Avoiding Investment Scams

We’ve already covered credit card fraud on this blog, and in this article we’ll talk some more about fraud and how to prevent it.

According to the 2012 CSA Investor Index, 27% of Canadians believe that they have been targeted for investment fraud at some point. 4.6% of Canadians believe they’ve been the victims of investment fraud. Over half of those affected lost their entire investment. Nearly all the rest lost over half their investment.

Seniors should be especially careful. Fraudsters love to target the elderly. The older population can be easily confused, and have big, juicy retirement funds.

How can you protect yourself from these blood-sucking financial schemes? Here are six steps you can take to prevent investment fraud.

Don’t let yourself be rushed

Scammers love to use limited-time offers—hot deals that will go away forever unless you act right now.

Whenever you hear rushed, panicky language like this, it could be an indicator of potential investment fraud.

Fraudsters know that if you have the chance to think about the offer thoroughly, you’ll see what a bad investment it is and say no. They want you to act quickly, before you can research their credentials. They may claim to have secret information that will make you a lot of money before it becomes public knowledge.

Take your time and don’t be hasty. Reputable advisors can help you think over an investment opportunity before rushing into financial decisions.

Ask lots of questions

Pitching a fraud to a well-informed investor isn’t worth fraudsters’ time. Instead, they’ll target uninformed and naïve investors. Asking questions can be enough to make a fraudster back off.

Ask for the investment prospectus. If there isn’t one, don’t invest.

Reputable advisors will be happy to talk you through an investment, whereas scammers just want you to sign as fast as possible. If you don’t understand the product, don’t sign anything.

Check credentials

Fraudsters will look and sound convincing—if they didn’t, they wouldn’t make any money. No matter how professional the individual seems, do a background check. CSA/ACVM provides free online tools for checking your advisor’s credentials. Only work with an advisor who is a member of a self-regulatory organization within the industry, for example the MFDA or IIROC.

You can also see if the advisor has ever been disciplined by an industry body or a provincial securities commission. Any disciplinary history at all is a red flag.

Check the credentials of the investment product itself, too. Products that aren’t scams are usually registered with a provincial securities commission. To find out if there is such a registration, call your securities commission and see if they’ve ever heard of the product. If they haven’t, don’t sign.

By taking these steps and doing a little research, you’ll be ready to halt fraudulent deals before they have the chance to hurt you financially.

Beware of guaranteed high returns

Unfortunately, it is difficult to get a high return on your investments.

A good savings account is likely to have an interest rate of about 1%. There are plenty of perfectly legitimate investments out there with a higher return, but they tend to come at a higher risk.

A high return with low risk is a bad sign.

An ordinary, diversified investment portfolio might carry an annual return of about 5%, and some of the investments will be calculated risks. A guaranteed rate of return of 10% is almost certainly a scam.

Just because your friend made money doesn’t mean you will

According to the CSA Investor Index, 12% of fraud attempts are affinity frauds, which means the fraudulent investment is introduced to you by a friend or relative. You may have experienced one or two multi-level-marketing schemes like this, with your loved ones peddling low-quality products to you and then suggesting you join the sales team.

The tricky thing is, some common investment frauds like Ponzi schemes actually do pay out to early investors, making them look legitimate and profitable. The testimony of a trusted friend make it even more tempting.

Your friend might have made a whole pile of money, but that doesn’t mean that you aren’t being played.

Report your suspicions

The fewer active fraudsters there are, the less investment fraud will happen. If you believe that you have been targeted by an investment fraudster, report it immediately! Fraud reporting systems vary from province to province, but a good place to start is your province’s Securities Commission. You should also contact your local police department or the RCMP.

As we all become more aware of the warning signs of fraud, fraudsters will have less and less uninformed investors to play.

Use the tips from this article to keep an eye out for investment fraud.

• Don’t let yourself be rushed
• Ask lots of questions
• Check credentials
• Beware of guaranteed high returns
• Just because your friend made money doesn’t mean you will
• Report your suspicions

Always remember that if you run into an investment deal that seems too good to be true, it probably is.