Transcript Slide 1

South Dakota Department of Labor & Regulation,
Division of Securities
What We Do – Our Mission
• To protect investors of securities products, franchises
and business opportunities by investigating
complaints, conducting examinations, enforcing antifraud provisions, ensuring investments sold meet
standards of full disclosure and providing investor
education.
South Dakota Codified Law Enforced by Division
of Securities
• Uniform Securities Act of 2002 - SDCL Chapter 47-31B
• Franchise Investments - SDCL Chapter 37-5B
• Business Opportunity Law - SDCL Chapter 37-25A
12 Principles of Financial Literacy
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Map your financial future – Those who fail to plan, plan to fail.
Don’t expect something for nothing – Watch Out for Scams!
High returns equal high risks
Know your take-home pay
Compare more than just interest rates - other product features
Pay yourself first
Money doubles by the “Rule of 72”
Your credit past is your credit future
Start saving young
Stay insured
Budget your money
Don’t borrow what you can’t repay
Characteristics of a “Scam”
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Calls come from distant cities/states
Salespeople counter every possible objection
Offer no risk, high returns and secret tips
Demand immediate action
Caller mixes believable statements with false promises
Sales person does not respect your right to say no
Makes you feel stupid if you are not interested in the offer
Popular Types of Investment Scams
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Pyramid Schemes
Precious Metal Fraud
International Investing
Stock Swindles & Insider Trading
Franchise/Business Opportunities
Ponzi Schemes
Affinity Fraud
Pyramid Schemes
1. One person recruits six friends
2. Those six recruit six more
3. A nine-level pyramid involves 10,000,000
Almost everyone loses!
The Ponzi Investment Scam
• Appears to be a real investment deal
• Scam artist usually organizes as a pyramid scheme in which early
investors appear to be earning “returns”, but are actually being
paid off by later investors
• Common examples
• Mortgage deals
• Real estate deals
• Oil and gas leases
• Promissory notes in startup companies
• Housing for the homeless
• Be especially suspicious of a company that claims to be
registered in one state, physically exists in a second state and
sells to investors in a third.
Lottery Scam/Sweepstakes Winner
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Often begins with a telephone call from a stranger who excitedly tells you that you
have won a contest. The caller then explains there will be some fees you have to pay
(taxes or a courier fee) to collect your earnings. You send the money, but the
winnings never arrive.
Older people often fall for it because it sounds like it could solve all their financial
problems.
If you fall for it the scam artist may do what is known as re-loading, which is where
they tell you there is another fee you have to pay and keep stringing you along to
see how much money they can get out of you.
2 signature traits
• Caller makes exaggerated claims of the amount of money that will have to come out of
your winnings
• Tell you that you have to pre-pay to get winnings
Investor Education Lunch Scam
• Untrained and unlicensed professionals are selling seniors
“investments” that offer little benefit while lining the agent’s
pockets with a fat commission
• “Free Lunch” seminars
• Seniors enjoy a free meal in a resort-type setting, as part of an
“educational” seminar offering investment advice
• Main purpose is typically to get an appointment to come into the
person’s home and pressure them with high sales tactics to purchase
unsuitable investment products
Top 10 Threats to Investors
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Ponzi Schemes- Pay early investors with money raised from later investors. The
only people who make money are the promoters who set the Ponzi in motion.
Unlicensed Individuals Selling Securities- Anyone selling securities without a valid
securities license should be a red alert for investors.
Unregistered Investment Products- Con artists bypass stringent state registration
requirements to pitch viatical settlements, pay telephone and ATM leasing
contracts, and other investment contracts with the promise of “limited or no risk”
and high returns.
Promissory Notes- Empty promises can leave these notes worth less than the
paper on which they are printed.
Senior Investment Fraud- Because they have built a lifetime of savings, seniors
continue to face investment fraud by con artists peddling unsecured promissory
notes, viatical settlements and other investments that are either fraudulent or
unsuitable for them based on their particular financial needs.
