Photo credit: CNBC.com “The top 10 investment scams”.
How to Avoid Getting Ripped Off by an Advisor
Investor scams are alive and well. I am amazed by the number of bulletins I receive through email that detail investment scams that are uncovered. Fortunately, if you know what to look for, you can avoid being ripped off. It is a matter of looking for red flags.
Red Flag #1 – High Interest Guarantees
When you are looking at a guaranteed rate of return, it should be in line with other guaranteed returns. If it is higher than the going rate for guarantees, there is a risk of some sort. A local financial advisor was brazenly advertising a 12% guaranteed rate of return backed by real estate. Now keep in mind, the best guaranteed rate is around 3%. Of course, it was later discovered that this advisor was running a Ponzi scheme.
Red Flag #2 – Writing a Check Directly to an Advisor or Investment Company
Not to say that in every instance when you write a check to an advisor you are getting ripped off. However, just about in every scheme that is busted by regulators a check was written to an advisor. It is a red flag. What keeps that advisor from depositing that check into his or her bank account?
Red Flag #3 – Investing in Unregistered Investments
Regulators raise a huge issue with advisors that sell unregulated investments. Not to say that in every instance when unregulated investments are involved you are getting ripped off. However, just about in every scheme the investments are unregulated.
Red Flag #4 – High Return, No Risk
This is good rule of thumb for any scam as well as for any legit investment. Anytime an advisor promises big returns with no risk, something is wrong. Either they are running a scam or they are just trying to sell you a bad investment. A legitimate advisor will tell you of the pros and the cons of any investment. Every investment has pro and a con. Even a money market has risk.
Red Flag #5 – Just Because It Is on the Radio Doesn’t Make it Legit
You would think that if an advisor was going to break the law they would do so in secret. Thus, if an advisor is on the radio talking about investments with big guaranteed returns, it must be legit. Right? Unfortunately, that is not the case. Often a scam artist will be bold enough to talk about the scam on the radio as well as on their company website. There are two advantages for the scam artist. First, talking about it in public gives it some legitimacy. Second, common sense would tell you that no one would break the law that publicly and risk getting caught. This is how investors get ripped off.
The bottom line is that investment scams are happening all of the time. Unfortunately, investors just assume that it is not the case and blindly give these scam artists their money. Look for the red flags so that you can make better decisions with His money.