assets on the books. And they don‘t pay those too-good-to-be-true returns.
  • You’re told complicated yet compelling stories about why the returns are so strong. Ponzi himself told the tale of postal reply coupons that could be bought and sold with different currencies producing huge profits
  • If you hear the terms “exclusive private placement,” that can be a red flag that something is amiss.
  • Recognize that new start up ventures are more prone to be frauds than older ventures, but remember that Madoff’s scheme ran for 30 years.

Steps to Take Before You Invest a Dime

  • Do your due diligence by researching the salesperson personally, as well as the company offering the investment. In these days of Google, and with the easy ability to to a criminal background check, you’d be foolish not to check these out. Get an official photo identification of your salesman. Is he really John Smith, or is that an alias?
  • Check with all relevant regulatory authorities and the Better Business Bureau for any complaints or investigations of any kind. These could include the Securities and Exchange Commission, state financial and securities commissioner’s office, along with the Financial Industry Regulatory Authority.
  • Ask what the collateral is for your investment
  • Find out who will be handling the closing of this investment? Are you giving them a check made out to their company? Maybe your attorney should handle all paperwork and work on your behalf to help verify whom you’re dealing with.
  • Referrals and references are important, but not nearly enough for a large investment because the people referring you could be victims of the con and not even know it yet
  • Don’t let greed overcome your good judgment. If your inner alarm bells are going off, listen to them and find another investment

The risk of getting taken a Ponzi scheme is much reduced if you invest with major brokerages and insurance carriers. Working through these kinds of companies doesn’t guarantee a good return, but it does give you the opportunity to make or lose money via above-board investments.

When you deal in private placements, venture capital, and private offerings, you must take extra care and time to evaluate that you are in fact, being offered a legitimate opportunity. There are tremendous amounts of money made and lost in such ventures but the risks are higher, so never put all your hard earned eggs in one basket.

Finally, if you’re going to take a chance and make a higher risk investment, invest only an amount that won’t seriously affect your lifestyle if it’s lost, whether due to the natural vagaries of the markets, or to the scheming of Ponzi’s modern disciples.

Is it too Late to Leave a Nice Estate For Your Family

When my mother entered her 70s, she began focusing more on what she would leave for her kids than her own financial well-being. She was more than fine; she had assets and steady income from two pensions, Social Security and an annuity. If you’re in that phase of life, you may have similar priorities. The question is: Do you know the best ways to increase your estate?

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Most people mistakenly believe that once they stop working, their net worth will shrink as they draw on assets for living expenses. Many people who are still working into their 60s and 70s also believe that it’s too late to add any significant wealth to their estate. Neither of those has to be true — if you have a well-designed plan.

Whole Life Policy

Let’s consider a client who is 64 and plans on working another 10 years. He is reallocating some existing assets and putting some extra cash into life insurance. We are not talking about an end-of-life policy sold by the truckloads by TV personalities with a $10,000 payout to cover funeral expenses. This might be a good call if you have very little in assets and worry about your kids paying for your funeral. This client has some resources, so we could do something a little more creative.

He elected to fund a whole life policy with $25,000 a year for eight years for a total of $200,000. His starting death benefit is $310,000. If he dies in the next eight years, his family would receive $310,000 to $508,000, depending on when that happens. If he reaches 72, he will have the entire $200,000 that he put into the policy over those eight years back in the form of cash value in the policy. He is free to take loans and disbursements, or just let the money sit and grow during the rest of his lifetime.

Should he reach 85, he would have more than $376,000 of cash value in the policy — even though he has only paid in $200,000 into it. Upon his death, his family will receive more than $470,000 of tax-free cash. He will more than double his estate by simply reallocating assets and letting tax-free compounding and guarantees go to work. Meanwhile, he can access the cash he is funding the policy with. If he does, he will lower the death benefit, but he has no need in the foreseeable future.

Fixed Indexed Annuity

Another client, who is 70, had concerns about leaving money behind to benefit a child with a mental handicap. The first step was finding a rock-solid trustee to make sure any money benefits the child after the death. Since the client was 70, the cost of life insurance was prohibitive.

The client had put away $300,000 for the child. The last market downturn had cost $130,000, but most of those losses have been recouped.

