Over the past few years, we have all been inundated with wads of bad political and economic news. These news streams, both fake and real, highlight the real challenge experienced in managing investments. This challenge is how an investor and his or her adviser respond to the emotional side of investing. The study of how we respond emotionally to investing is called Behavioural Finance and is now a mainstream study route offered by elite universities like Harvard. At the very root of behavioural finance are the twinned emotions of fear and its flipside bedfellow, greed. 

Other emotional responses in the world of investing are, that we are, generally, twice as unhappy with poor performance in our portfolio as we are happy with the good performance, and anchoring where we all seek confirmation that a view we already hold, is true “My father told me always invest in gold” is an example of anchoring. 

These largely emotional overlays to investing can lead to poor decision making and open us up to investment promoters who prey on these very emotions. The emotional responses to investment outcomes are more starkly seen amongst retirees. In this ever-changing world, my definition of a retiree is not driven by age but rather as someone who for any reason has commenced living off his or her accumulated wealth). Retirees often rightly or wrongly fear that they will outlive their capital. This fear drives a behaviour of seeking out apparently high performing investments ignoring the very real risks that these investments bring.
Possibly the worst of these investments are the so-called Boiler Room Scams. 

Recently a few of my clients have asked for advice regarding ‘share investments’ they have made overseas in the past. All of these have proved to be “boiler room scams” and the clients involved have lost their investment.

Wikipedia describes a boiler room as follows: 
“Boiler Room refers to an outbound call centre selling questionable investments by telephone. It typically refers to a room where salesmen work using unfair, dishonest sales tactics, sometimes selling penny stocks, private placements or committing outright stock fraud. The term carries a negative connotation and is often used to imply high-pressure sales tactics ….” (my underlining)

In South Africa, in the days of economic sanctions and heavy exchange controls, South Africans were targeted because offshore investments were largely illegal and the fraudsters could rely on a “conspiracy of silence”. Even if the South African investor knew or suspected they were being defrauded, he himself had operated illegally so he suffered his loss in silence. Through a number of amnesties, the South African authorities have allowed the regularisation of these investments.

Currently, during the inevitable waves of Rand weakness, South Africans are continually targeted as they desperately seek out offshore investments. In the definition above, the words “outright stock fraud” are underlined to highlight possibly the worst of these boiler room activities. Usually, but not always, located in India or the Far East, the so-called “Asian Boiler rooms” usually contact their targets by cell phone offering unlisted or shortly-to-be-listed shares. In many cases, these shares/investments don't exist. There are never direct meetings. The call is followed up by e-mails where very legitimate-looking documents and forms are delivered. Professionally designed websites are also prominent for prospects to visit. Some of the firms will also send a document pack to a prospect’s disclosed address. The reason that the shares or other securities offered are advised as not listed is that it is impossible to check whether the companies being offered actually exist. The boiler room can also then claim to be offering a preferential limited amount, of pre-listing opportunities to investors making an urgent deal sound more attractive.

Investors must then EFT payment to a bank account usually in China/Hong Kong or India for settlement. After the initial investment, usually, follow up calls are made by the boiler room advising of good returns and suggesting a further investment. Finally, when one wants to redeem/sell the investment, the boiler room has vanished and the funds lost.

As an enhancement of this scheme, sometimes after a year or two, the investor is again approached and advised that; a listing is now imminent, or that the house that holds the shares is in danger of becoming a controlling shareholder. They will then advise that the shares must be transferred from the nominee to the investors' own name. To achieve this, and release the shares from escrow, a fee is required. Anxious to realise their investment, which is now believed to be legitimate, the investor throws good money after bad and pays this fee (usually a percentage of the current value of the share) as well.

You may ask how one would avoid this scam.

  1. Normally, on enquiry, you will find that these boiler rooms are not licensed by any country's version of South Africa’s Financial Sector Conduct Authority (FSCA – previously known as the FSB). When contacted, you should ask which regulatory authority they are registered with. Bear in mind that not all countries have such an authority. If this latter situation is the case, don’t invest!
  2. You can obtain perfectly good offshore exposure, as part of your asset diversification, through properly regulated funds and managed offshore share portfolios. This can be achieved either through the use of institutional foreign asset allowances or your own foreign investment allowances
  3. Ask your South African registered financial adviser, he is obligated to check the investment houses that he/she recommends, so will be “in your camp” in determining the existence or otherwise of a possible offshore provider.
  4. Remember the rule that applies to all Ponzi schemes; “If it sounds too good to be true it probably is”.

Gavin Came holds a BComm LLB degree and is a certified financial planning practitioner. He serves as a wealth manager for Sasfin Wealth. Gavin has a national client base in most main centres and undertakes personal financial management throughout South Africa.  20180906

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