Investment fraud can happen to anyone but these ten steps will protect you from losing your money
Investment scams and fraud don’t just happen to the wealthy. From phone scams targeting seniors to decades-long Ponzi schemes such as the one run by Bernie Madoff, anyone can be the target of investment fraud.
One way to avoid most investing scams is to manage your own investments through an online platform and invest only in broad funds and shares of large companies. A simple investing strategy consisting of sector funds and asset class funds will keep you from chasing complicated investments that turnout to be scams.
Still, there may be times when you’re tempted to invest in alternative assets or are approached by money managers with a ‘hot’ new investment. Knowing the warning signs as well as what questions you should ask will help save your money from the next $50 billion-dollar fraud.
These ten steps will help you avoid being the victim of an investment scam
1) Be Cautious of Overly-Complicated Investing Strategies
Some fraudsters will try to hide their scams in complicated trading schemes and complex jargon. A good investment strategy should make sense even if the technical aspect of trading is more complicated.
I love the simplicity of sector funds and the buy-and-hold strategy of stock investing. Investing isn’t about beating the market but about beating your own goals and earning a good return on your money.
2) Compare the Investment Strategy to Similar Managers and Indices
There are money managers that have been able to consistently outperform others, but they are extremely rare. Most managers are not able to outperform their index or other managers for more than a few years in a row.
Returns should be independently audited by a firm that complies with Global Investment Performance Standards.
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3) Look for Independent Audits
Individual investors shouldn’t be expected to assess a firm’s financials. That’s where audits come in.
Most legitimate investment firms are audited by large accounting firms. An investment scam may claim to be independently audited but in fact, the auditor is a one-person shop set up more as a show than to do any real auditing.
This is what happened in the Madoff scam. The ‘independent’ auditor was a small storefront operation that wasn’t really able to do a legitimate audit (at best) or complicit in the fraud (at worst).
4) Be Cautious of e-mail Solicitations
If you have an email address, it’s on some scammer’s list…and probably on a great many lists.
These email scams are usually easy to catch but you’ll get a more sophisticated one every once in a while. When in doubt, always be extremely wary of any advice or tip sent to you unsolicited.
Always check the domain name of the return email. That’s the part of the email that comes after the @ sign in the address. It should match the domain of the sender. For example, a common email scam will look like it comes from PayPal but the email will be from PayPal@xyz.com instead of @paypal.com
One rule of thumb is to never click on a link or attachment in an email unless you personally know the sender. If the email asks you to click on a link to verify or correct account information, go to your account through your normal online process instead of clicking through the link.
5) Be Wary of Advertised Returns over Long-term Asset Benchmarks
Stocks, bonds, real estate and other asset classes all tend to offer fairly consistent returns over the long-term. That’s usually around 7% to 10% on stocks, 6% to 9% on real estate and between 3% to 5% on bonds.
Over shorter periods of a few years, investments and strategies may provide higher returns but be wary of any strategy or money manager that claims returns well over these for periods of 10-years or more.
6) Is there Existing Regulatory Oversight?
Hedge funds are less heavily regulated compared to other investment companies and offshore investment managers may not be regulated at all.
Always check to make sure the website or firm is registered with federal regulators like the Securities & Exchange Commission (SEC), FINRA or with local regulators like your state’s attorney general office.
7) What is the Operational Risk of the Company?
The firm should have insurance and licenses to cover operational risk and the organizational structure should not depend on one or a few people. Even small investment firms cannot depend on the performance of one person and should have a system of checks-and-balances.
8) Who are Key Personnel and other Staffing?
Do key personnel have professional credentials and licensing? Check to make sure they are actually registered with the organizations with which they claim.
Don’t let a social position keep you from asking questions. Just because someone comes recommended by a religious leader or family member doesn’t mean you can trust them. Some of the biggest investment frauds in history have been conducted by this kind of affinity scam.
Also, does the investment company have appropriate staff or is it just a couple of people with an office? That’s not to say that a small business run by a few people cannot be legit but an investment firm needs a certain number of people for administration, compliance, marketing and analysis.
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9) Limit Your Exposure
The best advice you can follow is just to limit your exposure to non-mainstream investments. Limit the amount with any one manager to no more than 10% of your total investable assets so even an outright scam won’t lose a big chunk of your money. This goes for alternative assets and similar investments as well, no more than 10% to 20% of your money should be in high-risk assets.
10) Do a Background Check on the Company and Personnel
Don’t be pressured to make an investment before you have checked regulator websites for pending investigations and past disclosures. Never make an investment on the first meeting with someone. You should always be given the opportunity to think about the investment privately and check on the manager and their firm.
No checklist is every going to protect you from every investment scam or potential fraud but this list will keep you from falling for the most common scams. Most investors are only exposed to the cheap, email-type scams but you should know what to look for if a more sophisticated scam comes knocking on your door. When in doubt, follow the age-old advice, “If it sounds too good to be true, it probably is.”