How Ponzi Schemes Prey on Personal Relationships

By: Jack Waymire | February 15, 2009 | Illegal Schemes & Scams, Investor Information, Report Fraud

A recent Paladin Registry (www.paladinregistry.com) study showed Ponzi investment scams have a common characteristic:? the people behind Ponzi?scams develop personal relationships with investors to create trust, gain control of assets, and generate referrals to other victims for their illegal products.

Jack Waymire, co-founder of Paladin Registry and author of ?Who?s Watching Your Money? The 17 Paladin Principles for Selecting a Financial Advisor (ISBN 0471476994, John Wiley & Sons, 2003)? said, ?Investors create substantial risk when they select advisors because they like them. That?s because they really don?t know if they hired competent, ethical advisors who put their interests first.?

Daniel Hawke, Director of the SEC?s Philadelphia Regional Office said of the Forte, LLP Ponzi scam, ?Forte engaged in lies and deception at the expense of innocent investors, many of whom considered themselves his friends and close acquaintances. Forte promised outrageous returns and because of his relationships with investors was able to lull them into trusting him with their funds.?

Waymire added, ?The source of investor vulnerability is their belief that people they liked would not take advantage of them for money. What they failed to realize was financial advisors want to be liked for three reasons. First, investors tend to trust people they like. Second, trust makes it easy for unethical advisors to sell bad products. And, third, investors are more tolerant of bad results when they like their advisors.?

2 Responses to “How Ponzi Schemes Prey on Personal Relationships”

Lee

February 17th, 2009 at 6:41 pm

I’m sure there are some very easy questions that investors could ask potential advisors that would help screen them to see if they are ethical and willing to provide disclosure for compensation, etc.

I guess the first thing is getting consumers/investors to understand how advisors are compensated. Most people don’t know the difference between commissions and fees.

Jack Waymire

May 14th, 2009 at 11:22 am

Knowing how advisors are compensated helps investors determine if they are talking to a sales representative or a “real” financial advisor.

Sales reps are compensated exclusively with commissions for the sale of company or third party investment and insurance products. They are not paid by investors to help them achieve their financial goals, nor are they compensated to provide ongoing services.

Advisors are compensated with hourly, fixed, or asset-based fees. These payments come direct from investors or their accounts. The appropriate way to pay for financial advice is with a fee.

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Investor Watch Dog is a weblog designed to inform investors about hidden risks when they invest assets based on the recommendations of financial planners, financial advisors, money managers, insurance agents, and investment sales representatives. Some of Wall Street's biggest investment risks result from Ponzi Schemes, investment bubbles, conflicts of interest, bad advice in bear markets, lobbyist activities that promote industry interests, bad investment products, and anti-investor business practices. While some of these risks are worthy of front page headlines, millions of investors assets are much more frequently exposed to less newsworthy but exponentially more harmful investment scams, financial fraud, illegal investment products, bad financial advice, bad investment recommendations, misrepresentation, omission, abuse of trust, deceptive sales practices, and breach of fiduciary duties. The role of Investor Watch Dog is to shine a spotlight on legal and illegal business practices that undermine the financial interests of investors, retirees, business owners, professionals, executives, and other types of consumers who rely on Wall Street and its financial professionals for the advice and services they need to achieve their financial goals.