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6 Ways to Spot Ponzi Schemes Targeting Self-Directed Investors

Estimated reading time: 2 minutes, 17 seconds

April 2017 was a busy month for Ponzi scheme-related cases. Unfortunately, it’s a fact of life that individuals must stay vigilant when investing. And this is even more important with self-directed investors, who regularly invest in alternative assets requiring more due diligence than publicly-traded assets.

Consider these six potential Ponzi scheme red flags when performing due diligence on an investment.

  1. Lofty, unbelievable returns. Does the promoter claim the asset will generate returns far exceeding those of similar investments? Is there any reason for this difference? If not, such an investment may fall under the “too good to be true” category.
  2. Guaranteed returns. As with the above, an investment guaranteeing a return without any risk is simply “too good to be true.” Generally, expect low-risk investments to generate low returns, with high-risk investments generating higher returns.
  3. Investment protection. Fraud promoters often claim custodians or trustees will investigate investments on behalf of the client. Some even claim the investments are insured against lost. Custodians are responsible only for holding and administering the assets on the client’s direction—not investment performance.* Also avoid investments labeled as “custodian-approved” or approved by the IRS, SEC or any other governmental agency.
  4. Hard-sell tactics. Avoid promoters with high-pressure sales techniques. Your decision should be made carefully with proper due diligence and not in the spur of the moment. You should expect to invest much of your time vetting investments and all parties involved.
  5. Unsolicited offers. Be wary of unsolicited investment advice or offers, even from those you may trust. Those you trust may have already been fooled themselves; they just may not know it yet! Avoid clicking on so-called “can’t miss” opportunities via email or social media as well.
  6. Requests for recruitment or confidentiality. Two opposite ends of the spectrum, but both are red flags. Question why a promoter needs your help seeking other investors since his or her job is to promote the “opportunity.” Likewise, be very skeptical of an investment you’re supposed to keep confidential.

This is not an all-inclusive list, as schemers are always seeking new ways to steal investor funds. But the above is a great place to start.

You may be able to rule out an investment prior to seeking additional advice.

Speaking of additional advice, Kingdom Trust regularly suggests engaging a team of professionals to assist with due diligence efforts. While some commentators and educators claim you should only do this if you don’t have personal experience with the investment you’re considering, a wise choice would be to get the professional opinions anyway.

For more on this topic, check out any or all of the following:


* Stay tuned for a follow-up post on this very topic in a few weeks!