Episode #108: “Ponzi Schemes Explained: The Scam That Never Seems to Die”

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Transcript

Welcome And Listener Appreciation

Speaker 0:01

Welcome to the Fiscal Physical Podcast. Join us today's week as we sit down with the founder of Alchemy Wealth Management and author of your Fiscal Physical, Ryan Nelson. Tune in to gain valuable insights and practical tips as we simplify complex financial concepts into digestible lessons. From budgeting to retirement planning, this podcast is your go-to resource for mastering financial literacy.

Today’s Focus: Ponzi Schemes

Aaron Hoisington 0:33

Welcome everybody. This week's episode of the Fiscal Physical Podcast here. We are into the the triple digits for uh episodes here. We're actually a few in at this point, so I really appreciate everybody who's uh been tuning in, making this possible. We probably don't say that enough. Uh really appreciate the listeners out there. Make sure to uh set your timers, clocks, calendars, whatever to uh Tuesday morning when these uh these drop so you can get be the some of the first listeners out there. But uh appreciate everybody and uh Ryan Nelson's here with me today, and I appreciate you. Ryan, uh, how are you doing today? I'm doing really well.

Ryan Nelson 1:07

How about yourself?

Aaron Hoisington 1:07

You know, can't complain, man. I say that I feel like I always answer that question like the same.

Ryan Nelson 1:12

I feel like we both do.

Aaron Hoisington 1:13

Oh, yeah, absolutely. Like on this one, like it's almost just like a cool, it's just muscle memory at this point, too. And like I remember a couple of nobody's tuning in to listen to the stuff. Yeah, no one's no one, no one really cares how we're doing. They just let's get to the good stuff here. But I remember a few episodes I've tried to like mix that up a little bit, and then I just end up like butchering it and going off the rails, and I'm just like, nah, just stick to what I know. It's then we'll get to the good stuff. But uh um today's an exciting one. I'm ex I'm I'm excited for this one here. We're gonna talk about uh um Ponzi schemes, explained like what they are, what they aren't. Um, you know, most people would have probably, you know, have have heard the term Ponzi scheme before, or uh, you know, they've seen a movie about it, read a book, whatever it might be, of and like people think of it as these quote unquote scams. I don't know if that's too harsh of a description for it here, but um, I'm hoping you can uh kind of break down you know what a Ponzi scheme scam is, Ryan, and uh um you know what to what to be aware of and you know just what the impacts of it there are.

How Ponzi Schemes Work

Ryan Nelson 2:12

Yeah, this was a fun one. I did a little research myself on uh the the exact definitions. Um but uh yeah, it's it was uh fun to do a little research on this. But uh so yeah, so a Ponzi scheme is a fake investment program, so it's gonna pretend to generate real profits, but it's actually just paying earlier investors using money from the new investors. Okay, gotcha. So um so it's not a real business, there's no real profits, it's just money shifting from one person to another. Um, so you can imagine the entire system can collapse the moment s new inflows or new money stops flowing into it. Um, but so where the name came from, so apparently there was a gentleman named Charles Ponzi. Um, and he uh I guess uh became good at his craft in the early 1900s. So he started promising investors these big returns by apparently flipping international postage coupons. Um there was some deal with uh apparently he was saying that you could get these like postage coupons or something and then sell them in the US, and there was some theoretical arbitrage there or something. So, anyways, there was no real profit. He simply used um again the new deposits to pay earlier investors, but that was the kind of the shtick he was selling to them, right? And so apparently at his peak, um he collected m basically what would be millions in today's dollars um before the scheme fell apart. So he he's the uh he's what Ponzi schemes are are named after. Um so you know, why do these schemes appeal to people or people? So they promise high returns with low or no risk. Of course, that sounds a trap. That sounds great. Yeah, sign me up. Often they can come from a trusted or convincing person. So imagine maybe this Ponzi scheme is hey, you know, you pay a hundred bucks in, you're gonna get 50% returns next month and every year thereafter. And I give my a hundred bucks, and then all of a sudden I get a hundred bucks back or fifty bucks back. I get my returns. I'm like, dude, this is crazy. Then I come sell it to you. I'm like, dude, you gotta get in on this. Yeah, yeah. Like, this is great. I've already received some of the money, you know. It's like, and uh, and so it can be, you know, convincing now when your friends and family are coming to you to try to convince you to get into the scheme because they've quote unquote seen it work. Um, it can also sound like an exclusive or special offer um getting access to something that other people don't have access to. Um, you know, the earlier investors, they will receive payouts because the newer investors are paying them, right? So on the surface, it can seem or appear legitimate. Um and uh so yeah, you can imagine how you know it could be sort of easy to to fall victim to something like that that does appear uh legitimate and you're seeing other people see quote unquote success with it, right?

