Research has discovered that perpetrators of investment fraud use a number of different persuasion techniques that are geared toward different psychological profiles. This is how they are sometimes able to hook individuals with relatively high financial and investment IQs. Typical persuasions include:
- That an investment represents a “once-in-a-lifetime opportunity” you will miss out on if you do not act. This appeals to our inner greed and not wanting to pass up an opportunity to get rich fast.
- That high investment returns are “guaranteed” and “risk-free.” In reality, there is no such thing as a guaranteed, high-return investment, but we all want to believe that we can strike it rich without taking any risk.
- That, “everyone else is investing so you should, too.” This is supposed to make you feel like you are the only one who is going to miss out if you do not invest. However, following the herd is not the way you should make investment decisions.
- That you have to invest right away. Investment scammers do not want you to take the time to investigate them or their supposed investment — they want you to make an emotional decision in the moment.
How to Protect Yourself
So what can you do to guard yourself against falling victim to investment fraud? Here are three suggestions:
- Adopt a healthy level of suspicion and skepticism. This is especially true with regard to any unsolicited calls or emails that you receive touting a supposed investment opportunity. Ask questions — lots of them — and if something looks too good to be true, well, you know what this probably means.
For example, Madoff was paying his investors a consistent return every month, regardless of what was happening in the financial markets. This should have raised suspicions because the markets (especially equity markets) fluctuate over time, which should result in payouts that are more uneven. In reality, he was just using money contributed by new investors to pay off old investors.
- Do some research on the supposed opportunity and investment broker. After you ask initial questions on investment policy and risk management, do some deeper digging on your own. Do not just rely on message board postings, news releases or other information provided by the investment broker. Go to the SEC’s EDGAR filing system to search for more information about companies, including their activities, registration statements, prospectuses, periodic reports and financial statements.
The same goes for the investment broker. Find out whether the broker is licensed to sell securities in your state, and search the FINRA online database BrokerCheck to find out if he or she has any disciplinary history with regulators.
- Confirm the existence of an outside custodian. All investment advisors should use an outside custodian to operate as the broker-dealer to execute and settle trades as well as prepare and mail investment statements. This enables you to verify your assets and returns yourself by going directly to the custodian, rather than just relying on your broker’s honesty in reporting assets and returns. By operating as his own broker-dealer, Madoff was able to create false investment statements that led his victims to believe that everything was OK — right up until the moment they realized it wasn’t. By then, it was too late.
Falling victim to investment fraud is one of the most traumatic events that can befall an individual. Countless victims have lost their entire life savings to fraudsters, sometimes leaving them destitute or unable to retire as they had been planning to do all their lives. Be diligent in guarding yourself and your family against investment fraud by putting these suggestions into practice today, but don't let this put you off investing. A diversified portfolio that includes stocks plays a vital role in helping you to save for retirement. Let the free Retirement Planner by MoneyTips help you calculate when you can retire without jeopardizing your lifestyle.