Top 5 Investment Fraud Red Flags
Though most Americans hope to generate sufficient income from their careers, investments play a major role in how we plan for the future. Whether it’s through a company-sponsored 401K or an independent investment portfolio, millions of Americans put their trust in financial experts in order to make the safest and most advantageous decisions with their savings.
Digital media has improved the availability of investment education and opportunities to a far greater audience than before, but it has also exposed more prospective investors to fraud. The annual cost of investment fraud has been estimated at approximately $8 billion per year. With growing social media and email access to potential investors, fraudsters are frighteningly well poised to steal even more.
As you assess your current investments or consider investing for the first time, here are five common red flags to help protect yourself against fraud.
1. Aggressive tactics
It is the investor’s choice whether or not to proceed with an investment, and to decide how the transaction should be handled. Under no circumstances is it acceptable for an investment advisor to use intimidation or other aggressive behavior to convince you to use their services or make a particular investment.
This includes calling, emailing or texting you repeatedly to remind you of “deadlines”, suggesting that you are unintelligent if you don’t take advantage of the investment opportunity, and telling you that you won’t have time to check their references.
Someone who pitches an investment opportunity to you completely unsolicited should also be engaged with caution. Even if the advisor’s resume seems to check out, they should not be pressuring potential clients to make upfront payments or commit to an investment immediately. It’s an especially bad sign when an advisor dissuades you from getting a second an opinion.
2. Suspicious resumes
The importance of verifying your advisor’s background cannot be stressed enough. Many fraudsters were at one point qualified investors, but some have completely invented resumes and portfolios. With the availability of educational information and professional history online, it’s easy these days to confirm whether someone is who they say they are.
If you still have doubts after on online search, thoroughly check the advisor’s references and ask acquaintances have significant investment experience whether they notice any obvious red flags.
In March 2016, the SEC filed charges against investment advisor in Florida for obscuring his true background from investors. The adviser, Steven Zoernack, allegedly falsified his identity several times over, and distributed false information about his former employers, current employees and success stories.
Even if you’ve heard good things about the opportunity through word-of-mouth, remember that some of the most infamous fraud schemes were perpetuated this way.
In 2004, a California investment advisor robbed clients of $814 million in a 20-year Ponzi scheme. He relied heavily on word-of-mouth referrals through a church network.
3. Unrealistic promises
We all like to think that we can easily tell when we’re being lied to, but it can be very difficult to trust our better judgment when someone tells us exactly what we want to hear. The simple truth in the world of investments, as in almost every other aspect of life, is that high returns almost always come with high risks.
Anytime an advisor uses language like “no risk” or “low risk” and then promises that you’ll soon get rich is most likely lying to you. This is just not a promise anyone can reasonably make when it comes to investments. Low-risk investments generally yield small, incremental rewards, not millions of dollars in a very short time span.
Advisors get away with these empty promises by flattering prospective investors and using their charisma to inspire trust. It is common, however, for fraudsters to have very engaging personalities and an ability to sway people’s opinions. Such people may be smiling outwardly, but their inner intentions are often sinister.
The popular film The Wolf of Wall Street is based on Jordan Belfort, whose infectious way with words, good looks and unusual charisma enabled him to defraud approximately $200 million from his investors.
4. Raising the stakes
Many organizations have a legitimate commitment to educating Americans about investment opportunities, but some will shameless take your money without delivering useful or original information. In these types of schemes, you may be promised certain investment information for a price, and then discover that in order to obtain that investment information you actually have to pay additional fees.
One such story making headlines is the Trump University scandal, which alleges that the candidate’s so-called school for prospective real estate investors charged students without delivering on its promises to give them unique tools to yield higher returns.
The scheme, which prompted multiple lawsuits, was allegedly structured as follows:
- Students were offered a free 90-minute seminar through targeted promotions. This seminar promised that they’d learn Donald Trump’s secrets to success in real estate investment.
- Throughout the seminar, students were encouraged to purchase a $1495 3-day course. The course w branded as comprehensive, covering all necessary information for students to generate significant returns from their real estate investments
- Instead, the course pressured students into mentorship programs that cost tens of thousands of dollars in order to receive the information they’d already been promised in the seminar.
Trump has denied the charges, but the allegations indicate similarity to a prevalent type of scheme targeting vulnerable investors looking for quick results.
i.e. Trump University and similar schemes—promises that you’ll get certain information if you pay a certain amount, but once you pay that amount you don’t actually get that information. You have to pay even more to get what you need.
5. Lack of transparency
It’s the advisor’s job to make things clear for you. While constant oversimplification of investment opportunities could be a red flag, so is an unwillingness to present clients with detailed options. If you hear something like “Just trust that I know what I’m doing” without further explanation of how advisor plans to proceed, you should be concerned.
Although financial language can be very complex, there is no excuse for a qualified investment advisor not to know how to explain it in a transparent way. Your advisor should be willing and able to provide you with the following information:
- Why the investment opportunity is advantageous for you
- A reasonable range of returns that you can expect
- The risks that are involved (and there are always risks)
- The laws related to that type of investment
- The communication process that the advisor will engage you in throughout the life of the investment
- Your rights as an investor, such as having final approval on any investment decision
To be especially cautious, spend some time doing independent research on official websites like investor.gov. If something the adviser is encouraging you to do doesn’t make sense to you or intuitively seems like too risky of a choice, don’t agree to it.
Investment fraud can cost people their hard-earned life savings, so it’s important to take keep an eye out for these red flags before committing to an investment. Even when you have a trusted advisor, never forgo your right to check in on your investments, course-correct if you need to, and re-check the advisor’s background.
If you suspect that you’ve been defrauded or that your investments were mismanaged, contact us here to discuss your legal options.