The media is full of stories about investment fraud and sales abuse. Wells Fargo was sued by the State of California for selling investments that were not as safe as reported. Bank of America was sued for involvement in a Ponzi scheme. Ameriprise paid a fine for selling products unsuited to clients retirement accounts. And of course the Bernie Madoff hedge fund scandal where people lost millions.
Now is a great time to review some methods to protect yourself from possible investment fraud and misrepresentation.
1. If an investment salesman uses the following or similar phrases, then you should be wary and extra careful:
high rate of return
your investment is guaranteed against loss
you must invest now
2. Security laws protect investors by requiring companies to provide investors with specific written information about the company. Unfortunately, this information is very detailed and is buried amongst dozens of pages of the prospectus. Security laws safeguards are of no value if you don’t read the information prior to the purchase.
3. Be aware of the risk associated with an investment. Most people know that a certificate of deposit at a bank is less risky than investing with someone who contacted you by phone or investing with someone you know through your church or a friend. Many people do not know how to assess the risk of bonds, mutual funds, or stocks.
4. Suppose a friend tells you about an investment opportunity that has earned returns of 20% during the past year. Your investments have been performing poorly and you’re interested in earning higher returns. This person is your friend and you trust them, however you should not invest until you call your securities regulator to see if the investment has been registered to be sold legally. It would be wise to get a second opinion from an investment professional who is not selling the investment.
5. When making an investment, do not rely on testimonials of others, advertising and news stories in the media, on the Internet, or according to technical data that you don’t really understand. You should rely on information that has been filed with your securities regulator. If you don’t understand it don’t buy it.
6. The best way to protect yourself from investment fraud include:
Read all disclosure documents about the investment
Be skeptical and ask questions
Never write a check for investment in the name of your salesperson
The NASAA recommends investors seek the advice from an independent objective source (a professional who is not selling the investment).
7. When dealing with an investment salesperson who you consider reputable, you should:
Request copies of opening documentation to verify that your investment goals and objectives are stated correctly
Evaluate your salesperson’s recommendations by doing your own research before you buy
Review all correspondence and account statements when received
Never allow the salesperson to manager assets as they see fit
8. Numerous investments have been used to defraud the public including:
short-term promissory notes
deeds of trust
offshore investments to avoid taxes
Nigerian advance fee letters amongst others.
If it sounds too good to be true it probably is!
9. If you work with the an investment salesperson and he or she asks you to invest in a product that they are really excited about but the recommendation is different from financial products you have previously invested in, you should be sure to check with your security regulator to see if there’s any information on the investment product and that the salesperson is authorized to sell that product.
10. Do not assume an investment is legitimate just because the promotional materials and company website look professional, have a prestigious office location, other investors report quick upfront returns or the company has an official sounding name. Make the decision only after completing your due diligence.
11. Remember, no one insures you against investment loss. Make sure that your investments are appropriate for your risk tolerance (your ability to mentally handle the ups and downs), your risk capacity (your financial situation), your goals, and your timeframe.
12. Whenever the sale of investment generates a commission for the salesperson, there is a possibility of misrepresentation or that it may not be as well suited to your circumstance and situation. This is the reason investors are wise to get a second opinion from an investment professional who does not sell product but only provides objective advice.
This article is for informational purposes and should not be taken as legal, tax or investment advice.
Photo by: Brian Rosengrant