We’ve seen it happen far too many times. An investor gets introduced by mutual friends to a financial professional who almost immediately begins pitching the investor on an amazing opportunity. Because the investment professional seems like a good guy or gal, and because he or she was introduced by someone the investor already knows and trusts, the investor unconsciously transfers that sense of trust to the broker or hedge fund manager or mutual fund whiz. The investor’s guard is already down.
High Returns, Low Risk, Likely Scam
The financial professional’s pitch is simple and almost irresistible. They offer high guaranteed returns at almost no risk to the investor. They might be vague on the details of the actual investment, or they may be extremely specific.
When the investor hesitates, the financial professional starts to apply pressure. They say the time to invest is now; you don’t want to miss this opportunity; I can’t promise this will be available tomorrow.
Just Because You’re a Smart Cookie Doesn’t Mean You’re a Sophisticated Investor
The investor may be a sophisticated person, but they’re not a sophisticated investor. Most importantly, they’re a trusting person who wants to believe the best about other people. And, sure, they might also be eager to make some extra money. Maybe they want to pad their retirement savings. Maybe they just want to get a higher return on the money they already have invested. Maybe they just like the feeling of doing something exciting and daring.
Then the trap closes. The investor signs over the money. Months pass. Maybe even years. But eventually they get the bad news. The financial professional they trusted with their money was a crook.
Crooks come in all shapes and sizes. What they have in common is the way they find investors and pitch.
Three Signs you might want to run, not walk, away from an investment opportunity:
#1 The investment opportunity sounds “too good to be true.”
It doesn’t matter whether it’s unrealistically high returns or impossibly low risk, the typical investment scam relies on our very human desire to get something for nothing, reward for no risk. In this case, the sage advice is the one you’ve already heard many times. If it sounds too good to be true, it probably is.
#2 You feel rushed and pressured into investing your money
Legitimate financial professionals with legitimate investment opportunities do not pressure clients into turning over their money. The stock market has been around for one hundred years; the opportunity to invest is not going anywhere. No retail investors should be enticed by an investment that has an expiration date or relies on market timing. It’s bunk.
#3 The person behind the investment opportunity is not licensed by FINRA or the SEC
While of course some crooks continue to hold licenses by the financial industry regulatory authorities, a very easy way to tell if you’re being taken for a ride is to visit FINRA’s BrokerCheck website or the SEC’s website to see if the person pitching you is a licensed professional investor. These sites have information about all licensed professionals, including their work history and any evidence of disputes or terminations. This should be the first place you go when considering investing with someone for the first time. You should even go there to check out your current broker or CFA. It’s an incredibly rich and useful resource that far too few investors utilize.