Aaron Hoisington 5:09

Oh yeah. I feel like you also like if somebody you know was to approach me who's a friend or colleague or friend family member and they they can show that like short-term like growth or opportunity, like I'm like, hey, that's pretty cool. Is this the is this a boat I need to be in? Like so absolutely having it come from like somebody who's more trusted, because in on on paper, I'm like, I would never fall for one of those. But if like somebody came to me and was like, I just made this much money doing this, like I'd be like, Well, I'll look into it. Sure, sure. Yeah, exactly.

Why People Fall For Them

Famous Cases And Anatomy Of Collapse

Red Flags And Warning Signs

Ryan Nelson 5:40

Um it's funny, you know, we've done I think a couple of episodes now on like different scams and stuff, and you'll see a lot of similar things here, like pressure, um, too good to be true, right? Like there's just different, yeah, a lot of similar concepts. But anyway, so so how these things actually work behind behind the scenes, which we've already alluded to, but so the new investor money goes straight to paying earlier investors, right? So the promoter, the person, the the schemer, I guess we'll call them, right? They're gonna pocket a portion for themselves. But so again, I've mentioned, but there's no real investment activity happening. Um so these can only survive as long as new people keep joining, which obviously can only happen for so long. So eventually these are gonna collapse, they're gonna run out of new investors, and the exist or or the existing investors may ask for their money back, right? In which case now that person, the what Ponzer or Ponzor or whatever has to come out, yeah, come out with more money out of pocket. And so eventually the math is just gonna catch up, right? And you can't just keep paying old investors with new investors money. Um, and so eventually the deposits, the money you have to pay out will exceed the money you're taking in, and then the Ponzi scheme collapses. So some famous examples are obviously Charles Ponzi that we mentioned earlier, who had the name is after. Bernie Madoff is another super popular one that most people are probably familiar with. Alan Stanford is a more recent one that maybe people are familiar with. Um, but so those would be some examples of the people you may have heard of um who uh quote unquote pulled off a scheme, a Ponzi scheme. Of course, you can only pull it off so long it's trying to catch up with you. So um it caught up with all these people. But so here'd be some warning signs. So, like you mentioned earlier, um, you know, of course it would never happen to you, but of course not. Yeah, but um some things to maybe keep an eye on would be returns, returns that seem too high or unrealistically steady. You know, again, if it sounds too good to be true, it might just be too good to be true, right? So if you're getting return like steady returns, there's no volatility, and they feel too good to be true, it's like, well, how's that how how is that happening, right? Um if there's pressure to invest quickly, right? Similar things in our other scam ex episodes. If there's vague or impossible to understand explanations, so if there's if you don't have a good understanding of how it's working, you probably want to keep digging deeper, right? Um there if there is difficulty to withdraw your money, so if there's like some period where you're getting locked in or it's not easy to access your funds, this could be a reason why. Um if the statements themselves like obviously appear homemade or look inconsistent, right? Um that'd be a huge red flag. And if there's no independent third-party custodian, so one of the things I talk about with all of our clients here at Alchemy is we work with a third-party custodian, so Alchemy doesn't take custody of any of our clients' money, right? Right, and that's important. Most actually consumers don't know to ask that, but it's really important. So Alchemy, we don't have custody of our clients' money. So there's we can't, you know, they're getting statements directly from week custody with Charles Schwab, so they're getting statements directly from Charles Schwab. So now they're not just blindly relying on me and Alchemy. You know, in theory, an organization could just create fake statements and say, Yeah, your account, you put you invest 100 grand. Well, guess what? Now it's 105 grand, now it's 110 grand, now it's 120. As long as you never pull your money out, they can keep getting away with this, right? And um, so it's nice to have a third party, a Charles Schwab who has no relationship with alchemy and no relationship with you in theory. They're just a third party that has now custody of the assets creating statements saying, no, this is what your actual account balance is. Right. Right. So having an independent third party, I think, is super important.

Aaron Hoisington 9:36

Oh, yeah. That's a big that's a big piece of it. Sometimes just having that extra set of eyes on it, it's like, okay, like, and and I could almost feel like in in a opportunity like this, like you mentioned, like the urgency is stuff too. Of if I was to be approached by somebody that has a bag, yeah, let me talk to my financial advisor. No, no, you gotta do it now, or kind of thing. Like I feel like that could kind of go hand in hand before you dig too deep into the books with it.

