Watch for Red Flags
Investment fraud comes in many forms, often involving opportunities and offers that seem compelling. You might know some red flags to watch for, but others can be more difficult to spot. To avoid being drawn into a scam, keep your guard up and look for warning signs before you commit to an investment.
- Guarantees – Be suspicious of anyone who guarantees that an investment will perform a certain way or promises a lofty return. All investments carry some degree of risk.
- Unsolicited Offers – Don’t respond to unsolicited cold calls, text messages, emails, junk mail, late-night commercials or infomercials, or social media posts that are either overly attractive or fear-inducing. These are common tactics scammers use to entice you to engage.
- Requests for Secrecy – Be extremely skeptical if the salesperson instructs you not to tell anyone else about the investment—or, alternatively, if they ask you to bring people you know into the sale. A legitimate professional won’t ask you to keep secrets or to recruit additional investors.
- Unregistered Products – Investment fraud often involves unregistered products, ranging from stocks or bonds to crypto assets or fictitious investments. If someone tries to sell you a security with no documentation—such as no prospectus in the case of a stock or mutual fund or no offering circular or other offering documents in the case of a bond or private placement—they might be selling unregistered securities. The same is true of stocks without stock symbols. Scammers might claim an investment is exempt from registration, which, even if true, raises the risks immensely. Carefully research products before investing.
- Unlicensed or Unregistered Sellers – Bad actors who are operating outside industry rules and regulations are behind many financial scams. Always research the seller of an investment product to make sure they’re registered and legitimate. And be alert to imposter investment scams in which scammers misuse the name of real registered investment professionals or firms to create the appearance of legitimacy.
- Overly Consistent Returns – Any investment that consistently goes up month after month—or that provides remarkably steady returns regardless of market conditions—should raise suspicions, especially during turbulent times. Even the most stable investments can experience volatility once in a while.
- Complex Strategies – Avoid anyone who credits a highly complex investing technique for unusual success. Legitimate professionals should be able to explain clearly what they’re doing. It’s critical that you fully understand any investment you’re seriously considering—including what it is, what the risks are and how the investment makes money.
- Account Discrepancies – Unauthorized trades, missing funds or other problems with your account statements could be the result of a genuine error—or they could indicate churning or fraud. Keep an eye on your account statements to make sure account activity is consistent with your instructions and risk tolerance.
- Unusual Asset-Holding Arrangements – Is the investment professional also the custodian of your assets? Or is there an independent third-party custodian? It can be easier for fraud to occur if an investment professional is also the custodian of the assets and keeper of the accounts. Be extremely wary of sellers who request that you provide money to them personally, rather than through their registered firm, or that you use a specific trading platform to purchase or transfer assets.
- Pushy Salespeople – No reputable investment professional should push you to make an immediate decision about an investment or tell you that you’ve got to “act now.” If someone pressures you to decide on a sale or purchase, steer clear. Even if no fraud is taking place, this type of pressuring is inappropriate.
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