Momentum fraud warning

Momentum warned South Africans to be cautious of high-return, low-risk investment schemes that exploit unrealistic expectations, emotional biases, and lack of due diligence.

A new investment that promises high returns with low risk, such as ‘exclusive’ high-return funds that promise up to 30% annually and accept investors only by referral, can be tempting.

Other investment schemes may come in the form of a crypto token programme that rewards recruits. According to Tyron Lessing, Certified Financial Planner at Consult by Momentum, clients are increasingly enquiring about these investments.

As a result, Lessing explained that it is crucial for investors to be cautious of Ponzi schemes and other potentially fraudulent investments

The term “Ponzi scheme” is named after Charles Ponzi, who became notorious for running a fraudulent investment scheme in the early 1920s.

“A Ponzi scheme is defined by a form of fraud where belief in the success of a non-existent enterprise is promoted by the payment of quick returns to the first investors from money invested by later investors,” Lessing said.

“With time, these schemes have become smart – very smart. Oftentimes, they have all the makings of a legitimate investment manager.”

For example, they may appear to have a Financial Services Provider license, knowledgeable staff, great websites and even professional advertising.

However, there are still telltale signs that can indicate the scheme is not legitimate. One sign, Lessing said, is the lending rate offered.

“When making a ‘low risk’ investment, you are most likely using a fixed interest instrument such as money market, corporate or credit bonds or government bonds,” he said.

“These instruments aren’t very likely to default; they are generally fairly ‘liquid’ and make for a smooth ride when it comes to returns.”

As these funds are typically closely linked to the prime lending rate of 10.5%, the first marker to apply when investing in a “low risk, high return” fund is to look at whether the rate offered is well above the current prime lending rate.

“The importance of this relates to the investment company itself – who exactly are they lending to in order to achieve returns of prime +4, +5 or even +6%?”

Beware of investments that seem too good to be true

Lessing said if a business is truly stable, it is more likely to borrow from a bank, where the rate is much closer to prime. When the rate offered is much higher, that should raise questions.

“A possible answer is that they can’t get more – or any – credit from a traditional institution, hence the need to take on debt at high rates. This, in turn, increases your risk of default,” he explained.

The best-case scenario is that the company is still making a legitimate attempt at securing a “low risk”, high-yield return for their investors, however unlikely it is that such returns can be sustained.

“The worst-case scenario is even more concerning – that the product is completely fraudulent and is using the promise of higher-than-average returns purely to attract new investors,” he said.

According to Lessing, investors can also look into whether the returns offered by the investment are realistic, especially within the promised period.

“Traditionally, equities or stocks are on the riskier end of the scale, as asset classes likely to make the highest returns over a period of time. However, equities are also synonymous with volatility,” he said.

“When making an equity-based investment, the recommended timeline is anywhere between five to seven years – or more.”

This is primarily due to the probable volatility, with the timeline giving the investment time to achieve the desired returns.

“The opposite can be said for a Ponzi scheme-style investment, whereby high returns are promised within a short period of time. How is this possible? Truth is, it probably isn’t,” Lessing said.

He also recommended that investors should be wary of their own unrealistic expectations. People may look at their friend who got a 25% return in a year and wonder why they are only getting 10%.

“There are certainly those investments that can return 25% in a year. But these investments are high risk, ideally longer term, and not guaranteed,” he said.

Over a period of 10 years, they’re also more likely to show an annualised return closer to 14% since inception.

“They are generally not new, ‘low risk’ or with returns ‘guaranteed’. The damage related to these is that clients start to lose touch with what is a good and realistic return, and what aligns with their needs and risk profile,” he said.

Avoiding Ponzi schemes

Lessing pointed out that there are some common emotional biases that lure investors into fraudulent investment schemes.

One of the most common emotional biases is the fear of missing out. People often see a share or alternative investment that has recently done extremely well and are eager to invest as the fear of missing out takes over.

“In South Africa, where economic inequality fuels hope for rapid wealth, this emotional pull is particularly strong,” Lessing explained.

Another common trigger is desperation and hope. Economic hardship can amplify desperation for financial solutions. Scammers prey on this hope, offering “guaranteed” returns to people struggling with debt or unemployment.

“This emotional vulnerability makes it harder to question unrealistic promises and blurs logical investing principles,” Lessing said.

Finally, confirmation bias is another strong lure which can pull investors into fraudulent schemes. Once invested, consumers may look for information that confirms the legitimacy of the scheme while ignoring warning signs.

Early payouts, a hallmark of Ponzi schemes, reinforce this bias, making you feel the investment is working – until it collapses.

When looking to make an investment of any kind, Lessing stressed that consumers should, first and foremost, ensure that they work with a professional. “Aligning your goals, behaviours, needs, your risk tolerance, and timeline are the most important things,” he said.

Secondly, Lessing urged investors to do their research and investigate the opportunity thoroughly before putting money in.

“Check if they are registered with the Financial Sector Conduct Authority. Do they have a reliable track record? Is their performance far superior to others over time? Can you access your money if needed?” he said.

Consumers should also compare these companies to industry top performers over time. It is entirely possible that someone will come across a new alternative investment that will outperform traditional investments.

“However, make sure that regardless of where you intend to invest, you have done your research, consulted a professional, and only plan to invest a portion of your portfolio. Diversification is still a golden rule in portfolio allocation,” he said.

“If you are going to take a chance on a new investment, promising great returns despite possible red flags, ask yourself: Am I willing to lose this money? And let that answer guide your decision.”