September 27, 2022

Detecting and Avoiding Ponzi Schemes

A Ponzi scheme is a type of fraud that all investors need to be aware of. The basic premise of a Ponzi scheme is to attract investors and pay profits to earlier investors from the money invested by later investors. This cycle can continue for lengthy periods of time especially if investors are enticed to keep their money “invested” due to the high presented returns. The most famous Ponzi scheme in history was run by Bernie Madoff. Madoff was able to defraud investors for almost 20 years, until the 2008 financial crisis led mass redemptions, exposing Madoff’s scheme. At its peak, the fund was an estimated $65 Billion dollars. While most Ponzi schemes are much smaller in size, investors should nonetheless be aware of the tell-tale warning signs that an investment may be a Ponzi scheme.

1. Excessive returns with low risk and zero volatility

In the investment world, there is no such thing as a “free lunch.” Investors who want high returns generally must accept higher risk to achieve these returns. A Ponzi scheme attracts investors by offering exceedingly high returns with little to no risk. Investors need to be wary when presented with excessive returns or “guaranteed” investments. Investors should also question when they see no volatility in the return stream of the investment.

2. Complexity in investment strategy

Your investment manager should be able to explain their investment strategy to you. Ponzi schemes tend to have complex strategies that are designed to confuse investors.

3. Questionable paperwork

Investment managers are usually required to issue account statements that are clear and easy to understand. Errors in these statements could be a sign that your funds are not being invested as promised.

4. Unregistered investment manager

Make sure to review your investment manager’s registrations. A lot of Ponzi schemes are run by unregistered firms and unregistered individuals.

About Northfront Financial

Northfront Financial, based in Calgary, Alberta is a boutique full-service financial planning firm serving professionals and business owners. We pride ourselves on being a different kind of investment firm. This stems from our humble roots, entrepreneurial spirit, and a culture of integrity and professionalism. Our goal is to offer the best investment products, services, advice, and ideas the financial industry has to offer from our experienced team, which includes individuals with the Chartered Financial Analyst® (CFA®), Chartered Investment Manager (CIM®), and Certified Financial Planner™ (CFP™) designations.

Share Post: