How to Steer Clear of Investment Scams
Get wise to the strategies that con artists use to separate smart people from their money
Caroline Mayer is a consumer reporter who spent 25 years working for The Washington Post. Follow her on Twitter @consumermayer
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Actually, the typical victim may look more like the face staring back at you in the mirror, says Gerri Walsh, vice president of investor education at the Financial Industry Regulatory Authority, the largest independent regulator for U.S. securities firms.
“The people who tend to be victims of investment fraud are college-educated, with above-average incomes and higher levels of financial literacy,” Walsh says.
The reason they get targeted?
To paraphrase Willie Sutton: That’s where the money is.
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So why do smarties get fooled? The scammers know what to say to bait investors then reel them in. “Con artists use the science of persuasion the same way legitimate marketers use it to sell detergents or cars,” Walsh says.
A recent action by the Federal Trade Commission shows just how shrewd scammers are pitching "safe" investments, promising huge profits in a short amount of time with very little risk of loss. In June, the FTC charged Sterling Precious Metals, a telemarketing operation, with running a deceptive scheme that took in at least $100 million from about 200 consumers, mostly age 60 and up. Among other things, the FTC said, the company failed to disclose that about 80 percent of the purchase would be financed through a loan with interest and that sales commissions could total as much as 39 percent of the investment. Many of the victims lost their retirement savings as a result.
You can protect yourself from becoming a victim of investment fraud by recognizing what Walsh calls the “science” behind five common pitches used by scammers:
1) Great Riches Await You
The con: Phrases such as “guaranteed returns,” “retirement security” or even a specific lure, such as “gas wells guaranteed to produce $6,800 in income a month.”
How to respond: “Criminals use these types of phrases to get you into an emotional state and excited about an investment’s prospect,” Walsh says. “So if you find your heart beating faster or your palms sweating, back off.”
End the conversation by telling the salesperson that you’re not interested or that you never make investing decisions without first consulting your accountant, financial adviser, attorney or spouse.
2) 'Our Credentials Are Impeccable'
The con: The scammer claims to be an expert, saying he or she is with a reputable firm, or has years of experience with this investment or has written a book on the subject.
How to respond: “Remember that credibility can be faked,” Walsh says. Ask for the salesperson’s credentials then check to see if they’re on the up-and-up.
Legitimate investment professionals — including brokers, investment advisers and insurance agents — must be licensed with FINRA, the Securities and Exchange Commission or a state securities or insurance regulator. It’s easy to check bona fides online at the websites of FINRA and the SEC; you can find links to state regulators at the North American Securities Administrators Association site.
Similarly, most legitimate investment securities are registered with the SEC. Use its database of company filings to check on the firm behind any investment that's new to you. “Most investment fraud tends to be from unlicensed professionals touting unregistered securities,” Walsh says.
3) Join a Select Group of Savvy Investors
The con: The crook tries to foster social consensus, either by citing others with an alleged stake in the type of investment (“Warren Buffett has put a lot of money into this industry”) or playing off your affinity with a group, like neighbors or members of your congregation. One favorite line of scammers: “This deal is so good, I’ve put my mother’s savings into it.”
(MORE: Seven Signs of Dubious Financial Advisers)
How to respond: “Even if you share a lot in common with people named by the salesperson, you need to think about what’s right for you,” Walsh says. “It’s a glaring red flag if a pitch focuses on how many others are interested in the investment.”
4) Free Seminar — Lunch Included!
The con: In exchange for making an investment, you’re offered a benefit, like as a free lunch to hear details about the sales pitch.
How to respond: “There’s nothing inherently wrong with free-lunch investment seminars," Walsh says. "But just because somebody bought you lunch doesn’t mean the investment is right for you.” Yet surveys have shown that investment fraud victims were three times as likely to have attended a free-lunch seminar than investors in general.
Before attending, make sure you check to see if the seller is licensed. Once there, pepper the salesperson with questions, so you can suss out his or her knowledge and professionalism. If you hear anything that makes you queasy, don’t invest.
5) Act Now, Before It's Too Late
The con: Supplies are limited — or you need to “move quickly” if you're going to get in on the action.
How to respond: “Hold on to your wallet and walk away,” Walsh says. “If the investment is for real, it will be there tomorrow.”
Wondering if you might be a potential investment-fraud victim? Find out by taking FINRA’s Risk Meter test. It’s quick — and the results may surprise you.