Ryan Nelson 9:59

It'd be those same, right? Those the same exact red flags we've talked about on the other episodes exactly. So now how do you protect yourself? So I would say from a financial standpoint, you want to work with a company who's gonna use a custodian. So that's gonna be you know, Charles Schwab and Fidelity are the two big custodians. Okay. So in theory, if you're working with uh an investment advisor and they're using a third party custodian like Charles Schwab or Fidelity, now you know that that third party has custody of the assets. You can log into their website, check your account balance anytime you want. The advisor has no influence over what they're stating the account balances are, they're just reporting the actual account balances, right? Um, so that's um using a real custodian, third party independent custodian is important. You can also, like if we're talking financial advisors specifically, you can because a lot of these financial frauds or Ponzi schemes are financial advisors. And so one important thing you could do is verify um the through regulatory their regulatory registration. So you can go to FINRA or broker check. Uh so or FINRA puts on broker check, and then there's a the SEC has this IAPD website. So you can go to broker check or the SEC's website and you can look up the adva individual advisor and make sure they're licensed. Sure. See if there's any complaints against them, so you can verify their licensing. Um you can also you know require ask them questions and require sort of explanations of how your money's being invested and continue to ask until you gain an understanding. I love the idea. If you can't explain it to your friend, yeah, so so if you if you if if you go talk to some Ponzi guy, right, and he's promising you these amazing returns, and you're like, oh, this is fantastic, and he gives you some stick about how they're generating the returns, and then you go try to explain it to your friend, and you're like, Well, yeah, I don't it doesn't, you know, I'm not exactly sure. But you know, it's 50% returns. Yeah, it's like okay, like you know, you should probably be able to explain it to your friend. If you can't, then you don't have a good enough understanding yet to be investing in it yourself.

Third-Party Custodians And Verification

Aaron Hoisington 12:00

Oh yeah. I I I think about that specifically with like sometimes I'll get like uh I get like a daily like email like about financial stuff, and like one of them is like definitely sponsored by a a company. They are also like putting like, hey, you can invest right now into this, like before it goes public, do all these. And I remember I think I messaged you, I was like, I was like, hey man, like does this this sounds great? And you're like, eh, you know, like maybe we should do a bit more research into this here, and like looking back on it, like I looked up, it was like a an ore mining company or something like that, and they were like they had a way to like get lithium out of the earth quicker. And like I this was like a year ago, something like that. And then I looked them up like today, and they had just filed for bankruptcy because it was just like not a legit thing. And I was like, wait a minute, but they had like paid some sponsorship to like show up on like this site or something like that. It was just but it was funny. I was just thinking about that. I was like, I need the trust, but verify. Yeah, that's funny.

Ryan Nelson 12:55

Yeah, I don't even remember that.

Aaron Hoisington 12:56

Yeah, I thought you were gonna tell me they're now like a billion-dollar company. No, no, no, no. That was I would probably yeah, yeah, no, I I would have told you that right away, but like it's it's so funny. I was like, wait a minute, nope, they're gone. Like, yeah, that's funny.

Protecting Yourself And Asking Questions

Ryan Nelson 13:07

Yeah, um, but so so like I said, so there, those are some of the things to be looking out for um and protect yourself against these Ponzi schemes. Now, if there's a lot of like financial advisors, investment management companies, there's a lot of companies and organizations, in fact, the vast majority of them out there are legitimate and not Ponzies, right? Um, so just some things to again keep your eyes on. Real advisors are typically not going to custody their clients' assets. So again, Alchemy Wealth Management doesn't take control of any client assets. It's we're always having a third party take control of the assets. Um, also, investments fluctuate, right? So all of my clients know, unfortunately, they probably look at their statements and every once in a while they see the values down and then they see it's up, right? And real, you know, the reality of markets is some months are good, some months are bad, and that's the nature of investing, right? If you want higher returns, you have to take higher risk, you're gonna have more volatility, more fluctuation, and that's not necessarily a bad thing, it just is what it is, right? Also, real sort of advisors are audited and regulated and have certain transparency regul requirements, um, obviously all to protect the end consumer, which is great. Um and you know the if any time you're like hearing the word guaranteed, things like that, that's probably a huge red flag. If if somebody's guaranteeing lose, yeah, yeah. That's probably a big big red flag that you might want to uh turn around and go um explore other solutions, uh even though guarantees of course sound attractive. Um in the grand scheme of things, it's it's uh it may be a scam or something, right? Um so the reality is what you want is like a strong retirement plan. It's not gonna require these exotic strategies or these secret shortcuts, right? These flashy bells and whistles. Um, you think like your money should always be held safely at that third-party custodian, not with an individual um person or advisory firm. And then your strategy, honestly, it should be boring, it should be consistent, it should be tax efficient, and you want it to be proven over long periods of time. You don't want the flashy, sexy bell and whistle thing. You just want a nice, boring, consistent, tax efficient, proven strategy, right? Yeah. Um so in closing, I'd say Ponzi schemes um are gonna catch those people who are probably chasing those shortcuts, and really a real financial plan is gonna protect you um from market risk and fraud risk, but it's not gonna protect you from those market downturns.

