Telltale Signs of a Ponzi Scheme

Trying to find a financial advisor or investment manager whom you can trust is difficult enough. Add to that, the presence of bad actors in the industry, and it becomes even more difficult. I have been a financial advisor for 6 years now and have seen more than a handful of advisors who push bad products, give bad advice, sell a financial product without informing the client of the costs or tax implications, and many other bad practices. I have even seen a real Ponzi scheme play out right in front of me with friends falling victim to it.

In an effort to help spread awareness and to protect investors, I compiled this list of 10 telltale signs of Ponzi scheme.

1. Promises of unlimited wealth. A skilled Ponzi-scheme artist promises infinite amounts of wealth available to investors. This is how they are able to lure in new investors. The more wealth that they promise, the faster they are able to bring in new investors.
2. Unrealistic rates of investment returns. Warren Buffet tells investors that they can expect to receive 6-7% rates of return on investment.[1] He is arguably the best investor in the world so anyone promising outlandish rates of return such as 700% annual returns, is making a promise that they cannot keep. The bottom will fall out and the Ponzi scheme will collapse. It is a matter of “when” and not “if.”
3. Mystery surrounding how the company actually makes money. If the company has to use big words or multiple pages to explain how they actually make money, then it’s a possibility that they are actually using newer investors money to pay out the former investors—the definition of a Ponzi scheme. Eventually the company will run out of new investors and will start defaulting on its payments to former investors, and then comes the rug pull. If the company claims to make money through complex areas such as international finance, crypto, or AI, then they may be attempting to confuse investors with the added layers of complexing and misunderstanding.
4. A huge push to bring in new investors. Ponzi schemes make money by bringing in new investors so they push this by bringing on more salesman and incentivizing them with fat bonuses for bringing in friends and family. This fuels the returns of the company. If the company is so good at making money by themselves, then it doesn’t make sense why they are so desperate to bring on more investors. If they were good at business, then they would want to keep those outlandish investment returns for themselves and not give them away to as many new investors as possible. If they really have found a gold factory, then they would keep that for themselves instead of giving it away to others.
5. Barriers to getting your money back. If the company creates barriers to getting your money back, then it may at some point block those barriers and you could lose all your money. Sending money via wire to an unsecure platform or multiple platforms or a proprietary network which the company controls is a telltale sign of a Ponzi scheme.
6. Not regulated by any regulatory authority. If the company is not regulated by a governing or regulatory authority, and it claims to be an investment company, then that is a very bad sign. If its salesman are not required to pass any sort of investment exam or license, that is even a worse sign. Buying products or investing with someone who claims they are an investment advisor or have access to investments that perform better than any other investments in the world, may not be a prudent decision and should be considered with extreme caution.
7. Leadership in the company has a bad reputation. If the company is led by individuals or companies that have a bad track record or even a reputation for being involved in previous Ponzi schemes, that is a telltale sign.
8. Your friends and family and people on google are concerned about the company. If you tell your friends about it and they tell you it sounds dangerous, it may be a Ponzi scheme. If you google the company and most of the results that come up use the words “Ponzi scheme”, then it may be a Ponzi scheme.
9. Flashy sales presentations. A common sales trick used in today’s world is to impress you with tailored suits, gold watches, beautiful people, yachts, etc. to show you how rich you can be and seek to sucker you into investing. This “selling the dream” tactic may include TikTok videos, sales presentations, trips abroad, fancy dinners, and promises of life-changing results. They promise you that your life will be so much better, wealthier, and happier—all you have to do is everything they tell you to do.
10. An explanation for everything. Yes they can explain why they were formerly called Ponzi artists, but that they actually aren’t. They explain with much verbosity and confusing language how they make money and how you will get rich. They take 15 minutes to explain in great complexity how their simplest product works. They have an explanation as to why former customers left bad google reviews and why former customers never got their money back.

Unfortunately it is all to easy to fall victim to one of these Ponzi scheme scams. They promise so much, and it seems like you could really get life-changing results, however in the end, these schemes always fall and investors could lose some or all of their money. The only thing worse than losing your own money would be your friends, family, or acquaintances losing their money as well and then come knocking on your door crying and begging for their money back.

Investing in confusing, complex, and unregulated products is a very risky practice and should be considered with extreme caution. There is plenty of money to be made in the regulated markets such as working with a licensed financial advisor who can help you make the most prudent decisions for your financial future.

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[1] https://www.washingtonpost.com/archive/politics/2003/05/04/buffett-tells-investors-to-be-realistic-about-stock-returns/96c17015-0b31-453d-850e-e8fde29456f8/