“An adviser told me that he can get me a 5% guaranteed return with no risk. What do you think?” – A Yield-Starved Investor

“Ask for everything in writing. Earning a 5% guaranteed return on your investment is virtually unheard of with today’s interest rates. Add some risk, and you might get a 5% return, but it won’t be guaranteed. Many fixed annuities are available with a 5% income payout, but a “payout” is not the same as a “return.” With all that said, if anyone says they can get you a high return with no risk, I’ll bet you it is a fraud. Distance yourself quickly!” – David

Know the Fraud – High-Yield Investment Programs (HYIPs) are unregistered investments created and touted by unlicensed individuals. They use an array of websites and social media – including Facebook, Twitter, and YouTube – to lure investors. While the pitch and structuring of the fraud may vary, many HYIPs are nothing more than Ponzi schemes in disguise. Regulators shut down the ironically named “Genius Fund” back in 2010. The HYIP was permanently banned for illegally selling securities, and according to the Financial Industry Regulatory Authority (FINRA), the investors in the “Fund” lost $400 million.

See the Fraud – Virtually every HYIP has the five characteristics of a fraud:

1. Abnormally High Yields – The Genius Fund, for example, promised a 36 to 40% daily return! If the long-term average annual return for the overall stock market has been around 10%, how can 40% a day be realistic?

2. Unclear Methodologies – HYIPs don’t tell you how they produce those astronomical returns. At best, their websites might have general references to trading in foreign currencies, futures, or commodities.
 
3. Intentional Anonymity – Legitimate financial businesses make it very easy to contact them by phone and they publicize their physical location. HYIPs don’t make this information readily available. That’s an obvious warning sign.
 
4. Predictably Foreign – Many HYIPs are located outside the United States. Off-shore doesn’t necessarily mean “off-limits,” but, it always seems that’s where the lofty (and fraudulent) returns are hiding.
 
5. Insidious Incentives – Many HYIPs offer “referral bonuses” to get existing investors to usher in new ones. Why? Because a Ponzi scheme is hard to maintain without a steady stream of new victims.

Avoid the Fraud: Most states have departments for banking, insurance, and investments. Contact them to verify adviser licensing and to check on complaints. Also, confirm the legitimacy of a touted financial product before investing. These two simple steps could save you years of regret (and a lot of money).

 

 

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David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show at 9AM on AM1380 Ormond Beach, AM1230 New Smyrna Beach and AM1490 Deland. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to info@DavidHolland.com.