How to Avoid Investing in a Ponzi Scheme

How do you know whether the investment into which you want to put your hard-earned money is a solid, reputable one or a Ponzi scheme or some other type of scam?

First, it’s important to check whether it has the credentials of a proper investment, and, second, to recognise red flags that might mark it as a scam. Unfortunately, you need to do both, because there are instances of investments that ticked all the boxes in terms of credentials but turned out to be run by crooks or cowboys.

Investment credentials

• Licensed providers: All financial services providers, including advisers, asset managers and providers of investment and insurance products, must be registered with the Financial Sector Conduct Authority (FSCA) for the services or products offered to consumers and have a Financial Services Provider (FSP) license number. For example, an adviser licensed to sell insurance-related products may not be allowed to sell private equity investments. There have been cases where advisers linked to big financial institutions have sold risky, suspect investments on the side. If you are in doubt, check with the FSCA here.

• Collective investment schemes: Pooled investments that fall under the Collective Investment Schemes Control Act include unit trust funds, most exchange traded funds (ETFs) and retail hedge funds. The Act affords a high level of consumer protection by ensuring that the fund’s assets are under the control of a trustee and not the property of the fund manager. Not all pooled investments are collective investment schemes (CISs) as defined by the Act. However, you’re far safer in CISs or on a reputable investment platform that offers them within a wrapper (such as a retirement annuity).

• Investment management track record: While new kids on the block may be perfectly legitimate, the bigger, established providers have reputations to uphold and are highly unlikely to engage in nefarious investment activities, although it has been known to happen.

Look out for these red flags

• Returns sound too good to be true. What is “too good to be true” in terms of investment performance? This year, 2005, has been an exceptional year so far for gold and related investments, such as CISs heavily invested in gold mining shares. According to The Corion Report for the third quarter 2025, the resources sector of the JSE returned 99% in the 12 months to the end of September, and the top-performing general equity fund delivered 42%. But these returns are far from the norm. According to the latest Old Mutual Investment Horizons report, the average return for South African listed equities from 1991 to 2024 was 15.9%, and for global equities (in SA rands) it was 16.7%.

• Returns are guaranteed. Interest-bearing bank deposits and money-market collective investments deliver a stable, consistent return. Structured products offered by banks and life insurers may guarantee your starting capital, with the company itself assuming the risk of loss. But you should be immediately wary of any provider guaranteeing future returns.

• The investment structure is complex or opaque. The safest investments are generally the simplest: it is clear what you are investing in, how the investment derives its returns, and details such as its past performance and its holdings are transparent and open to scrutiny. Beware of investments that involve complex, murky networks of underlying entities or that advertise a certain return with little evidence to support it.

• You are pressured to invest. If an adviser puts any pressure on you to part with your money, especially by referring to “limited” or “exclusive” offers, walk away immediately. Mapalo Makhu, personal finance coach and author of “You’re Not Broke, You’re Pre-Rich”, reminds us that “good investments are bought, never sold”.

• The level of regulation is low. Private equity – shares in private, unlisted companies – has a far lower level of consumer protection than shares in public companies listed on an exchange. Equally unprotected are debt instruments, such as debentures, in private companies. One area where local regulation is virtually powerless is offshore online trading platforms.

A word of warning

Don’t confuse a risky legitimate investment and a scam. The difference is that the legitimate investment will indicate the level of risk upfront, whereas the illegitimate one will downplay the risks.

• Also see “What is a Ponzi scheme?”