Because the money goes to charity, a spokesman from the Commerce Commission said it sounded as if it wasn't illegal. But in the circle you describe the recipients keep the money — a crucial difference.
"Pyramid schemes come in many different guises, but they all operate by requiring new participants to make a payment to join," says the spokesman. "They then must recruit new members in order to receive their own profit. Eventually the chain will end, leaving new participants out of pocket. It's a tired cliché, but if it sounds too good to be true then it is.
"Pyramid schemes are illegal in New Zealand, so those who are involved do risk prosecution. Anyone who believes they have encountered a pyramid scheme should gather as much information as possible about it and contact us." You can call 0800 943 600 or email contact@comcom.govt.nz. For more info see tinyurl.com/pyramidnz
The sooner these schemes are closed down, the fewer people will be hurt. This is not just about legality but about how people treat one another. Read on.
Gift giving circles
I read your recent article on women's gifting circles with great interest.
Only a couple of weeks ago I had a close friend try to convince me about joining a gift giving circle that she has become part of. She was extremely excited and explained to me that you give US$5000 to the person in the middle of the circle, and she ends up receiving a total of US$50,000.
My friend said effectively it is a woman's support group and that they will talk in confidence about particular themes — for example, how to create abundance of love, resources, etc, in one's life.
She said a friend of hers has just received her US$50,000. There was absolutely no talk of the money being donated to charity, instead she is spending it on travel. Likewise, my friend was already dreaming about how to spend her US$50,000.
When I kept questioning the legitimacy of this scheme — as I will always be sceptical of a scheme that promises a huge profit — my friend got obviously annoyed with me and kept saying I should just forget everything she had just told me and hung up on me. I think there is something really morally wrong with this. Those women that do end up in the middle of the circle and get this large financial return only do so at the expense of other women who will most probably never see their money again, and who, by the way, they were meant to be supporting.
I couldn't agree more. The Commerce Commission website explains that pyramid schemes are "specifically prohibited by the Fair Trading Act because they are unfair, and it is also common that many recruits are misled about the likely financial returns".
Where do these women think the money comes from? There's no wealth creation from a growing business, or anything like that. It's simply a transfer from one person to another. So if some people end up with lots more than they put in, others must end up with less than they put in.
When I read your quote about creating "abundance of love, resources, etc, in one's life", it made me feel ill. Abundance of hate and a lack of resources is a more likely outcome for those left when the music stops.
And one expert thinks that might be quite soon, because $5000 is an unusually high buy-in. "It's a big barrier for people to find new recruits, so if it is a scheme it's likely to collapse quickly," he says. "Normally buy-in is a few hundred dollars to make it accessible to as many people as possible. Could you find 10 people to give you $5000? I know I couldn't."
The fact that your friend wanted you to forget what she'd told you suggests she has a feeling that what's going on isn't legit.
A message to anyone involved in one of these circles: give back any money you've received, ask for your contributions to be returned to you (good luck on that!) and get out now.
Investment advisers
We are both semi-retired, my wife working more hours than me while I take care of cooking and housework.
We have about $340,000 in shares with an investment broker, mostly New Zealand and Australian shares. We are both 66 years young and enjoying life and I see that we will probably start to use the income from this in another three to four years.
There is also about $90,000 in bank deposits that is earmarked for specific wants, travel, health and emergencies. We have our own freehold home that we are very happy living in.
It worries me that the sharemarket could go through another downturn just as we are needing to start drawing on it, but I struggle to see where else the money should be.
I fear procrastination might be a problem, but it is an extremely important decision, and I am not sure where to get the correct answers.
We pay our adviser for the advice we get, but I wonder if he has a vested interest in keeping us in the sharemarket. We would appreciate your thoughts on this.
I'm glad that you pay your adviser. Many people don't and the adviser instead receives commissions for putting them into certain investments — which gives the adviser an incentive to go for the highest commissions rather than the best investments for you.
Nonetheless, your adviser may be being rewarded in some way for keeping you in shares.
It's really important that you ask him. It might be an awkward conversation, but it's your savings — not his — that are at stake here.
Alternatively, you could perhaps just give up on him.
If he's been taking an interest in you, he should know you plan to live partly off your shares in the next few years and he should have suggested some time ago that you move part of that money into lower risk investments. Your fear that the market could fall when you need the money is justified.
A basic rule is to invest in shares with money you plan to spend in 10 or more years — so there's time to recover from a downturn. Nearer-term spending money should be in high-quality bonds — which your adviser should know about — or bank term deposits.
I realise bonds and deposits are paying what seem like pathetic returns these days. Keep in mind, though, that inflation is really low — currently at 0.1 per cent.
So your money is still growing in terms of what it can buy — which hasn't always been the case when interest rates were much higher. When it comes to buying groceries, or anything else, it's the gap between inflation and interest that matters.
I suggest you either discuss your investment strategy with your adviser, or look for a new one — interviewing would-be advisers and asking how they would help you.
For tips on finding a new adviser — and some possible ones to try — see the Info on Advisers page on www.maryholm.com
While we're on the subject of financial advisers, I haven't yet received much response to the Government's request in last week's column for comments on advisers.
If you've had good, bad or confusing experiences with advisers — or if you've decided not to use one for some reason — let's hear from you.
Sharemarket fluctuations
I noticed a recent correspondent asked about how to time the sharemarket and essentially you said it fluctuates. Which is very true. But you can use this fluctuation to your advantage if you regularly contribute the same amount.
If you do this regardless of the market state, you get more when the market is down and less when the market is up. I think this is called dollar cost averaging and is a sound strategy for long-term investors.
I have invested regardless of market state in growth funds. I did almost regret my decision at the early stage, as cash/low-risk funds seemed to be doing better initially following the global financial crisis. But now, as the market has increased, those shares are worth significantly more — increasing at $1000 a month.
While I appreciate that it will not continue at that rate for the next couple of decades to my retirement, it will still give me quite a buffer to ride out the next downturn, whereby my fund will again be buying shares at a low price, and may even decrease in value.
However, I will hold my nerve, because superannuation is a long-term plan and at the end, I am reasonably sure that my total investment will be worth substantially more than what I, my employer and the Government has contributed, because of dollar cost averaging.
Quite right. Because regular contributors buy more shares when they are cheap, the average price of all their shares ends up being lower than the average market price.
It's an advantage most people in KiwiSaver benefit from, even if they don't realise it. As another reader, who wrote along similar lines, puts it, "Give me a market that fluctuates any day."
Super scheme fees
The last letter last week was about investing in a lower-fee KiwiSaver fund compared with a higher-fee non-KiwiSaver fund.
SuperLife's fees for its superannuation scheme (non-KiwiSaver) are about 0.25 per cent of assets (just under) less than those of its KiwiSaver scheme. This reflects the higher compliance costs of KiwiSaver.
This is unusual in that most providers would have higher fees in non-KiwiSaver, but it reflects the philosophy of SuperLife of keeping fees to a minimum.
Okay, you got your free ad. I'd be interested to hear from any other providers that charge a lower fee for a non-KiwiSaver fund than for a similar KiwiSaver fund. I don't think there are many.
• Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office.
Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name.
Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.
