Melissa Caddick disappeared from her Dover Heights home on 12 November and subsequently it was revealed that she was under investigation by ASIC.  The unusual circumstances of this case has attracted a lot of press attention.  It appears that her disappearance was intentional but there has been no trace of her.

It is alleged that she was operating an unregistered investment scheme and had been reported to ASIC for falsely claiming to be a licensed Financial Adviser.  Her house was raided, her accounts frozen and she was given a court attendance notice before she disappeared.

A total of $20 million had been invested in her private company and allegedly invested in direct shares using Commsec.  Fake statements were issued to the clients showing consistently good investment returns.

It now appears that the money was actually used to fund a lavish lifestyle for Melissa and her family.

This scheme is identical to the ponzi scheme run by Bernie Madoff.  Fortunately her scheme has been stopped much quicker than he was.

Unfortunately, there were many warning signs that were missed and protective steps that her victims could have taken.

The warning signs include:

  1. Her lavish lifestyle.

Most Financial Advisers earn less than $150,000 per year, let alone per month and do not live in $6 million houses.  It can be a very rewarding occupation if you stick with it long enough but very few people get rich from it these days.

  1. Investing via her private company.

A legitimate Financial Adviser will never require a client to invest via their own private company.  All investments are placed directly with the institution actually managing the money (Commsec in this case).  Any professional adviser (including Accountants, Real Estate Agents & Solicitors) who are receiving client funds must operate a Trust Account and have it audited every year.

  1. Consistently good returns.

It is simply impossible to achieve consistently good returns when investing in shares.  If your portfolio doesn’t drop by more than 10% at least once every 5 years something is not right.  CSL shares have tripled in value in the last 5 years yet have suffered big falls 3-4 times in that same period. This Ponzi scheme was promising 25-30% per year returns when 5-10% is probably more realistic.

  1. Grandiose statements.

Dishonest people have a tendency to lie about everything including mundane trivial things that can be easily disproved.  They might claim to hold credentials they don’t have or to be an elite athlete or that they were better than Cate Blanchett at NIDA.  It might seem like harmless fun but trustworthy people don’t do that.

The steps that you can take to protect yourself are:

  1. Verify the credentials of your Adviser.

All licensed Financial Advisers are listed on the publicly available Financial Adviser Register that can be accessed from the ASIC website.  If someone claims to be licensed by a certain company (e.g. AMP), contact that company to verify if they are actually licensed. It is a criminal offence to present yourself as a Financial Adviser or Financial Planner if you are not listed on the Financial Adviser Register.

One investor is said to have escaped the scheme after finding out that the licensing details were fake in a random encounter.  It was lucky as this meant she could request a timely withdrawal but an adviser’s credentials are something they could have easily verified at any time.

  1. Read all the paperwork.

Proper investment advice involves a complicated process and lots of paperwork.  The adviser is required to collect your information, undertake research, carefully consider the options and give you advice that is in your best interests.  Fees and charges must be explained to the client and represent value for money.

If the process is far too simplistic, something’s not right. No legitimate financial adviser will propose a 4 stock portfolio to a client with hundreds of thousands of dollars.

  1. Invest directly to the Custodian.

If your investments are to be managed via Commsec then you should be given a Commsec application form and you’d be requested to transfer your funds to Commsec.  Any legitimate investment custodian will have a complicated application form and be required to verify the identity of their investors.

You should be able to contact that company to verify your holdings.  They also have Apple or Android applications and/or websites that you can use to monitor your holdings.

  1. Think twice about using an SMSF.

Self-managed Superannuation Funds are very popular but if your investment strategy is purely investment in shares or managed funds, then it is likely to be cheaper and easier for you to invest in a public super fund.  If you are using a public super fund it is extremely difficult for a scammer to steal your super and you’ll have better access to compensation schemes.

  1. Be realistic about what kind of returns you will get.

Most of the people who fall victim to these schemes often are not willing to accept the ‘low’ returns offered by legitimate investment plans.  A good financial adviser will set realistic expectations about risk and return.  It should be possible for them to develop a plan that can satisfy most of your goals based on these realistic assumptions.  Don’t be greedy.

  1. Spend the kid’s inheritance.

Interest rates are very low right now so term deposits are only offering 1% return.  Many retirees are determined to leave an inheritance for their children so will not spend their capital.

This leaves retirees with a choice of living on a very low level of income, taking unnecessary risks or leaving smaller inheritances.

It may be worthwhile having a family discussion about which option is best, but I’m very comfortable with the idea of your kids being disappointed with their inheritance because you spent all the money enjoying yourself.

 

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