12/Mar/2009
Lessons From the Stanford Group And Other Investment Schemes
By Marcel Dupre, Wealth Planners
I like to say that if the sales pitch sounds too good to be true, it probably is. In fact, if you have any doubt at all about the legitimacy, walk away.
I’m sure you heard the recent news about the fraud involving Stanford Group and hopefully we can turn this unfortunate news into an important lesson for all of us.
Many of those involved with the Stanford Group were not wary enough of the CDs issued. United States CDs, or Certificates of Deposit, have FDIC- or NCUA-backing, meaning the CDs are safe up to the limits the FDIC or NCUA insure.
It is easy to search the FDIC and NCUA websites to see if your depository institution is listed. Just be wary of how you search – the name must be exact. They also have calculators to help you determine how much of your money is insured.
So how can you tell when companies like the Stanford Group may not be what they seem? If CDs are issued by an off-shore bank and the yields offered are extremely high compared to your local financial institutions, these are red flags that should invoke a healthy dose of skepticism.
Annuities
The Stanford Group isn’t the only company guilty of customer manipulation. Annuity and life insurance salesman are pounding the pavement right now selling products and promising higher rates than CDs.
But these products are not guaranteed by any federal agency, and annuities or cash-value life insurance are loaded with issues you should investigate.
Over the past year, some investments held by insurance companies (such as credit default swaps) became toxic assets on the books of insurance companies such as AIG. AIG was a very highly rated company before the credit meltdown but they’ve since lost their luster.
This means that you should do your homework on the insurance company offering the product, the sales person and the details of the contract before you hand over your money. Also, never make a check payable to an individual representing a company or any business that is not the issuer of the contract.
Money Market Funds
Money market mutual funds are required by law to invest in low-risk securities and generally trade at $1.00 per share for the life of the fund. Since there is no federal insurance on these shares, occasionally some of these funds may "break the buck" and fall below $1.00 a share.
The U.S. Treasury did offer some protection for investors this past September but that was only for those with money already in a money market mutual fund, not new depositors.
Higher-than-average rates should be a warning sign that your investment may not be protected. Also, if the money market fund is outside of the U.S., it may not be worth the risk.
Stocks, Bonds & Mutual Funds
For those of you holding out hope for a return in the stock market, things still look bleak for the economy in the short term.
But investing money is not about the short-term. For those of you that can wait out the worst, you will probably do well in the long run. You may even receive a larger reward for your patience than those who sell early.
Of course I cannot make promises about where the markets and our economy will be 10 years from now, and the worldwide geopolitical and financial relationships are difficult to predict as well. Until then, I recommend the following precautions for any of the instruments I’ve mentioned:
1. Always make sure your check is payable to the institution that will be holding your money, not an individual or local business.
2. If anyone makes promises that sound a bit over the top, be very skeptical. Ponzi schemes are possible from anyone: brokers, insurance agents, billionaires, church deacons and grandmothers have all been found guilty of this scheme. White collar criminals are much worse than the average gun-toting thug when it comes to your money.
3. Finally, if anyone calls and asks for your social security number, account number or any personal information, do NOT give them your information. They will probably tell you they are calling from your bank, credit union, brokerage firm or other trusted institution. But keep in mind, financial institutions already have your information. They do not need to verify anything.
If you have any questions or comments, please email marcel@professionalinvesting.com or call 757-8007.
By Marcel Dupre, Wealth Planners
I like to say that if the sales pitch sounds too good to be true, it probably is. In fact, if you have any doubt at all about the legitimacy, walk away.
I’m sure you heard the recent news about the fraud involving Stanford Group and hopefully we can turn this unfortunate news into an important lesson for all of us.
Many of those involved with the Stanford Group were not wary enough of the CDs issued. United States CDs, or Certificates of Deposit, have FDIC- or NCUA-backing, meaning the CDs are safe up to the limits the FDIC or NCUA insure.
It is easy to search the FDIC and NCUA websites to see if your depository institution is listed. Just be wary of how you search – the name must be exact. They also have calculators to help you determine how much of your money is insured.
So how can you tell when companies like the Stanford Group may not be what they seem? If CDs are issued by an off-shore bank and the yields offered are extremely high compared to your local financial institutions, these are red flags that should invoke a healthy dose of skepticism.
Annuities
The Stanford Group isn’t the only company guilty of customer manipulation. Annuity and life insurance salesman are pounding the pavement right now selling products and promising higher rates than CDs.
But these products are not guaranteed by any federal agency, and annuities or cash-value life insurance are loaded with issues you should investigate.
Over the past year, some investments held by insurance companies (such as credit default swaps) became toxic assets on the books of insurance companies such as AIG. AIG was a very highly rated company before the credit meltdown but they’ve since lost their luster.
This means that you should do your homework on the insurance company offering the product, the sales person and the details of the contract before you hand over your money. Also, never make a check payable to an individual representing a company or any business that is not the issuer of the contract.
Money Market Funds
Money market mutual funds are required by law to invest in low-risk securities and generally trade at $1.00 per share for the life of the fund. Since there is no federal insurance on these shares, occasionally some of these funds may "break the buck" and fall below $1.00 a share.
The U.S. Treasury did offer some protection for investors this past September but that was only for those with money already in a money market mutual fund, not new depositors.
Higher-than-average rates should be a warning sign that your investment may not be protected. Also, if the money market fund is outside of the U.S., it may not be worth the risk.
Stocks, Bonds & Mutual Funds
For those of you holding out hope for a return in the stock market, things still look bleak for the economy in the short term.
But investing money is not about the short-term. For those of you that can wait out the worst, you will probably do well in the long run. You may even receive a larger reward for your patience than those who sell early.
Of course I cannot make promises about where the markets and our economy will be 10 years from now, and the worldwide geopolitical and financial relationships are difficult to predict as well. Until then, I recommend the following precautions for any of the instruments I’ve mentioned:
1. Always make sure your check is payable to the institution that will be holding your money, not an individual or local business.
2. If anyone makes promises that sound a bit over the top, be very skeptical. Ponzi schemes are possible from anyone: brokers, insurance agents, billionaires, church deacons and grandmothers have all been found guilty of this scheme. White collar criminals are much worse than the average gun-toting thug when it comes to your money.
3. Finally, if anyone calls and asks for your social security number, account number or any personal information, do NOT give them your information. They will probably tell you they are calling from your bank, credit union, brokerage firm or other trusted institution. But keep in mind, financial institutions already have your information. They do not need to verify anything.
If you have any questions or comments, please email marcel@professionalinvesting.com or call 757-8007.
