Protecting Yourself from Financial Fraud
About This Course
“Have I got a deal for you?” When you hear these words, you may listen with extra caution. But even self-reliant, college-educated individuals with past experience in finance fall victim to fraud. Con artists use persuasion tactics to get to know their victims, gain their trust, and bilk them out of thousands of dollars’ worth of savings.
Help protect yourself from those intending to do you financial harm. Here you’ll learn about fraud persuasion tactics and hear first-hand how con artists perpetrate scams. Based on material supplied by the Financial Industry Regulatory Authority (FINRA) Foundation, this course provides fraud-spotting know-how that could give you the upper hand.
Approximately 20 minutes
- Pattie Christensen, ChFC, RICP
- Janet Todd, Assistant Vice President, Educational Programs
“If it’s too good to be true, it is.” That phrase is especially true for investments. Trust your instincts and follow two cardinal rules: ask a lot of questions and research, research, research. Fraudsters are counting on you not to investigate before you invest.
Take the time to do your own independent research. Be sure you understand a company’s business and its products or services before you invest. Know how you are going to make money on the investment. Stay away from investments you don’t understand. Here are a few simple tips and red flags:
Know the salesperson. Spend time checking out the salesperson even if you already know the person socially. Are they licensed to sell securities in your state? Have they or their firm had run-ins with regulators or other investors? Check out their disciplinary history using the SEC’s and FINRA’s free online databases. Your state securities regulator may have additional information.
Be wary of unsolicited offers. Be especially careful if you receive an unsolicited pitch to invest in a company or see it praised online but can’t find current financial information about it from independent sources. Common frauds are:
— “Pump and dump” schemes, where the promoters urge investors to buy a stock with a fast-rising price only to sell their shares when the price is high, leaving the investors with a worthless stock.
— International or “off-shore” investment recommendations. If something goes wrong, it’s harder to find out what happened and to locate money sent abroad.
Red flags for fraud and common persuasion tactics:
How do successful, financially intelligent people fall prey to investment fraud? Researchers have found that investment fraudsters hit their targets with an array of persuasion techniques
Watch for “phantom riches.” Compare promised yields with current returns on well-known stock indexes. Any investment opportunity that claims you’ll receive substantially more could be highly risky. Be careful of claims that an investment will make “incredible gains,” is a “breakout stock pick” or has “huge upside and almost no risk!” Claims like these are hallmarks of extreme risk or outright fraud.
“Guaranteed returns” aren’t. Every investment carries some degree of risk, which is reflected in the rate of return you can expect to receive. High returns entail high risks, possibly including a total loss on the investments. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are “guaranteed” or “can’t miss.” They try to plant an image in your head of what your life will be like when you are rich. Don’t believe it.
Beware of the “halo” effect. Investors can be blinded by a “halo” effect when a con artist comes across as likeable or trustworthy. Credibility can be faked. Check out the salesperson’s and the firm’s actual qualifications.
“Everyone is buying it.” Watch out for pitches that stress how “everyone is investing in this, so you should, too.” Think about whether you are interested in the product. If a sales presentation focuses on how many others have bought the product, this could be a red flag.
Pressure to send money RIGHT NOW. Scam artists often tell their victims that the offer is a once-in-a-lifetime offer, and it will be gone tomorrow. A solid investment will not disappear. Take the time you need to investigate and resist the pressure to send money quickly.
Reciprocity. Fraudsters often try to lure investors through free investment seminars, figuring if they do a small favor for you, such as supplying a free lunch, you will do a big favor for them and invest in their product. There is never a reason to make a quick decision on an investment. If you attend a free lunch, take the material home and research both the investment and the individual selling it before you invest. Always make sure the product is right for you and that you understand what you are buying and all the associated fees.
Tips & Resources - Investment Fraud
- For more about information see Ask Questions from Investor.gov.
- Look for the company’s financial statements on the SEC’s EDGAR filing system. You can also check out many investments by searching EDGAR.
- The SEC’s investor site - www.investor.gov
- Financial Industry Regulatory Authority (FINRA)
- North American Securities Administrators Association (NASAA) listing of State Regulators
- The SEC complaint hotline (800)732-0330
- Research your sales person and their company on FINRA.org