What retirement investment is this? It sounds like a scam

A coworker was telling me about an investment her financial advisor (who worked with her parents and set them up for retirement) was informing her about. I didn’t hear tons about it, but it is from an advisor she has known for decades.

The impression I got is you take a large sum of money (maybe 250k), and it gets invested, and in return for that you are given 10% of the principal in non-compounded interest. It is for a minimum of 5 years and a maximum of 10 years. So a 50-100% return after 5-10 years (not factoring for inflation). She claims you can take the money out after 5 years. I got the impression it was a relatively low risk investment.

Here is my problem with that. Corporations are sitting on almost 2 trillion in cash reserves, the wealthy are saving their money, corporate profits are up, and the middle class are saving more money. There are trillions of dollars in capital sitting around doing nothing. So if there was an investment vechile offering a safe 10% annual return over a 5-10 year period, it would be flooded with cash right now until the rates of return were down to more realistic levels.

Plus if you go to bankaholic and bankrate, and look at the highest rated 5 year CDs none are paying more than about 2.5%.
Is this something totally unrelated to regular investments that only retirees can utilize (or something that goes through the company she works though)? Is it a potential ponzi scheme? I can’t see how anyone could make those kinds of returns in this economy. I should ask her more tomorrow.

You’re missing details I think.

The ONLY low risk way these things legitimately work is the bank takes the “interest” and invests some of the interest in long dated options. If options work out, investors get an ok return, if the options don’t work then investors get their principle back. This works much better in a high interest rate environment. Swiss Bank Corporation (now UBS) pioneered these “Guaranteed Return on Investment” in the early 1990’s. These were very popular and the maximum return **possible **was IIRC about 15% and minimum was principle repayment.

Read the prospectus. I’m about 99.99% sure this is not a “low risk” investment.

That may be what it was. I don’t know much about it, she was just telling me about it since she is trying to find a way to retire and still make ends meet until SS kicks in.

But it isn’t the early 1990s anymore, there is tons of underutilized capital. So I don’t see how she’d get 10% returns.

I’ll say this again, if the potential return is greater than US Treasuries, then your friend is taking on risk. Finance is a zero sum game - you get a bigger rate of return and someone has given you greater risk.

Your friend is getting scamed in that there is no way this is risk free. She needs to read the prospectus very carefully to understand what the catch is.

I used to write the marketing fluff for this kind of thing in the 1990’s. Prospectus or term sheet would say RISK FREE*

*but if the sun rises in the East then you loose everything and owe us money

From your description, it seems to me like an annuity.

Or another Ponzi scam

Yes. The OP should keep in mind that many of Bernie Madoff’s victims had known him for decades too.