Avoiding Investment Fraud

Every year thousands of people lose millions of dollars to investment fraud. One conservative estimate is that one in 10 investors will be victimized at some point in their lives, and seniors are targeted more often than younger people. The number and sophistication of investment scams is ever-growing—but by maintaining a healthy dose of skepticism and training yourself to spot some common red flags, you may be able to protect yourself and your loved ones from becoming victims.

The come-ons
Be skeptical if investment opportunities come with any of the following features:

• Guaranteed high returns
• Low or no risks
• Invitations to join exclusive investment organizations
• The ability to “get in on the ground floor”
• Claims of breakthrough technologies
• Penny stocks
• Seminars, free meals or travel offers

The tactics
Be particularly alert to these types of strategies:

• Unsolicited approaches by phone, email or text or in person
• A hard sell and lofty promises
• No way to call back or follow up with the seller
• Insistence on a quick decision
• Sketchy details
• Complicated explanations or use of highly complex terminology
• Emails and newsletters with unclear sources

Sidestepping scams
Here are some ways to avoid the potential of financial exploitation, should you or a loved one be approached with an unsolicited investment opportunity:

1. Verify credentials. Legitimate investment professionals are registered with the Financial Industry Regulatory Authority (FINRA), the Securities and Exchange Commission (SEC) or your state securities or insurance regulator. You can use BrokerCheck, a free online tool offered by FINRA, to review a broker’s qualifications, registration and employment history. BrokerCheck also contains a disclosure section with information about customer disputes, disciplinary events, and certain criminal and financial matters on the broker’s record.  
2. Adopt a mindset that “there’s no such thing as easy money.” Guaranteed, assured profits with zero risk simply don’t exist; every investment involves some degree of risk.
3. Don’t follow the crowd. So-called affinity frauds prey upon members of a common social circle, religious group or ethnic background. If someone tells you that “everyone” is in on the deal, they may be lying—or they may have victimized a number of your peers already.
4. Refuse to rush to decision. Legitimate investment professionals will allow you time to conduct your due diligence. If you’re given a limited window in which to accept, walk away.
5. Never feel obligated. Even if you’re offered something for free, such as a meal or a seminar, you don’t owe a salesperson anything. Don’t let guilt guide your investing decisions.
6. Ask for documentation. Stocks, mutual funds and ETFs are typically required to have a prospectus, and bonds are required to have an offering circular. If there’s no documentation, the securities may not be registered with the SEC—which usually prevents them from being sold to the public.

Other ways to protect yourself

• Never act on an unsolicited offer to buy any investment product.
• Keep your financial information to yourself: Never share account numbers, user names, logins, passwords or personal identification numbers.
• Keep your assets at a reputable firm.
• Never invest in a product you don’t understand.
• Ask questions about costs and risk, and ask for responses in writing.
• Verify what you’re told with a trusted advisor or friend.
• Ask, and consider, what’s in it for the seller.

Above all, remember the old axiom: If it sounds too good to be true, it probably is.

If you'd like to read an academic paper on the problem of investment fraud directed toward older Americans, you can access this publication from the Wharton School of Business: Understanding and Combating Investment Fraud,