What I learned unwinding a ponzi scheme
I once worked for a lawyer who had been appointed receiver of a failed company by the SEC. The firm he took over had engaged in fraudulent activities that closely resembled a Ponzi scheme. The lawyer had been tasked with dispersing what money he could recover to investors and winding up the affairs of the business. Long story short, people lost a lot of money and many lies were told by the perpetrators of the scheme.
This fraud occurred like so many others like it do:
- Sales force on commission promoting the investment product
- Very high yield promised to investors (~12%)
- The illusion of third party verification and custody of assets
- An ignorant (and sometimes greedy) investor base
One of my jobs was to call the investors in the scheme and update them on how things were going. One call was particularly disheartening. I spoke with a single woman in her 60’s who had lost the majority of her retirement savings. What attracted her the investment initially? She said,
“The nice man that sold it to her.”
Goodness. Many other calls had similar themes, but this one in particular got me. How could this woman have been protected? She knew very little about investing in general or the nature of the investment she had made. All she had to go off of was what the man at the door was telling her. The man who made a sizable commission on her investment, and who did nothing illegal himself. The SEC’s preventative measures had not worked. (accredited investor rules etc…)
There is a lot of talk today in the political realm related to investor protections. Until I had been through the experience of talking to people who had lost everything, I was a “no regulation is the best regulation” kind of guy. That experience changed my tune. I don’t think any political party is talking tough enough on investor protections. My skeptical side sees political contributions to both parties from large financial firms and wonders how this affects politician's decision making.
How do we fix this? Why not try something dramatic and simple?
Do not allow any financial products to be sold on commission.
What would happen if the government enacted this rule?
I believe it would clean up a LOT of fraud. If no one is on commission, a lot of salespeople would no longer be incentivized to promote their products to investors. They would have to get into the advice business and consider what was best for the customer based on the customer's circumstances.
What would the detractors say?
Q: “But how would financial products get into the hands of most consumers?”
A: The same way I buy Size 4 Pampers Swaddlers on Amazon.com. By pushing a button on my smartphone. In 2017, buying financial products online is that easy.
Q: “How will investors receive the right advice to buy these products? We need commissions to serve the lower net worth investors”
A: By hiring someone that charges by the hour. I charge $ 150 an hour. Not free for sure, but it is much more affordable than a percentage each year or a commission structure for most folks.
I see a close to 0% chance of anything close to what I suggest ever happening, there is just too much money being made in the current system.
What then can you do then to protect yourself from Ponzi schemes and bad financial products?