Aaron Hoisington 15:35

Yep. No, I think that's super well said, man. Really, really well, really well laid out as far as this goes. I feel like I am well versed in that. It also kind of you know gives a peek behind the curtain and really humanizes how these things happen too. And I'm like, okay, cool. Like, I mean, I yeah, maybe you fell for one, awesome. Like, fool me once, okay. Like, but maybe don't fool me again. Like I think, like, um, but just uh just in general, I think it's uh um something to be aware of and uh an interesting kind of um I learned the origin of it too, so that's that's awesome, man. So um great, Ryan. We'll go ahead and uh pause for a break here. We'll be uh back on the other side of this, and uh everybody hang tight.

Speaker 16:12

And now to put the personal in personal finance.

Aaron Hoisington 16:18

Welcome everybody. The this side of the physical physical podcast, the personal section here. And uh um, Ryan, I got a question for you, and uh probably as most of our well, some people have been a homeowner in their days or um at least have done some chores growing up. Uh um I'm curious to see what your least favorite household chore is. What would you consider that?

Ryan Nelson 16:41

Yeah, I don't enjoy like any of them? Deep yeah, like deep cleaning, like scrubbing type cleaning of like anything. Yeah. Um I I'm like pretty tidy. I like being tidy and like, you know, I always get comments as there's like nothing on my desk at work. I don't like a lot of things on like my dressers or my nightstands, or like I like things being like in their place and night nice and tidy. Um but I just do not love like scrubbing or doing that really like deep type cleaning.

Boring, Proven Strategies Over Hype

Aaron Hoisington 17:11

What about you? Oh, I'm I'm right there with you. Like I can I can pick up, I can clean a room, cool. Like this is I because I can find a place for something, or I can, you know, uh throw it away, um, or you know, repurpose it in some portion or some way to use it. But you know, when you have to get into like this deep cleaning, like uh um in the past we've used a house cleaner, which has been great because I don't have to do that. I think it's a great investment if you can. And one of the times I came home and and the house cleaner was still there, and the individual is using a toothbrush like like behind like our stove, like into like and I was just like, I don't think I would ever do that. Yeah, like and I I do not have a desire to do this, but I'm so glad you're doing that because it was looked disgusting back there. But like the deep cleaning aspect of it is is definitely not my favorite. Um, I don't mind taking out like the trash or anything like that. I actually feel like kind of fulfilled and you know, fun with that kind of stuff. But like when you you get into those deep cleaning, the mopping, the scrubbing, you move all the furniture so you can vacuum under everything. Like uh honestly, I just don't really like household chores at all. Like and uh it was funny, growing up we had four kids, and like my mom always we had like our list of chores to do, and like you know, we'd always fight over like who didn't have to like clean the shower. I mean that was like what it was. We're like, we don't want to do that. But um anyway, I'm curious to see what's out there. Like uh what's uh what's your guys' least favorite household chore that you maybe did growing up, do now, try to avoid at all costs now, and uh your rationale behind that. So uh please let us know. And uh as always, please make sure you uh are sending us those topics you guys want to hear, you want to cover. Hopefully you guys are learning some things out there. I know I am every week that we do these, so um appreciate it, Ryan. And uh I'll uh let it uh let it uh linger with you for the uh last part of this. As always, stay the course.

Speaker 19:03

Thank you for joining us for the Fiscal Physical Podcast. Until next time, happy listening. And as always, stay the course. If you have a question or topic suggestions, please email us at podcast at alchemywealth.com. If you enjoyed today's discussion, subscribe to the podcast to ensure you never miss an episode. And consider leaving us a rating and review on your favorite platform. This helps other listeners like you find this channel. For more resources, you can visit Alchemy Wealth Management's website at www.alchemywealth.com or find your physical physical book on Amazon. We'd be remiss if we didn't mention the personal finances just then. First of all, please don't take anything we say as advice. The pre-tady content is for informational and entertainment purposes only. It's not an offer or a solicitation, nor should it be construed or relied upon for tax, legal, or investment advice. It doesn't consider your personal financial situation or objectives and may not be suitable for you.