Investments can be both fun and financially lucrative. However, it’s important to remain diligent. Brokers may expose themselves to conflicts of interest, some legal and some illegal. It’s not only the investor but also the broker, adviser, and member firm which stand to profit off of the investor’s hard-earned money. Be wary of brokers who make unqualified guarantees. All investments have some inherent risk. Investors should be skeptical about brokers who make performance guarantees about investment products.
Additionally, you want to avoid placing money in an unregistered product. Many investment scams involve unlicensed individuals selling securities that are not registered on the federal or state level. These unregistered securities can include stocks, bonds, notes, hedge funds, oil or gas deals, and fictitious instruments, such as prime bank investments. A broker may prey on an investor’s ignorance by telling them point blank that the investment is an unregistered product. If this happens, run! Also, consider reporting the broker to the SEC or FINRA. If he or she doesn’t tell you point blank, they may try to trick you by saying the product is registered in another state or the product is pending registration. Never be afraid to follow up with questions or contact the SEC or FINRA directly.
If your investment shows consistently increasing returns, or shows shockingly consistent returns regardless of market conditions—especially in turbulent times, it might be promising overly consistent returns. Every investment, even the most stable investment in the world, will experience down periods.
Avoid anyone who credits a highly complex investment strategy for unusual success. An investment professional worth his salt should be able to explain his investment methods to you clearly. There are certain pieces of information that you should know about any investment that you are seriously considering, including what it is, what the risks are, and how the investment makes money. If your investment professional brushes off your questions about these pieces of information, keep pressing him. No investment is too complex for the layman investor to understand.
Registered securities must provide documentation to the SEC. If your investment has missing documentation, you may be involved in an unregistered security. There should be a “prospectus” in the case of a stock or mutual fund, or an “offer circular” in the case of a bond. These are REQUIRED for legitimate investments.
Review your statements for account discrepancies. These include unauthorized trades, missing funds or other problems with your account statements. These could be a result of a legitimate error, or they could indicate churning or fraud. Keep an eye on your account statements to make sure account activity is consistent with your instructions, and be sure you know who holds your assets.
Last, but certainly not least, be wary of pushy sales people. A legitimate investment professional should not push you to make hasty decisions with your money, or tell you that you’ve got to “act now.” If someone pressures you to decide on a stock sale or purchase, steer clear. Even if no fraud is taking place, this type of pressuring is inappropriate.
Red Flags for Fraud