Risk of scams still high
Risk of scams just as high as it was in Madoff’s day
While fraud doesn’t make the news as much as it used to, you might still be at risk. Don’t worry — there are steps to take to stay safe.
Bernie Madoff’s Ponzi scheme unraveled almost a decade ago, and not many big headlinemaking scams have surfaced since them. That doesn’t mean the risks are any lower today, however, so it’s wise to assess your vulnerability to foul play. Here are some questions to ask yourself, based largely on research cited by Finra, the Financial Industry Regulatory Authority, which oversees stockbrokers and other advisers.
How carefully do you investigate investments?
Many people take shortcuts when researching investment opportunities.
It’s easy to gloss over documents filled with boilerplate, legalistic jargon. This includes the prospectus — a type of owner’s guide — provided on mutual funds or new-stock offerings.
Nobody reads this stuff cover to cover, but at a minimum you should scan the documents for answers to key questions, such as: What are the fees, how much and what types of risks are involved and how quickly can investors cash out?
This assumes an investment is legitimate, meaning that it has been properly registered with accurate disclosure documents, with a real management team and assets behind it. Many frauds involve entities that have not registered with the Securities and Exchange Commission or other regulatory groups.
In some cases, no actual businesses or assets exist.
Properly registered stocks, mutual funds or other securities still can drop in value due to economic or market forces, but unregistered investments could be outright fabrications.
How self-reliant are you in making investments?
This is a double-edged sword.
It certainly can be wise to confer with trusted advisers when investing. Finra’s research found that fraud victims “tend to be self-reliant, preferring to act on their own instinct rather than (seek) the advice of a professional.”
Smart investors get second opinions from trusted sources who don’t have a conflict of interest, but there’s also something to be said for thinking on your own and not relying exclusively on the advice or suggestions of others, even professionals.
It also can be dangerous if you fall into a groupthink mentality.
Many of Madoff ’s victims belonged to the same country clubs or had other religious or social connections. This is a hallmark of affinity fraud — letting your guard down because you assume friends and colleagues already have checked everything out (and because you want in on the action they’re bragging about).
In Finra’s research, fraud victims were more likely than others to invest based on the recommendations of friends, relatives or co-workers.
How carefully do you check out potential advisers?
Even if you get solid referrals from friends or family members, it’s still smart to check out an adviser’s disciplinary history and credentials. It’s also easy to do.
The finra.org website has a interactive section called “broker check” that lets you look up an adviser’s track record, including prior complaints. Con artists wouldn’t be registered or overseen by Finra — and that would be a major red flag.
Some legitimate advisers might not show up either, if they’re regulated by other groups (such as the Securities and Exchange Commission), so you might need to ask about this.
“Criminals often use word of mouth to make new contacts and recruit investors for their schemes,” said Finra. Past investment-fraud victims were more likely than others to have been working with a salesperson recommended by a friend or acquaintance. How receptive are you to sales pitches?
Many dangerous solicitations come through the mail or over the internet. These include mailings promising free meals at upscale restaurants for sitting in on a marketing presentation.
According to Finra, fraud victims were more likely to listen to unsolicited sales pitches and read material received in the mail (or sent via email) than nonvictims.
To reduce this exposure, you could remove your name from solicitation lists.
According to Finra, you can reduce telemarketing pitches by calling 1-888382-1222 or visiting the Federal Trade Commission’s National Do Not Call Registry page.
Other sources include the Data & Marketing Association’s website to reduce direct mail/email offers and the Network Advertising Initiative website to cut down on digital ads.
Many people seem aware of the risks but don’t think they’re personally vulnerable. In a March survey conducted by Wells Fargo, nine in 10 older Americans ages 60 and up suspected they had been contacted by scammers at some point. Yet only one in 10 respondents thought they could fall victim. How obsessed are you with big gains?
Fraud victims often seek out highrisk/high-return investments.
“Chasing high yields can get investors into hot water, especially if they don’t stop to ask about risk,” Finra said. “All investments carry risk — and the higher the (possible) return, the greater the risk you take.”
But what are unrealistically high returns? That depends on the investment.
As a general rule, stocks are both riskier and potentially more rewarding than bonds, which offer higher yields but with more uncertainty than stable products like bank certificates of deposit.
The stock market historically has generated average returns of about 10 percent annually, but the numbers can be all over the place, and no results are guaranteed.
Low-priced “penny” stocks are in a high-risk category of their own.
So if someone touts a return above 10 percent or so, it’s questionable whether the asset will deliver. If he or she also implies the results are guaranteed, it could be a scam. How financially literate are you?
People with a good grasp of financial concepts are better able to spot misleading pitches and other red flags.
William Francavilla, author of a new book, “The Madoffs Among Us,” cites several principles that he considers essential for everyone.
These include understanding how compounding works, the importance of having cash reserves and the dangers of debt, along with an understanding of how to manage risk and how to invest according to need, not greed.
Grasping these and other concepts can make you a better investor generally and bolster your defenses against fraud.
If you’re ready to test your fraud vulnerability, check out the online Risk Meter at finra.org. In this 12-question, online quiz, you will be asked how carefully you research investments, investigate advisers, understand financial issues and more.
If you have received a suspicious sales pitch, evaluate it using Finra’s online Scam Meter, a four-question quiz that asks about the investment and how it’s being marketed.