Top 10 Threats Continued
6. High-Yield Investment Schemes- Con artists lure investors with promises of triple digit
returns through access to “risk free guaranteed high yield instruments” or
something equally deceptive
7. Internet Fraud- Stock promoters are using online “boiler rooms”, instant messaging,
and fake websites to lure investors into “pump-and-dump” stock schemes.
8. Affinity Fraud- Con artists are increasingly targeting religious, ethnic, cultural and
professional groups.
9. Variable Annuity Sales Practices- Senior investors, in particular, should beware of the
high surrender fees and steep sales commissions agents often earn when they
move investors into variable annuities.
10. Oil and Gas Scams- With oil topping $50 a barrel and continued Middle East
instability, regulators warn that con artists may renew schemes promising quick
profits in oil and gas ventures.
Questions to Ask Before Hiring a Financial Professional
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What are your credentials?
What services will you provide?
How much will it cost?
How are you paid?
Is this product registered
Are you registered?
Saving vs. Investing
Savings (Bank Product)
• Passbook Savings Account (Basic/Regular)
• Money Market Account
• Certificate of Deposit
Truth in Savings Law
• The Truth in Savings Act (Federal Reserve Regulation DD) requires financial
institutions to disclose the following information on savings account plans
they offer:
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Fees on deposit accounts
The interest rate
Other terms and conditions
The annual percent yield (APY), which is the percentage rate expressing the total
amount of interest that would be received on a $100 deposit base on the annual
rate and frequency of compounding for a 365-day period. Truth in Savings
defines the year as 365 days rather than 360, 366, or some other number. This
law eliminates confusion caused by the more than eight million variations of
interest calculation methods previously used by financial institutions.
Choosing a Savings Account
• Factors that determine the dollar yield on an account:
• Interest rate (also called rate of return, or annual yield)
• All money earned comes from this factor.
• The following factors reduce money earned and can even turn it into a loss:
• Fees, charges, and penalties
• Usually based on minimum balance requirements, or transition fees
• Balance requirements
• Some accounts require a certain balance before paying any interest.
• On money-market accounts, most bank will pay different interest rates for different
size balances. (Higher balance earns a higher rate.)
• Balance calculation method
• Most calculate daily. Some use average of all daily balances.
Investing
• Not FDIC
Bonds
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What they are
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How they work
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A bond is an “IOU,” certifying that you loaned money to a government or corporation and
outlining the terms of repayment.
Buyer may purchase bond at a discount. The bond has a fixed interest rate for a fixed period
of time. When the time is up, the bond is said to have “matured” and the buyer may redeem
the bond for the full face value.
Types
• Corporate
• Sold by private companies to raise money.
• If company goes bankrupt, bondholders have first claim to the assets, before
stockholders.
• Municipal
• Issued by any non-federal government.
• Interest paid comes from taxes or from revenues from special projects. Earned Interest
is exempt from federal income tax.
• Federal Government
• The safest investment you can make. Even if U.S. government goes bankrupt, it is
obligated to repay bonds.
Stocks
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What they are
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How earnings are made
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Company profits may be divided among shareholders in the form of dividends. Dividends are usually
paid quarterly.
Larger profits can be made through an increase in the value of the stock on the open market.
Advantages
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Stock represents ownership of a corporation. Stockholders own a share of the company and are entitled
to a share of the profits as well as a vote in how the company is run.
If the market value goes up, the gain can be considerable.
Money is easily accessible.
Disadvantages
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If market value goes down, the loss can be considerable.
Selecting and managing stock often requires study and the help of a good brokerage firm.
Mutual Funds
• What they are
• Professionally managed portfolios made up of stocks, bonds, and other
investments.
• How they work
• Individuals buy shares and the fund uses money to purchase stocks,
bonds, and other investments.
• Profits returned to shareholders monthly, quarterly, or semi-annually in
the form of dividends.
• Advantages
• Allows small investors to take advantage of professional account
management and diversification normally only available to large
investors.
