Investment fraud is as old as the world itself. From the day we stopped trading livestock and produce and began using money as a means of exchange, dishonest people have been trying to cheat and swindle it away. Though it is an old problem, recently Bernie Madoff and now (allegedly) Allen Stanford have brought it back to our attention in a big way.
As an investment professional as well as a consumer, it is an outrage that both inexperienced and savvy investors alike get taken advantage of by con-men and charlatans. So in an effort to battle these wrongs and protect you from being a victim yourself, I offer these guidelines to reduce the risk of imprudent investment as well as fraud.
1. Educate yourself.
Buy a basic investment primer if you don’t know the basic nature and risk vs. return characteristics of traditional stock, bond, money market, CD & mutual fund investments. Double digit returns invariably mean higher volatility. Annuities and retirement plans are long term investments. If an investment sounds “too good to be true”, it probably is! Avoid the seduction of “alternative investments” except as a minor piece of a diversified portfolio.
2. Map out your goals before shopping or investing.
What is the purpose and time horizon for the planned investment and your need for liquidity?
3. Who are you considering investing with?
Never do business with a stranger you’ve only met over the phone or internet. You have been detecting clues about liars all your life by looking people in the eye and watching their response to impromptu questions! Get their business card It should show evidence of regulatory oversight and ideally professional designations (such as CFP®, CHFC or CPA PFS) which show evidence of continuous training and ethics reviews. Almost all investments are regulated either as securities or insurance and you can check out the investment advisor at http://www.finra.org/brokercheck or verify insurance licensing with the state. For Texas go to http://www.tdi.state.tx.us.
4. Be careful mixing business with pleasure.
Affinity fraud occurs when investors relax their investment scrutiny because they know or know of the salesperson from church, civic or social organizations. Con-men frequently depend on this approach!
5. Beware of “edutainment”.
Radio, TV and newspaper commentators are not legally responsible for their stated views and some program formats promote audience interest by featuring two radically different viewpoints. Merely writing a popular book or appearing on Oprah does not make someone an investment expert or appropriate investment advisor!
6. Ask tough questions.
How is the salesperson compensated? Does he or she have an incentive to promote “new issues” or proprietary products? Will there be regular written performance reports and is online look up available?
7. Don’t be rushed – check it out.
Say no to any salesperson that pressures you to make an immediate decision. Get an independent research report on any stock or bond and a prospectus on mutual funds or variable annuities. Be suspicious of “hot tips” or “one time offers”.
8. Benefit from internal controls.
Never make investments in cash or payable to the salesperson. Most investments can be held within a SIPC insured brokerage account and initial investments should be payable by check to the brokerage firm (or insurance company).
9. Limit your exposure.
Limit the amount you invest in any one security to 5 – 10% of your investment capital. Diversification is your friend!