It seems snake oil salesmen are not confined to selling cure-alls for all manner of physical ailments but have branched out into more ambitious territory: selling hopes and dreams in the form of quick money making fixes.
Run a mile when someone tries to sell you software that will make you money on the financial markets. Run a mile when someone tries to sell you a short education course that reveals a so-called secret trading strategy. Run a mile when someone tries to sell any money making scheme involving the financial markets. You will end up forking out hard-earned cash for little return, while the vendor laughs all the way to the bank.
Software and education tools that promise to make you rich are a growing consumer rip-off. The providers are careful not to release any information that could be considered financial advice; thus they steer clear of any laws or regulations that would stop them. Regulators are only now playing catch up – the National Consumer Commission launched its first investigation into share speculation software in August.
These so-called tools play on consumer aspirations, often promising financial freedom and wealth – whether they promise to turn you into a foreign exchange trading guru or a stock picking genius. There are two main strategies such firms pursue. The first is to milk you up front by selling software, training events, DVDs and whatever else. The second is to earn revenues off you when you actually get to trade. The trick is to churn clients, which is the practice of getting you to make lots of trades, paying over commission to the broker for each one. There are loads of psychological tricks to make it happen via the trading platforms, including flashing numbers, bright colours and pictures of attractive women (research shows that people become much more willing to engage in risky behaviour if sex has been subliminally suggested – and that’s for both men and women). Providing lots of data and moving graphs has also been proven to induce greater churn. You’ll likely also be told that regular trading is the key to success, perhaps through the miracle trading strategy that you’ve been lucky enough to learn from them.
One prominent foreign exchange education salesman, Greg Secker, is doing a nationwide series of workshops across South Africa in November. The marketing material promises to teach you “how to automate your profit creation” and “create wealth” with “no experience required”. Secker is based in the UK and although the workshops are advertised as free, it is clear that they amount to a substantial sales pitch for expensive further workshops if you really want to get the skills you allegedly need to become rich. We sent an email with questions and left a voicemail with the South African promoters of Secker’s tour but got no response. An article in the UK’s Guardian in 2012 quoted a former staff member saying that clients there often end up paying over £2000 (about R40 800) for courses that don’t make them any money.
There are plenty of other providers operating in the local market. One that Moneyweb has reported on extensively is called Sharetrackin, which sells software and courses that promises to be “everything you need to become successful” with software going for around R20 000. Another is Optimal Market Systems, which charges around R21 000 for its software, according to complaints on website Hellopeter.com. Details are limited, but both appear to be based on technical analysis, providing buy and sell indicators based on analysis of share price graphs. Consumers then open a separate account with a stockbroker to implement the trading strategies they develop from the software. If they want daily pricing data for the software they pay an ongoing fee.
Regulators have reacted with alarm to the growing trend. In a 2013 report, the UK’s Financial Conduct Authority noted in a report that, “Firms play a crucial role in shaping consumer choices through product design, marketing and the sales process. Much consumer detriment arises as firms design and sell products that benefit from consumers not overcoming mistakes or, at times, exacerbating mistakes.”
Such strategies – exploiting our errors in reasoning, or vulnerability to promises of easy riches – are often not illegal. Particularly since the advent of the internet, savvy providers looking to exploit customers can use behavioural insights to manipulate them into handing over their cash.
In South Africa, because the products are software and training courses rather than financial advice, they are not regulated by the Financial Services Board. Nanasse Malimabe, head of FAIS compliance at the FSB says, “No person may canvas for, market or advertise any business related to the rendering of financial services by any person who is not an authorised financial services provider. The activities of selling of software and training of people falls out the jurisdiction of the FSB.” Nevertheless the FSB says it has received complaints about software and education courses, but has referred these on to the National Consumer Commission.
The Commission confirmed to us that it has launched a “full scale investigation” into the company Cursu Taurorum which was selling “stock exchange speculative software”. It is an approved agent for Optimal Market Systems. The Commission received seven complaints against it and envisages that it will complete the investigation by February 2016.
To see how lucrative selling such schemes is, consider Greg Secker. According to the latest financial records of his UK holding company, Knowledge to Action Holdings, the highest paid director made £429 901 in 2013 – at current exchange rates, that’s almost R9m. While the accounts don’t disclose who that director is, Secker owns 100% of the company and has signed off the accounts, so it’s reasonable to conclude it was him. The accounts also make clear that the company earns its money from “consultancy, training and coaching seminars” and not from trading forex. The company’s liabilities exceeded its assets by £1.7 million, which the auditors attribute to the costs incurred in opening subsidiaries in South Africa and Australia. More than half of the £14.3 million in revenue earned by the company comes from outside the UK.
The realities of financial markets make it unlikely that any of these tools – whether for forex or share trading will deliver any value. The foreign exchange market is global and operates 24 hours with traders swapping from one currency to the other. Some of that trade is speculative and some is to facilitate the buying and selling of goods and services across borders. The banks that make money from it do so by earning a small margin on each trade. Those who speculate on currency movements expend a great amount of effort in analysing supply and demand dynamics in the market. Unlike shares, though, foreign exchange is a zero sum game. For someone to win, someone else has to lose. With the input of leverage, which is usually included in the contracts for difference or currency futures that are the underlying instruments for trading, and trading fees, every trader, on average, is losing. Given that big investment funds with major research teams don’t often get it right, a lone consumer is most likely to simply be paying over their money in fees and interest.
Technical analysis software aims to identify signals in share price movements based on their history. The fundamental problem with such an approach is that it is the future prospects of a company that determine the share price, not its history. So when new information about a company enters the market – say a big earnings disappointment or surprise – the share price will react. Technical analysis is never going to be able to anticipate such surprises. At best it helps to identify pricing points in the market at which there are significant buyers and sellers (“resistance” or “support” levels) though these change over time. Even fundamental analysts struggle to identify companies whose financial earnings mean it will become more valuable over time compared to others. But, at least in the case of shares, it is not a zero sum game. Shares on average do appreciate in value over time, though they can be volatile in the short run. Trading fees, though, can easily suck up your gains.
The bottom line is this: forex should only be used to hedge exposures if you are going to be selling or buying real goods and services in other currencies. That manages the risk of prices moving against you. Shares are a great investment if you have a long time horizon, but then the best strategy is to build a diverse portfolio and hold on to it for the long run. That is the only prudent use of the opportunities that forex and stock markets provide. And you don’t have to buy expensive software to do it.