Investment fraud affects people of all backgrounds and education levels. Scam artists don’t discriminate. The best thing an investor can do to protect him or herself from fraud is to be aware of common fraud tactics and watch out for the “red flags” of financial abuse and misconduct. The Financial Industry Regulatory Authority (FINRA) highlights the seven biggest “red flags” of investment fraud in an Investor Alert on their website.
The main warning signs to watch for are:
- Guarantees on returns. All investments carry some amount of risk. A promoted “guarantee” or a “sure thing” is a sign the advisor or sales agent may be misrepresenting what they are selling.
- An unregistered security or sales agent. Many investment scams are run by unregistered agents selling “private offerings” in an unregistered company. Research the salesperson and investment to ensure that both are properly registered and licensed.
- Returns that don’t fluctuate with the market or seem overly consistent. If an investment product gains a steady return month after month, particularly when the market is experiencing significant fluctuations, this could be a sign the product is a scam.
- An overly complex investment product. A registered securities agent or stockbroker should always be able to clearly explain the investment strategy of any product being offered. An investor should understand the risks, benefits, and expected results before purchasing it. If he or she cannot make sense of it, it is best to stay away.
- Missing documentation. Make sure documentation or offering materials are provided. If the sales agent doesn’t provide a prospectus or an offering circular, the product may not be legitimate.
- Inaccurate documentation and statements. Double-check all account documentation and account statements for errors, missing funds, and unauthorized activity.
- Pushy sales tactics. A legitimate professional shouldn’t pressure an investor to act quickly. A common tactic is to put an unreasonable time limit on the decision to invest, or the investor will “miss out.” This is a significant red flag.
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