Articles - Archived Expert Advice

Ponzi Schemes

I've been hearing in the news about people losing all their money by falling for scammers running Ponzi schemes. What are these, and how can I keep from getting caught up in one?

Ponzi schemes, sometimes referred to as pyramid schemes, are investment scams that appear to pay high returns on short-term investments. In reality, money is never invested, and the investor never realizes any actual profit. Rather, they are paid from new money that comes into the fund. Initial investors might see a return, but as more investors pull money out, those remaining could find there is no money left for them. This is when this "rob-Peter-to-pay-Paul" scheme collapses.

Needless to say, this can be devastating to your savings and financial future. To avoid being scammed, you need to know the signs. One red flag is if you are making checks for investments or insurance directly to an advisor. Funds invested on your behalf will almost always be payable to the investment or insurance company.

Another red flag is if your advisor sends statements directly to you. This means the advisor—not a broker/dealer firm—is responsible for reporting accurate numbers to you. Make sure you know how to verify your holdings. The process to verify funds can vary, but you should generally be able to contact the custodian or corporate call center for your accounts to verify the accuracy of your statement. You can also visit the Financial Industry Regulatory Authority's website at www.firna.org to verify you are working with a registered securities representative.