It’s easy enough to think of an investment as a rip-off when it plummets in value for legitimate reasons: market forces, the outmaneuvering of a competitor or even the lavish spending of a CEO who flies the company jet to wine and dine girlfriends on every continent, including Antarctica.
OK, so that last one’s a joke. But it’s truly no laughing matter when investors succumb to scams and shams that turn money into a liquid asset of another kind: one that pours down the drain.
“Invest in things that you understand,” says John Huber, a principal with Atlanta-based Financial Discovery Group. “If you have to draw a flow chart to figure out where the cash goes, it may be too complicated.”
Despite Huber’s view from the perch of experience, too many investors take the bait from unscrupulous wolves dressed in chic clothing. This is especially true for baby boomers and older investors who have accumulated sizable retirement accounts, according to the Retirement Industry Trust Association: “Pursuit of seniors’ nest eggs is one of the fastest-growing consumer fraud issues today.”
As for which schemes continue to dog the investment world, experts list five that are especially pervasive, with advice on how to defend yourself.
The promise of guaranteed returns. Because a few retirement investments offer payouts over time, investors can become confused when someone steps forward with an amazing opportunity the rest of the market has missed. “Guaranteed returns are a red flag,” Huber says. “The only guarantees are in annuities — and their payouts usually reflect the low interest-rate environment.”
If you’re even remotely tempted because your Uncle Bigbucks sent the opportunity your way, always get a second opinion. According to a 2007 survey by the Financial Industry Regulatory Authority, 70 percent of investor scams hit people who take investing advice from a relative, friend, neighbor or co-worker. “Run the investment past your financial advisor or CPA,” Huber says.
Requests for personal information upfront. This scenario could become especially pervasive now that the Securities and Exchange Commission has enacted Regulation A+. This regulation allows startups to raise money from nonaccredited investors (those who make less than $200,000 annually or have less than $1 million in assets). All it takes is a smooth sales pitch about “the next Google” to get nonaccredited types to share their valuable financial particulars. “Getting in on the hottest new companies ahead of institutional investors can be a great thing,” says Rod Turner, CEO and founder of Manhattan Street Capital, based in San Diego. “But be careful to abide by the rules and be on high alert to avoid the risk of a fraud.”
Investors need to be sure they are dealing with a legitimate company or platform, Turner says, and not give up any more information than is required until the time has come to invest.
Pump and dump. If this sounds like a new dance for Miley Cyrus to debut at the next music awards show, consider that this is crude choreography of sorts. The premise is simple: “A group of informed investors touts the quality of a stock to a larger, uninformed group — and sells after the stock has peaked,” says Steve Berg, CFO of O.penVAPE and a former managing director at Wells Fargo and UBS. That might sound like good, old-fashioned capitalist savvy, “but it’s highly illegal,” he says.
Pump and dump “is generally used with smaller, less well-known companies, for which it’s easier to manipulate the price,” Berg says. Such companies often evade scrutiny, so if you can’t investigate or research them, stay away.
Emailed investment solicitations. It’s easy to blow off emails that begin “Hello, my dear,” or “About your $1 million lottery prize …” But with the new implementation of EMV credit card chips in the U.S., thwarted crooks are turning their attention to sophisticated investment scams via email. In the meantime, “People continue to be duped by ludicrous offers,” Berg says. “Additionally, the Internet has eroded barriers that once prevented foreign scammers from targeting domestic investors, such as time zones, the high costs of international telephone calls and differing currencies.”
This brand of scamming also targets small businesses and sole proprietors “when an individual receives a payment request from an unknown party,” says Robert Strang, chief investment officer of Investigative Management Group and a board member of ACG New York.
Since email investment scams often target older investors, teach family members and friends to scrutinize — or simply delete — financial emails from unknown senders. Another defense involves setting up email screening, or blocking messages with the word “investment” in the subject head. (In this case, alert your financial planners and advisors so they don’t get blocked, too.)
Revenue sharing in 401(k)s. This conflict of interest is hard to spot because it happens on an administrative level. But it’s “a total kickback,” says Bobby Monks, the author of “Uninvested” and former chairman of Institutional Shareholder Services. In this scenario, mutual fund companies pay 401(k) plan administrators or sponsors to put their funds in retirement plan menus. That means you could invest in a fund not based on its merit, but its ability to wiggle into your plan. “This certainly qualifies as a scam, especially when the target includes vulnerable retirement savers who assume that their 401(k) has been designed in their best interest,” Monks says.
Monks says the best thing investors can do when they suspect such as scheme is to be direct. “Ask your employer or 401(k) administrator why they selected the funds offered in your plan,” he says. “If revenue sharing was involved, take a very close look at the fees being charged and how they compare with the potential advantages of tax deferment and a company match.”
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5 Scary Schemes and Scams That Target Investors originally appeared on usnews.com
