Are you worried that an investment you’re considering might be a Ponzi scheme? Are you afraid that your financial planner might turn out to be the next Bernie Madoff?
If you answered yes to either of these questions, then follow these simple tips to avoid potential investment scams and steer clear of con artists posing as trusted advisors.
Tip 1: Beware of the promise of high returns and low risk.
A lot of investment scams attract investors by promising very high returns will little or no risk. But that’s not how things work in the real world. If you want to earn higher returns, then you’re going to have to take on more risk.
Insurance agents often use the promise of equity-like returns without any downside risks to sell equity-indexed annuities. While equity-indexed annuities from reputable insurance companies might not be scams or Ponzi schemes, there will be contract details that work against you and pose hidden risks (e.g., rate caps, participation rates, spreads, margins, asset fees, etc.). So once again, know that high returns don’t come with low risks!
Tip 2: Be leery of consistent returns.
All investments fluctuate in value. The higher the expected return of an investment, the more volatility you should expect. Be leery of anyone that promises consistent, positive returns regardless of the market environment.
Once again, there are annuities and other structured investments that aren’t scams or Ponzi schemes that do make the promise of somewhat higher-than-average consistent returns, but the dangers will be in the details. Be sure to read the contract of any investment or product that you’re considering purchasing and stay away if you don’t understand something about it!
Tip 3: Check for registrations.
Many investment scams involve unregistered securities, so make sure any investment you buy is registered with the appropriate regulators. And if you’re getting advice from someone, make sure that he or she is registered with the appropriate agencies as well.
You can find information about Registered Investment Advisor (RIA) firms like ours through the Securities and Exchange Commission website. Advisors that are affiliated with broker-dealers can be researched through the Financial Industry Regulatory Authority’s Broker Check system.
I suggest contacting the appropriate state regulator to double-check any information you find about a potential advisor through the SEC or FINRA website. You can find a list of state regulators through the North American Securities Administrators Association (NASAA).
You should also consider doing a quick Google search for information about a potential investment or financial advisor! You can dig up a lot of information through web searches that might not be available or required on official reports.
Tip 4: Check your statement.
You should monitor your investment account regularly, either online or through paper statements and trade confirmations. Make sure you receive statements at least quarterly, if not monthly, and that trade confirmations are sent after any trading activity takes place in your account.
Your statement should list each investment you hold as well as the market value at the time the statement was generated. Review the statements and trade confirmations for inaccuracies and be sure to ask about anything you don’t understand.
Tip 5: Avoid complex or secretive strategies.
Swindlers often use complex or secretive strategies as a smokescreen to cover up what they’re doing. That’s why I suggest investing in straightforward investments like mutual funds and exchange-traded funds (ETFs). Complicated doesn’t necessarily mean better in the investment world. In fact, added complexity usually means higher fees that reduce your potential returns.
We use low-cost index and passively-managed mutual funds and ETFs from companies like Vanguard, iShares, and Dimensional Fund Advisors for ourselves and for our clients. These funds and ETFs are completely transparent when it comes to the strategies they use and investments they hold, so there’s no need go worry or guess about what they’re doing with our money at any given time.
Tip 6: Get a second opinion.
When in doubt, get a second opinion from someone that’s not directly related to an investment that you’re considering like a CPA or an independent, fee-only financial advisor. Don’t let anyone pressure you into making a decision before you’ve had time to do enough research to feel comfortable.
You can find a list of questions to ask a potential financial planner on our blog here.