Fraudsters and scam artists use an arsenal of tricks to separate you from your cash. Here are some red flags that may signal potential problems with a product or security, including investment frauds and scams:
Investments with high guaranteed returns with little or no risk
Claims of huge gains with almost no risk are illusions or “phantom riches” for unsuspecting investors, despite the efforts of fraudsters to convince you otherwise. All investments carry some degree of risk. Fraudsters dangle the prospects of easy money in front of you to entice you to invest. You should be suspect of an investment that is purportedly both low risk and high return because it falls into the category of “too good to be true.”
Scam artists use the tactic of “Don’t miss this opportunity – get in now!” to pressure you into making a quick decision. Scammers love to make this claim. A “limited time only” deal also makes the investment seem more desirable. You should resist the temptation to invest quickly. Instead, take the time needed to investigate any investment opportunity and get independent third-party advice.
Everyone is buying
You should beware of pitches stressing how “other savvy investors have invested, so you should too.” Just because others such as successful investors and wealthy celebrities bought a product or security doesn’t mean that it’s right for your portfolio. A variation on this theme is the claim that your friends are investing, so why shouldn’t you? This approach relies on the trust you place in your friends, which might be misplaced because they could be wrong or the salesperson could be lying.
Pressure to buy quickly
Fraudsters and scam artists often create a false sense of urgency by claiming limited supply. They want you to buy quickly so that you won’t have time to figure out their game. No reputable investment professional should use high-pressure tactics to push you to make a quick decision. Thus, you should steer clear of a pushy salesperson.
Overly consistent returns
Although not applicable to all investments, you should be suspicious of investments, such as common stocks or equity mutual funds, providing consistently stable returns regardless of market conditions. Returns generally vary over time due to market volatility.
Free investment seminar and meal
Another tactic that fraudsters use to attract investors is offering a free seminar with the promise to educate those attending about investing strategies or managing money in retirement. The real purpose of such seminars is often to lure new clients and to sell investment products or services. Fraudsters rely on the concept of reciprocity. That is, if they do a small favor for you, such as providing an expensive lunch or dinner, you’re more likely to do them a big favor in return and buy what they are selling. Although you might not get a hard sales pitch during the seminar, you can expect high-pressure tactics during follow-up contacts from the person selling the investment.
Unregistered products and salespeople
Anyone offering to sell you an investment should be registered and licensed. If they aren’t certified, they could have little, if any, investment knowledge or experience. You should research the background of the individuals and firms wanting to sell you investment products.
If the salesperson doesn’t answer your questions directly, this individual is probably trying to keep you from seeing the truth. Those who have nothing to hide should willingly respond to your queries.
Overly complex investments and strategies
Legitimate professionals can explain what they are doing and strive to ensure you fully understand the investment, any associated fees, and its suitability for you. If you don’t understand the investment, it probably isn’t right for you.