Types of Mutual Funds
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Balanced Fund includes a variety of stocks and bonds
Global Bond Fund has corporate bonds of companies from around the world
Global Stock Fund has stocks from companies in many parts of the world
Growth Fund emphasizes companies that are expected to increase in value; also has higher risk
Income Fund features stock and bonds with high dividends and interest
Industry Fund invest in stocks of companies in a single industry (such as technology, health
care, banking)
Municipal Bond Fund features debt instruments of state and local governments
Regional Stock Fund involves stocks of companies from one geographic region of the world
(such as Asia or Latin America)
Variable Annuities
• Typically have something like a 20-year payout
• Usually come with a high commission, which is not
revealed
• Hybrid between a life insurance policy and an
investment product
• Often charge hefty penalties when money is
withdrawn early
Real Estate
• Ways to Invest
• Buy a house, live in it, and sell it later at a profit
• Buy income property (such as an apartment house or a commercial
building) and rent it
• Buy land and hold it until it rises in value
• Advantages
• Excellent protection against inflation
• Disadvantages
• Can be difficult to convert into cash
• A specialized type of investment requiring study and knowledge of
business
Savings and Investment Products
Savings
Investing
Source of
Return
Interest paid on money
deposited
Interest, dividends, or
capital gains or losses
Key Benefit
Money is safe and
accessible
Returns have outpaced
inflation over long term
Key Drawback
Returns haven’t outpaced
inflation over long term
Risk of losing money if
securities decline in value
Savings and Investment Products
Savings
Investing
Objective
Short-term needs or
emergencies
Long-term growth
Products
Savings account, moneymarket account, CD
Stocks, bonds, mutual
funds
Risk
None on capital if FDIC
insured, inflation risk
Varies, depending on
investment product
Risk vs. Reward
Retirement Plans
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What they are and how they work
• Plans that help individuals set aside money to be used after they retire.
• Federal income tax not immediately due on money put into a retirement
account, or on the interest it makes.
• Income tax paid when money is withdrawn.
• Penalty charges apply if money is withdrawn before retirement age, except
under certain circumstances.
• Income after retirement is usually lower, so tax rate is lower.
Retirement Plans
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Types
• Individual Retirement Account (IRA)
• Traditional IRA
• Roth IRA
• 401(k)
Retirement Plans
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Types
• Individual Retirement Account (IRA)
• Allows a person to contribute up to $5,000 of earnings per year. Contributions
can be made in installments or in a lump sum. Set up with a financial
institution like a bank, broker, or mutual fund in which contributions may be
invested in many types of securities such as stocks, bonds, money market, and
CDs.
• Traditional IRA
• Roth IRA
• 401(k)
Retirement Plans
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Types
• Individual Retirement Account (IRA)
• Traditional IRA
• Contributions to account are tax deductible (go into account pre-tax). Earnings
grow tax-deferred until withdrawal. Withdrawals are subject to tax.
• Roth IRA
• 401(k)
Retirement Plans
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Types
• Individual Retirement Account (IRA)
• Traditional IRA
• Roth IRA
• Contribution to this plan is not tax-deductible (go into account after-tax), the
earnings on the account are tax-free for qualified distributions. The funds from
the Roth IRA may be withdrawn after age 59 ½ or after 5 years after account
opening if the account owner is disabled, for educational expenses, or for the
purchase of a first home.
• 401(k)
Retirement Plans
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• Individual Retirement Account (IRA)
• Traditional IRA
• Roth IRA
• 401(k)
• Allows a person to contribute to a savings or investing plan from his or her pretax earnings, reducing the amount of tax that must be paid. Employer matches
contributions up to a certain level.
Cost of Credit:
Fees and Interest
(1) Fees
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Maintenance Fees
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Service Charge
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Late Fees
(2) Interest
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Variable Rate: Interest can change
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Fixed Rates: Interest remains the same
Credit Cards – Debt – Impact on You
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Less than 40% credit card holders pay off entire balance each month.
