“Given where the market is, in bearish territory, it’s a great environment for scammers to feed on investors’ growing fears,” said Eric Sterner, chief investment officer at Apollon Wealth Management, based in Charleston, SC. “People are afraid of layoffs, market losses, inflation. This makes them increasingly vulnerable to the promises of quick and easy returns from scammers.”
Sterner added, “But you can protect yourself with some basic security steps.”
Of course, you assume that you would never fall for any bunco artist’s scam. But perhaps your young adult son or daughter or older loved one is more vulnerable.
They may benefit from your eagle-eyed coaching.
Number of scams: high and growing
One thing is certain. Someone needs coaching. The number of investment scams is exploding. This year through Sept. 30, victims have filed just under 80,000 complaints with the Federal Trade Commission (FTC).
That easily puts the scam count on track to surpass the 82,181 complaints filed in all of 2021.
And it drastically dwarfs the 14,797 filed in 2018.
Furthermore, the pain caused by these scams is increasing. This year’s scams have cost investors $2.7 billion so far. And that’s before accounting for the collapse of cryptocurrency exchange FTX in the fourth quarter.
Victims reported $1.8 billion worth of scams in all of 2021. And just $94 million in 2018.
Step no. Tip #1: Watch out for red flags
So how can you – or a less experienced loved one – avoid becoming a victim? Step no. 1 is to be wary of an investment solicitation that raises one of eight red flags:
- Excess of urgency. Tone convinces you to act quickly. Fraudsters want you to act quickly, before you’ve had a chance to research the investment or vet the sellers.
- Wrong focus. “Any worthwhile advisor should start by asking questions about you as an investor,” Sterner said. “If all he talks about is an investment, get up and walk away.”
- Fake statistics and testimonials. Do your homework. Try checking the performance stats. Contact people who offer endorsements. If you can’t verify the facts, figures, and favorable quotes, head for the exit.
- Guaranteed returns. Huckster Bernie Madoff liked to promise exorbitant rates of return. The problem is that high returns are almost always impossible to guarantee. “If it sounds too good to be true, it probably isn’t,” said Paul Brahim, chief executive officer of Wealth Enhancement Group, in Pittsburgh.
- Unregistered titles. Avoid them. The Securities and Exchange Commission (SEC) said: “In general, offers to sell securities must be filed with the SEC or be eligible for an exemption. To see if an investment is filed, check the SEC’s EDGAR database ( o) Call your state securities regulator for more information.”
More red flags
- Hidden fees. Many online commercials and classifieds offer free seminars and videos. “But later you find out that you have to pay a large fee to get the coaching they promise,” the FTC warned. Worse, there’s no way to confirm the success stories they advertise. Don’t get involved, the FTC says.
- Risk-free training. This is what many investment promotions offer. But all investments involve risk, so offers to train, coach or risk-free investments are, by definition, bogus.
- Get rich fast. You will not. “In fact, most people never get back their money,” the FTC said.
Step no. 2: Background check
The second critical step to avoid becoming a victim? Check the background of anyone who claims to be the right financial advisor for you.
Start by doing an online search for the company that has approached you and its officers or promoters.
Next, check the background, including registration or license status, of anyone recommending or selling an investment. “See if they have a history of complaints,” Brahim said. Here are the places where you can do it for free:
Step no. 3: custody of goods
With few exceptions, investment advisers must hold clients’ money and securities with an external depository. And qualified custodians include banks, registered broker-dealers and futures commission traders. Ask the caretaker to check where your belongings would be.
In the collapse of cryptocurrency exchange FTX, FTX reportedly retained custody of most of its customers’ assets. Investigators reportedly fear this allowed for the misuse of clients’ assets. The vast majority of such assets are said to be missing.
Step no. 4: securities listed on the stock exchange
“Most retail investors should stick to publicly traded stocks,” Brahim said. “Those involve more regulation. The less regulation you have, the more opportunities for fraud.”
Step no. 5: Explore liquidity
Always check how liquid your investment would be. “Ask how quickly you can get your money,” Brahim said. And be sure to see it in writing. Also, find out what fees, if any, you are being charged for withdrawing funds. Likewise, is there a penalty for withdrawing early?
Follow Paul Katzeff on Twitter to @IBD_PKatzeff for personal finance advice and top mutual fund strategies.