How will scamsters get their hands on people’s pension pots?

I have just had the first bulk e-mail promising a 16% return on a 50K property investment, but I am sure that they will be playing a more subtle game as well.

History can tell us a lot about financial scandals, bubbles and scams going back three hundred years.  There are always people who lose small or large amounts of money. You cannot generalise. Small savers who lose money which they have accumulated over years can feel more pain than a big player who is wiped out. “The Wolf” went after penny share people who were small investors. Bubbles or major scams can wipe out bigger investors with equal grief.

National or world events can throw even the most savvy investors. Spreading risk can help, but if there is a world Depression, times are tough. That is investing.

Getting swept up into a bubble is probably also par for the course. Paying too much for something because everybody else is chasing after it is just what the majority of people do. Punters lose money (or maybe simply don’t realise the gains that they thought they had) when a bubble bursts. How much is down to their strategy.

The challenge facing people who chose to extract a big lump sum from their pension pot is just daunting. The pressure to do so from the press and peers is shaping up to be enormous. There seems to be the usual cast of people waiting in the wings for the good times to roll including estate agents, car dealers, cruise companies and conservatory firms amongst others. Anyway, if people chose to spend their money this way, that is their decision. We all know somebody who has had their “last cruise” three times.

For those who are going to do their own thing on investment and are chasing returns, things are tough. The press seem concerned about cold callers, whether by telephone or e-mail chasing investors for their cash, but I am not so sure that this is the biggest threat.

If you contrast the business models of Jordan Belfort in “the Wolf of Wall Street” and Bernard Madoff in the book “Bernard Madoff- the Man who stole 65 billion dollars”, you wonder what is new in human nature and suspect that someone who had lost a fortune in the Dutch Tulip bubble in 1637, the South Sea Company of 1720 or more recently the Lloyds scandal would feel it was all familiar.

From what we read and see, Jordan was a true master salesman. His business model was cold calling and saying the right things to people who were looking for a profit. He was a broker, taking a commission on sales of investments. The people he approached knew he was a stockbroker. I am not sure that they appreciated how much commission he was making or how he was able to manipulate the market prices of the stocks he sold. Never the less, that was his business model.

Bernie seems to have operated a different model which I suspect has been around for a very long time and is probably a lot more destructive to the victims. The people who lost money with him commonly admitted that they suspected that something was not quite right but if they were benefiting from something dishonest like insider trading and were on some sort of “inside track”, then that was a risk worth taking. They were in denial. He had a circle of “introducers” who were intermediaries and introduced investors for an initial commission then annual fee. The interesting thing from the book is that certain fund managers were uneasy about the sales pitch from him and some simple thought it sounded too good to be true and never had anything to do with him. Other fund managers and intermediaries grabbed the opportunity and pocketed the commission and fees. There were some very reputable people snarled up in this scandal with careers ruined. Why did professional people who should have known better get involved?

Bernie’s master stroke was to make his operation quite exclusive and he ended up in the bizarre position where people were pleading with him to be allowed to hand over money. Potential investors would be told that the subscription was closed then suddenly get a call to say that somebody had dropped out, spurring them on to sign up. That is the sign of a real pro, when people are desperate to buy from you.

It is all a credibility thing. Maybe “good chaps or girls” who people trust have been around for ever. Somebody who friends or colleagues know who has done “really well”. In Bernie’s world, they were well connected to potential punters either socially or professionally. “Schemes” invariably seemed to offer market beating returns and more often than not were very complicated. “Complicated” is often the hallmark of “dodgy”. Or the scheme just did not stack up for other people who knew finance. “But xyz have made a fortune out of this fund for the last five years, so what can be wrong?” What indeed?

Yes, I think we should be braced for lots of sad stories of people punting hundreds of thousands on flaky buy to let investments, commodities funds, and fine art portfolios more often than not through a good chap who they knew through somebody else who knew his mate. The investors will in the majority be professional people who should have known better or just people out of their depth.

Yes, there will undoubtedly be “Wolf” characters but also lots of people who talked the talk and seemed quite credible. I bet deals will be out of the reach of regulation, “lessons will be learnt” when it goes wrong and so on.

At Sarum Hydraulics we just stick to manufacturing what we know. We don’t offer dodgy deals but just manufacture durable hydraulic pumps under our Micropac brand. Look what we do on www.sarum-hydraulics.co.uk .