One of the most underestimated parts of being a savvy investor is identifying and defending against financial abuse and exploitation. While seniors and those with disabilities are frequent targets, financial exploitation and abuse can happen to anyone.
Reports of fraud in investment accounts are on the rise. The Federal Trade Commission reported 107,699 instances of investment-related fraud, totaling $4.6 billion in losses, in 2023. That was an all-time high and a 14% increase over losses reported in 2022, and more money was lost in investment scams than in any other fraud category.
As a certified financial planner professional, I consider protecting yourself from losses one of the most important topics I discuss with clients.
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Here’s how to recognize investment fraud and abuse, and how to safeguard your money:
— Recognizing financial abuse and fraud.
— Elder financial abuse.
— Marital financial abuse.
— Preventing financial abuse in investment accounts.
Recognizing Financial Abuse and Fraud
Theft is one thing; it’s a shock when someone steals from you outright. But investment abuse can cut much deeper because you often play a role in making it happen. You might have given the green light to move forward with an investment, only to realize later it was a terrible decision.
Investment frauds can take many forms, but they all have one thing in common: They’re designed to separate you from your hard-earned money. Here are common types of investment fraud to watch out for:
Promissory Note Scams
These are IOUs from companies or individuals that promise a fixed return over a specific period. Fraudsters can lure investors with the promise of “guaranteed” returns when the notes may be worthless or tied to nonexistent assets.
Ponzi or Pyramid Schemes
Ponzi schemes rely on money from new investors to pay “returns” to earlier investors. No legitimate investment exists, but it creates the appearance of profitability. Pyramid schemes rely on recruiting new participants to keep money flowing up the chain.
Real Estate Investment Fraud
Real estate can be a solid investment. Fraud happens when you’re promised low-risk, high-return investments in properties that don’t exist, aren’t what they claim to be, or are way overvalued.
Cryptocurrency Scams
Scammers can exploit the hype and complexity of cryptocurrencies like Bitcoin. They might use fake celebrity endorsements or “exclusive” insider tips to lure you in.
Social Media or Internet Fraud
Investing victims can be drawn in through online platforms, emails and even dating apps. Scammers can offer “foolproof” trading systems or the chance to get in on the ground floor of a “can’t miss” opportunity.
Elder Financial Abuse
Elder financial abuse involves the unauthorized or improper use of an older adult’s financial resources. According to the U.S. Department of Justice, it’s one of the most common types of elder abuse. Scammers often target seniors due to their accumulated wealth and perceived vulnerability, especially if they’re experiencing cognitive decline or social isolation.
I’ve seen elder abuse firsthand, from outright theft of money or possessions to more subtle tactics like pressuring an older person to change their will or grant power of attorney to someone with ill intentions. Sometimes, the abuser is someone the senior knows and trusts, like a family member, caregiver or close friend, which can make it even harder for the victim to speak up and seek help.
Marital Financial Abuse
Marital financial abuse is about control. It’s when one spouse uses money as a tool to dominate, manipulate or intimidate their partner. This can take many forms, from restricting access to bank accounts and credit cards to forbidding the victim to work outside the home or pursue education and training opportunities.
The National Network to End Domestic Violence (NNEDV) reports financial abuse in 99% of domestic violence cases. Victims often find themselves trapped in a cycle of dependence and fear, unable to leave the relationship because they lack the financial resources to support themselves and their children.
Preventing Financial Abuse in Investment Accounts
It’s not always easy to spot the red flags, but staying vigilant and following these key principles can reduce your risk of falling victim to investment fraud:
Choose an Investment Firm and Advisor You Can Trust
The first and most important step in safeguarding your investments is to choose a reputable brokerage firm, investment company or bank to house your assets. Make sure it’s properly licensed and regulated by the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA).
If you decide to work with a financial advisor, take the time to thoroughly vet their background, qualifications and disciplinary history. Look for advisors with respected designations like the CFP® certification, CFA charterholder or registered investment advisor (RIA) designation. These professionals are legally obligated to put your interests first.
Maintain Oversight and Secure Your Accounts
“Elderly individuals, people with disabilities, and inexperienced investors are generally the most common victims of financial abuse,” says CFP professional Bonnie Maize. “They can protect themselves by maintaining regular oversight of their accounts and setting up multifactor authentication.”
She also suggests adding a trusted contact to your accounts. “Designating a trusted contact ensures that your financial institution can reach out to someone you trust if they notice suspicious activity, offering an additional layer of protection against financial abuse.”
Understand and Be Comfortable With the Level of Risk
Every investment carries some degree of risk. The trick is understanding exactly what you’re getting into. “One of the best ways to avoid financial abuse in investment accounts is to keep investments as simple as possible,” says John Stoj, a financial advisor in Atlanta and founder of Verbatim Financial. “The more accounts, the greater the number of investments, and the more types of investments all make it much easier for someone to take advantage of a person. A smaller number of investments makes it easier for even inexperienced investors to spot problems.”
Review the documents carefully before investing. If you don’t fully understand how an investment works or what could go wrong, take a step back and do more research until you feel confident in your decision.
Don’t Let Anyone Rush You Into an Investment Decision
A false sense of urgency is one of the most common tactics fraudsters use. They might say an opportunity is only available for a limited time, or you must act fast to get in on the ground floor. But legitimate investments will still be there tomorrow.
Don’t let anyone pressure you into making a hasty decision. Take your time, ask questions and trust your instincts. If someone tries to rush you, that’s a sign that something isn’t right.
Research the Investment Program
Before committing any of your hard-earned money to an investment program, do your due diligence. Research the company or individual offering the investment. Include words like “review,” “scam,” “fraud” or “complaint” with the firm’s name in your search.
Check with the Securities and Exchange Commission (SEC),Financial Industry Regulatory Authority (FINRA) or your state securities regulator to see if the investment and the person offering it are properly licensed and registered. A lack of a track record, unclear or unrealistic promises, or a history of regulatory issues are warnings.
Safeguard Your Financial Future
Investing can be an exciting and rewarding way to grow your wealth, but it’s crucial to approach it with a healthy dose of caution and skepticism. As an investor, you must be your own advocate and verify claims made about an investment opportunity.
Don’t let anyone rush you into a decision or downplay the risks involved, trust your instincts and remember that building wealth is a gradual process, not an overnight miracle.
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Financial Abuse and Fraud in Investment Accounts originally appeared on usnews.com