Average interest is 18-21% (Adds 18-21% to price of items purchased
There are 3 large credit reporting agencies.
All lenders will use your credit report as the single most important factor in
deciding whether or not to lend you money.
• Payment patterns stay on your report for 7 years (on-time, 30 days late, 60
days late, 90 days late, greater than 90 days late).
• Bankruptcy will show on your reports for 10 years.
If You Owe...
$2,000 on a 19.8% APR Credit Card
A Minimum
Means a
Payment of...
Debt Lasting...
2%................................................32 Years
3%................................................12 Years
4%.................................................8 Years
5%.................................................6 Years
$5,000 Card Debt!
A recent study found that more than ½ of college
students accumulated more than $5,000 in credit card
debt while in school.
Of the 13,000 respondents, 1/3 piled on more than
$10,000 in credit card debt while in school.
Only 19% said they did not acquire any credit card debt
while in school.
Trying to Find Money for College
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Unscrupulous companies guarantee or promise scholarships, grants or fantastic
financial aid packages. Many use high pressure sales pitches at seminars where youre required to pay immediately or risk losing out on the “opportunity”
Some companies guarantee they can get scholarships on behalf of students or award
them “scholarships” in exchange for an advanced fee. Most offer “money back
guarantee”, but attach conditions that make it impossible to get the refund.
Others provide nothing for the student’s advance fee- not even a list of potential
sources
Some tell students they’ve been selected as “finalists” for awards that require an
upfront fee, sometimes asking for the student’s checking account to “confirm
eligibility” then debit the account without the student’s consent.
Other companies quote only a relatively small “monthly” or “weekly” fee and then
ask for authorization to debit your checking account- for an undetermined length of
time.
Tell-Tale Lines
• The scholarship is guaranteed or your money back.
• You can’t get this information anywhere else.
• I just need your credit card or bank account number to hold this
scholarship.
• We’ll do all the work.
• The scholarship will cost some money.
• You’ve been selected by a national foundation to receive a
scholarship.
• You’re a finalist in a contest you never entered.
The Rule of 72
To determine about how many years it will take to double your money:
72 divided by
= Years to double investment
Interest rate
you can get
To determine the interest rate that will double your money in a set number of years:
72 divided by
= Interest rate required
Years to
double investment
How Simple Interest is Calculated
• Dollar Amount x Interest Rate x Length of Time (in years) =
Amount Earned
• Example
• If you had $100 in a savings account that paid 6% simple interest, during the
first year you would earn $6 in interest
$100 x 0.06 x 1 = $6
• At the end of two years you would have earned $12.
• The Account would continue to grow at a rate of $6 per year, despite the
accumulated interest
How Compound Interest is Calculated
• Interest is paid on original amount of deposit, plus any interest earned.
(Original $ Amount + Earned Interest) x Interest Rate x Length of Time =
Amount Earned
• Example
• If you had $100 in a savings account that paid 6% interest compounded annually, the
first year you would earn $6.00 in interest.
$100 x 0.06 x 1 = $6
$100 + $6 = $106
• With compound interest, the second year you would earn $6.36 in interest.
The calculation the second year would look like this:
$106 x 0.06 x 1 = $6.36
$106 + 6.36 = $112.36
Income & Expense Statement
Income Source
Expenses
Wage from primary job
$
Rent/Mortgage
$
Wage from second job
$
Housing Bills
$
Gifts
$
Food
$
Allowance
$
Clothing
$
Interest on Savings
$
Laundry/Clothing
$
Investment Earnings
$
Car Payment
$
Other
$
Public Transportation
$
Gas
$
Maintenance
$
Insurance
$
Entertainment
$
Medical
$
Emergency
$
Savings
$
Personal Care
$
Gifts
$
Credit/Loan Payments
$
Other
$
Total
$
Total
$
Net Worth________=Total Assets________-Total Liabilities________