The client was very clear on wanting no market risk and elected to go with a fixed indexed annuity with a death benefit rider. This rider guarantees that the $300,000 will never decrease in value and will increase at a minimum of 4 percent — plus any indexed market gains. The least average growth rate combined with the 4 percent percent guarantee means that if the client dies in 10 years, the client will leave behind more than $650,000 in cash. If the client lives only five more years, annuity will leave behind $488,000.

A fixed indexed annuity can also have a lifetime income rider that guarantees you income no matter how long you live and even if the underlying cash goes to zero from income withdrawals. The National Association of Fixed Annuities has more information about how these products work.

 

Image Credit iStockPhoto -by nanita

From Employee to Entrepreneur – What You Need to Know

Do you long for more independence or wealth? Maybe you should start your own business.

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A successful business can open up opportunities, options and freedom like very few jobs can offer. Starting a business will take time and require you to re-examine your priorities. The only thing we all have the same amount of is hours in the day. High-income business owners use their 24-hour allotment differently than employees.

Small businesses are a huge factor in the growth of the U.S. economy. True, the recession hit wannabe entrepreneurs hard. According to the U.S. Small Business Administration, the rate of new start-ups went down 12 percent from 2007 to 2010.

Getting the Money

Most businesses are started with a large investment — made with owner equity, borrowed funds or both — in goods, space, equipment, labor, marketing and other factors.

When you think of borrowing money, banks of course come to mind. Find out what banks specialize in your type of business. Network with others in your industry and find out who is helping them with financing. To get a loan, be prepared with a business plan, personal financial statement, an explanation of your experience in this type of venture, additional collateral, relevant industry facts about growth rates and demand and other pertinent information.

Finance companies and venture capital firms might be a better fit. Be very wary of companies wanting large upfront fees to simply review your application. Files for many small business ventures can be reviewed and underwritten with very little upfront costs other than an appraisal.

The Unique Selling Proposition

The most important part of any business is getting many people interested in what you have to sell. One critical point is a “unique selling proposition” that can separate you from most of your alleged competition. Some famous examples are Domino’s (DPZ) “Fresh, hot pizza delivered to your door in 30 minutes or less or it’s free” and Subway’s promotion of healthy subs with its Jared weight loss campaign.

A USP should quickly tell prospects what’s in it for them, and it should be used in all of your marketing messages. The USP is not necessarily a slogan but could be a mission. One of mine is helping families all over the country create tax-free generational wealth. It is simple and to the point, and many prospects want to know more.

Potential Customers Are Online

Thanks to the Internet, you have a worldwide marketplace at your fingertips. But how do you get just a tiny fraction of the billions of people online to check you out and do business with you?

A website is an absolute to be taken seriously. A website needs to be “sticky” (meaning the content urges people to stick around) and should generate leads by giving away something of quality. All prospects need do is to give their name and email address to get this free item. Most of your leads are not ready to do business with you right away, but if cultivated inexpensively over time via email and occasional snail mail, they can be worth a fortune to your business.

Internet marketing can generate leads to a targeted group of people. Google (GOOG) AdWords and Facebook (FB) marketing can be quite successful for entrepreneurs who take the time to understand how they work.

To start a successful business, spend time researching with the U.S. Small Business Association and elsewhere. Spend money on business training. Make it a priority to make your dreams of business ownership and financial possibilities come true.

Wealth Without Stocks! Why haven’t I heard of this before?

The indoctrination of the stock market is most powerful

Turn on your television, your phone, your computer, and any other device you care to name and you will almost certainly be greeted by the day’s stock averages such as the Dow Jones, NASDAQ, and S&P 500, among others. You will be instantly updated as to the direction of the market. There are entire television channels that are on 24 hours a day and 7 days a week that do nothing but report on the stock market; such as CNBC. How boring to have to follow those for hours every day.

When that kind of media blitz has been happening now for generations it is small wonder why people are unaware that they can, in fact, create much wealth even without stocks or mutual funds. This philosophy is NOT about being anti-stock market; there is certainly a place in every wealth plan for stocks or funds somewhere along an individual’s stages of wealth. The problem is that the vast majority of people have no idea of the many other ways that are available to grow and protect wealth. When me or my teammates and staff work with our clients from all over the country they are always fascinated when we start to discuss many of the alternative options to grow and protect wealth.

