It’s a disastrous story that happens way too often. You look cautiously for somewhere to invest your carefully accumulated savings, or possibly an inheritance or a gift. It’s a nest egg, and you feel it represents a good part of your long-term financial security. You search around, talk to people, and find what you think is an excellent opportunity offering a projected 15%-17% return but with low risk.
For the first year or two everything seems great. Until you stop hearing from the financial marketers, who also don’t seem to answer the phone anymore. Then you read an investigative article about the company in the business press which states that they are suspected of investment fraud. And from that point onwards, it’s a downward spiral of bad news whereby the only thing not clear to you is whether you’ll lose everything, or manage to recover a part of your “safe” investment.
Unfortunately this scenario repeats itself day in and day out in Israel and around the world.
So the following are some of the major warning signs of investment fraud that every investor needs to be aware of.
- Don’t judge a book by its cover. People running scams will go to extreme lengths to ensure that their image looks reliable in order to gain people’s trust. But just because they look solid and reliable doesn’t mean they are. Do thorough background checks before investing your money anywhere, especially if you are transferring the money to them as opposed to keeping your investments in your account.
- Don’t trust people offering high rates of return concurrently with low risk investments. They simply do not go together. High rates of return (today 5% or 6% is considered a solid return especially when inflation is running under zero percent) are almost always unattainable unless you are willing to take substantial risks which could endanger your principal. Identifying the risk may be hard, but that doesn’t mean it isn’t there. Run away from anyone who tells you that you can earn high returns without taking significant risk.
- Guaranteed returns are another telltale sign. Investments just can’t come with guarantees. Even structured products which “guarantee” one’s principal have their own list of built in risks. If anyone is guaranteeing future rates of returns they simply cannot be trusted.
- Most financial investments use third party custodians to hold your money and manage your account. This arrangement is mandated in many cases and provides a higher level of security for you knowing that your investment manager has no direct access to withdraw any money from your account. If you are investing in a product without a third party custodian, you need to perform more due diligence to ensure you are not working with a “Madoff” like situation.
- Be wary when dealing with non-regulated investments, or those sold by a non-regulated investment professional. Not everyone who markets investment products is regulated, and that could be a cause for concern.
- Be tuned in to excessively warm or cold sales techniques. Both extremes attempt to relate to your emotions and prevent you from using common sense and reason.
- Be cautious of marketers who are unwilling to disclose how they are being compensated. Investment sales products should be transparent and reasonable. Ensure you understand how they are taking their fee and that it seems fair to you before signing on the dotted line.
- In today’s day and age of sharing information between countries, and increased money laundering, someone who offers to work with offshore or secret accounts should receive a higher level of scrutiny. Not only should you be extra cautious about transferring your money to a domain that you know nothing about, but it is a very problematic scenario and should be a red flag if you are personally unable to gain immediate access to your money.
The above list is by no means an all-inclusive guide to avoiding investment fraud but I hope it gives you something to think about. As appealing and enticing as these offers often sound, if it seems too good to be true it probably is too good to be true. You have been warned.