The world is populated immensely with information, market, and opinions. Ease of access to financial advice often blurs the line between qualified financial advisors and frauds. Differentiating between the two remains a careful process. There are certainly red flags and common behaviors to observe in scammers. Financial literacy becomes ever more important, but a few core concepts can keep you safe most of the time. Consciously allocating trust and information, verifying every transaction, and making your own decisions are vital concepts to hang onto.
1. The Allure of Over-the-top Returns
The first telltale sign of a potential fraud is the promise of unrealistic returns with little to no risk. The adage, “if it’s too good to be true, it probably isn’t,” holds especially true in the realm of finance. An advisor guaranteeing returns higher than 12-15% is likely leading you down a rabbit hole. Over the last 85 years, the U.S. stock market has averaged approximately 9.5% return, and even this isn’t a “safe” return, but one that is quite volatile.
2. The Pressure to Act Swiftly
Scammers often inspire a sense of urgency, artificially seeming to shrink the window of time available to decide on an investment opportunity. Emails and contact often contain phrases like “Urgent! Action needed! Don’t miss out!”. Legitimate opportunities will not disappear overnight, and a good advisor will not rush important financial decisions.
3. Consolidation of Your Funds
If you are encouraged to put all your money in one place, then there’s no professional on the other side of your partnership. Diversification is a basic principle of investing, and any advice that encourages otherwise ignores history suggesting it is a far safer and more secure approach to investing. If one market fails, then the investor would be left without any flexibility or value to transfer to another source of investment or opportunity.
4. Beware of the Affinity Scheme
An affinity scheme is a scam that targets a specific group, usually those who share the same religion, cultural background, or geographic region. Scammers take advantage of the inherent trust within these groups to peddle their fraudulent schemes. They may even be, or pretend to be, a part of the group to gain trust.
5. Excessive Activity with No Returns
If you notice an increase in frequency on your account and your returns are not proportionately increasing, evaluate your account and connections immediately. The scam known as “churning,” is where an advisor initiates frequent buys and sells, racking up commissions and often resulting in less-than-stellar investment returns. What appears as maybe lateral movement or small loss from a potentially poor financial advisor, is additionally a gain for the scammer.
6. Sharing Your Personal Information
Requests for sensitive personal and financial information should trigger your fight or flight response. The IRS rarely initiates phone calls, especially without prior written communication. Never disclose sensitive information unless you’ve initiated the call yourself, to a number listed on the website. Mail contact is most common, and you have no idea if it is really a trustworthy individual on the other side of the phone line or communication chain.
7. They Want to See Your Money as Their Money
If an advisor asks for direct access to your money or a power of attorney, it’s a serious warning sign. Always keep control of your money and require every financial action to be cleared with you first. Commonly, the psychological trick is to influence the target into believing in trusting them. They need them, so they say.
8. Contracts and Fine Print
Always ask for a contract and read it thoroughly before agreeing to pay money. If the advisor is hesitant to provide a contract upfront, it’s a strong indication that they might be trying to scam you. Once a contract is signed, the possibilities of altering it range from frustrating to potential losses. Tread carefully.
9. Credentials and Background Check
Take the time to verify an advisor’s credentials and background. Certifications and qualifications are specific and measured. If someone claims to have a credential they haven’t earned, it’s a clear sign of a scam. Websites like www.finra.org/brokercheck, www.adviserinfo.sec.gov, www.nasaa.org, www.naic.org, and www.cfp.net can aid in uncovering fraudulent advisors.
10. The Reddest Flag: A Ponzi Scheme
In a Ponzi Scheme, returns to existing investors are paid from funds contributed by new investors, with the owner pocketing a portion of the money.
In conclusion, it’s crucial to be vigilant and informed when seeking financial advice. Transparency and communication are the core values of a trustworthy legitimate advisor. Never hesitate to ask questions and always take your time before making any financial decisions. You have every right to know what’s being done with your money