Investing can seem like a difficult and complicated subject. Perhaps that is why so many individual investors turn to stock brokers and other advisors to manage their money. While most of these financial professionals and ethical and honest, others are not.
Learning to spot the early warning signs of an investment scam is one of the best ways to keep your money safe. Falling victim to an investment fraud can hurt you in many ways and haunt you for years to come. Not only do you lose money, but you lose out on the investment returns you could have made in the market. Falling victim to such a scam can also send your retirement planning off track and cause other long-term problems.
The best defense against those con artists is knowledge. Knowing what to look for can keep you – and your money – safe. If any of the following items apply to your current broker or securities firm, you may want to investigate a little more closely.
Has a History of Steady and/or Unrealistically High Returns
One of the biggest warning signs of an investment fraud is a history of unrealistically high or inexplicably steady returns. Returns that are steady from year to year might make sense in a money market fund, but not in a stock market investment. Unrealistically high returns are another red flag. No money manager, no matter how talented, can consistently beat the market year after year. If you see this kind of pattern in your holdings, it is time to start asking some questions.
Touts Honesty and Integrity
Honesty should be a given – not a selling point. Beware of any broker that goes out of their way to tout how honest and ethical they are. Touting honesty and integrity could be a sign of a bad broker.
Asks You to Make Checks Payable to the Broker or the Firm
The only checks you should write to the broker or the firm should be for direct fees. If you are working with a fee-only broker, you might be asked to write a check for the annual service fee on your account. All other checks should be written directly to the investment firm. Watch out for brokerage firms that insist you write checks to them directly. That is a big red flag for investment fraud.
Provides its Own Monthly Statements
This is another major red flag. Ask a lot of questions if you receive your monthly statements directly from the broker. Your statement should come from the companies where you have your investments, not from the brokerage firm itself. Statements generated by the brokerage firm are easy to falsify, and that is exactly what has happened in many past fraud cases.
The Broker Has a Long Disciplinary Record – Or No Record at All
It is important to check the record of any broker you are considering. Check with the SEC, FINRA and other appropriate agencies to see if the broker or firm has been involved in disciplinary actions. A long history of disciplinary actions should send up a big red flag. You should also be wary if the broker has no record at all with those organizations. That could indicate that the broker is not properly licensed to sell securities.
Their Marketing Consists Mainly of Testimonials
Watch out for testimonials – they might look good, but they are often the first sign of a fraud. Shady companies have been using testimonials for years – to tout phony weight loss products, to promote inferior products and to sell unlicensed securities to unwary investors. Be wary of any firm whose website and marketing materials are full of testimonials from supposedly happy customers.