Why Small-Business Owners Fall Prey to Investment Scams
Convicted Ponzi-schemer R. Allen Stanford was sentenced to 110 years in prison recently for perpetrating a financial fraud with estimated losses of $7 billion. The Stanford Financial Group offered “investors” the opportunity to invest large sums of money at a very high interest rate with a 100 percent principal protection guarantee. Not bad, eh? Unfortunately for the thousands of investors involved, they lost most or all of their money.
One interesting element of this financial fraud, just like the Bernie Madoff scheme and the lesser-known Michael Rothenberg case, is that the people being duped were not uneducated or inexperienced. They were successful investors, entrepreneurs, business owners and the type of people that you would expect to know better. Like many financial experts, I have written about how entrepreneurs can detect and avoid financials scams before. Yet people continue to fall victim to schemes on a daily basis.
Desperation Leads to Vulnerability
In the case of small business owners, part of the problem is a lack of planning and expectations management when it comes to personal investments. Consider the average employee who has a 401(k) or a pension plan offered through her work. She doesn't have a lot of choices when it comes to setting up a retirement plan, but the offerings are usually well-vetted and contributions can be made on an automatic basis because someone in the benefits department is taking care of the administrative details.
Small-business owners, on the other hand, spend their professional lives growing their businesses. Their singular focus means that many important personal financial decisions—like retirement planning—aren’t given the attention they deserve. At some point, a small-business owner turns 55 or 60 and realizes she doesn't really have a retirement plan. If she happens to want to sell her company during a difficult period—like now—valuations are lower and she may not have as much money as originally planned. This lack of long-term planning can lead to desperation and a search for a “quick solution,” which is something financial scammers are more than happy to provide. Lack of planning can make you desperate.
Check Your Expectations
The returns offered by most financial scammers are nothing short of extraordinary. What a genuine investment can return in a year or two years, they promise to deliver in a month. Many victims don’t understand that investment opportunities with little to no risk cannot offer these types of returns. If they were genuine opportunities they would have been exploited long ago. Earning 4 to 5 percent annually on an investment with tolerable risk is the benchmark that small-business owners should use when evaluating new opportunities. The 120 percent that a supposed opportunity can offer misses the mark by several orders of magnitude. Part of the difficulty with managing expectations among successful business owners is that they have already seen high returns with their businesses. But the risk and effort associated with entrepreneurial ventures is entirely different than those offered by investments in the securities markets.
Fear and Greed
The basic types of financial scams, tricks and frauds haven’t changed since they were invented. Ponzi, pyramid and high yield “opportunities” continue to find victims because human nature is plagued by fear and greed. The scammers know how to play on these two emotions; don’t let them. Proper planning and managing expectations can help you resist the temptation to go for a perceived jackpot that in reality could wipe you out.
Have you been made an offer that sounds too good to be true? How did you handle it?
Photo credit: iStockphoto/Thinkstock