There has been a flood of new investment opportunities marketed online and through social media in the past few months. It can be hard to dissect all the information and determine the legitimacy and the risks associated to these investments. It goes without saying that you should be carefully researching every investment opportunity.
We have put together a list of red flags for investments where you should tread carefully and do an extra level of due diligence:
- Low risk, high return – Promises of high returns in a short period of a time, with little or no risk.
- Very High consistent returns – Investment values tend to fluctuate over time, be wary of companies marketing consistent high returns.
- Commission base on referrals – The promise of income or commission for recruiting or referring people to invest or buy a certain financial product. This is common in pyramid schemes.
- Secretive or complex strategies – Investing should be simple, straightforward, and easily explained.
- Difficulties cashing out – You should be able to withdraw your investment quite easily, unless there are pre-agreed investment periods. Before investing you need to understand the liquidity restrictions.
- Pressure to invest – Often these companies will pressure you into making a quick decision or the “opportunity will be missed”. This is very common of telemarketers. Have them send you the information and consider the opportunity in your own time.
- Low or zero fees – Although there are a lot of legitimate products that have abnormally low or no fees, no one works for free, establish clearly how they get paid.
- Not regulated by any financial authorities – In South Africa, financial products and financial services providers are governed by the Financial Services Conduct Authority (FSCA). You need to be authorised by the FSCA to sell financial products. You can confirm if a company or individual is authorised on the FSCA website (fsca.co.za).
- Bad news flow – A simple Google search of the name of the investment provider or person representing the investment provider along with the word “scam” may help identify any scams or pyramid schemes.
If you are a new or even experienced investor it is best to first meet with a financial services provider. Make sure they are suitably authorised by a regulator. They will be able to suggest investment options that are authorised and covered by the current legislation, which is designed to help protect investors from fraud, negligence, and misconduct.
Fintax has been an authorised financial services provider (FSP642) since 1983 and is suitably regulated by the FSCA.