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Most of the topics we will cover in future posts are not only virtually unknown to most of the world but when used properly they can be extremely powerful. I am so excited to put all these wealth vehicles in one place that I can’t wait to begin to put this powerful information in your hands. We are going to cover debt reduction strategies, creative real estate strategies, private pension and self-directed IRA strategies, just to name a few.

We talked earlier a little bit about why the stock market is such a major force in almost every investor’s life but there is also the fact that you don’t need any knowledge to put your money into the market. Most Americans simply select what kind of investor they are; which will include aggressive, moderate, and conservative (Translation is how much money you can afford to lose). Just like that, they are signed up for their employers 401k, which will be their main retirement savings and investing plan for the rest of their lives. More than 80% admit to really having no clue what they signed up for to any great degree and certainly no knowledge of how their money was being invested. They just get their investing amount taken out of every check and let it ride!

The good news with that philosophy is that you don’t need any extra knowledge; the bad news is that you are making one of the biggest financial decisions in your life blind. You are investing (not saving, in most cases) money and just blowing all of your income. Although this is far from perfect, it is better than not doing anything at all. It’s fast, easy, and painless to get started funding your future. So you don’t have to be a financial expert to begin to accumulate wealth. That system is hands off from you and will allow you to focus on other things that are important in your life. The money is given to Wall Street (most of the time) and invested through mutual funds into many different kinds of stocks. However, that system also comes with enormous costs in the form of market losses and huge opportunity costs that we will talk about more in an upcoming articles.

The wealth without stocks philosophy is not that simple (it is pretty easy but not that simple) and will require you to obtain some niche knowledge to take advantage of the markets that are available to you in your quest to build wealth. If you are reading this than I am going to assume that you are the kind of person who is willing to shut off the television to further their own education for even one hour per night. You are willing to sacrifice time on Facebook® and every other social media time suck that are available to us. If that is a true statement than you will have the opportunity to grow and protect wealth at an accelerated rate that should far outpace your colleagues who have bought into the old financial plan described earlier. I want to congratulate you for being one of the few that actually will take the time to design their finances and secure an abundant future.

You are about to be launched into a secretive world (in comparison to the stock market and mutual fund world) that will make simple sense to you. Think of these articles like your own personal wealth buffet and you are free to choose whatever is to your liking and leave the other strategies on the table untouched. However, what will happen for many of you is that you will implement one of two of the strategies and then come back to the well of knowledge to see what else might be a fit for your goals. Just because it is not a fit for you today doesn’t mean it won’t be a fit for you tomorrow.

Just be open-minded and ready to learn!

All the best to you,
John Jamieson

Do you review your beneficiary forms?

The importance of an annual review of your beneficiary forms on your different accounts and/or policies is often overlooked. Think of your smoke alarm; most people have an annual schedule to change their battery. Your beneficiary forms on your IRA, 401k, annuity or life insurance policies, etc… are important too and should be added to your schedule. At a minimum they should be reviewed by you annually and/or after a life-changing event such as death of a loved one, divorce Calendar 300x301or birth of a child.

Just think how upset you would be if the government took more taxes on your monies because you didn’t name the beneficiary correctly on one of your accounts. Maybe you forgot to change the beneficiary from your ex-spouse to your new spouse on your life insurance policy. Or you just named your estate as the beneficiary and therefore your estate goes to Probate Court. The probate process could take a year or more to get finalized; delaying your beneficiaries from getting the monies. This could have large ramifications for your loved one’s after you have passed away when you wanted to bring them peace of mind.

Did you know that your beneficiary form will override your will on your IRA accounts? Say you remembered to update your will after you remarried but didn’t update your beneficiary form on your IRA account. This means the monies in that account might not be going to the person or persons you wanted.

There could be tax ramifications for those named as your beneficiary on your different accounts and/or policies. For example; naming a person or trust as a beneficiary will usually help those monies avoid going to probate court. This could also keep the monies away from your estate and available to creditors. We recommend you speak with your tax advisor to determine the best way to list your beneficiary to avoid the common pitfalls that beneficiaries deal with after the death of their loved one.