Investment scams are on the rise

The collapse of cryptocurrency exchange FTX has sparked investigations. Aspects of the scandal serve as a reminder that investment scam complaints are skyrocketing. The good news? You can protect yourself by taking five precautionary measures.

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“Given where the market is, in bearish territory, this is an ideal environment for scam artists to prey on mounting investor fears,” said Eric Sterner, chief investment officer of Charleston-based Apollo Wealth Management, in South Carolina. “People are afraid of layoffs, market losses, inflation. This makes them increasingly vulnerable to scammers’ promises of easy and quick returns.”

Sterner added, “But you can protect yourself with some basic security measures.”

Of course, you assume you’ll never fall for a bunco artist scam. But perhaps your young adult son or daughter or elderly loved one is more vulnerable.

They could benefit from your eagle-eyed coaching.

Number of scams: high and growing

One thing is certain. Someone needs to be coached. The number of investment scams is exploding. This year, through September 30, victims have filed just under 80,000 complaints with the Federal Trade Commission (FTC).

This easily puts the number of scams on track to surpass 82,181 complaints filed in 2021.

And that significantly eclipses the 14,797 filed in 2018.

Moreover, the pain of these scams increases. This year’s scams have cost investors $2.7 billion so far. And that’s before taking into account the collapse of cryptocurrency exchange FTX, which occurred in the fourth quarter.

Victims reported $1.8 billion worth of scams in 2021. And just $94 million in 2018.

Step #1: Watch for Red Flags

So how can you – or a less experienced loved one – avoid becoming a victim? Step #1 is to be wary of an investment solicitation that triggers one of eight red flags:

• Emergency excess. The pitch pushes you to act quickly. Scammers want you to act quickly, before you’ve had a chance to research the investment or consult with the sellers.
• Bad focus. “Any adviser worth their salt should start by asking about you as an investor,” Sterner said. “If all he’s talking about is an investment, get up and get out.”
• False statistics and testimonials. Do your homework. Try checking the performance statistics. Contact the people offering endorsements. If you can’t check the facts, figures and favorable quotes, head for the exit.
• Guaranteed returns. Huckster Bernie Madoff liked to promise exorbitant rates of return. The problem is that high returns are almost always impossible to guarantee. “If it sounds too good to be true, it probably isn’t,” said Paul Brahim, managing director of Wealth Enhancement Group in Pittsburgh.
• Unregistered titles. Avoid them. The Securities and Exchange Commission (SEC) said: “Generally, offers to sell securities must be registered with the SEC or qualify for an exemption. To see if an investment is registered, check the EDGAR database. from the SEC (or) call your state securities regulator for more information.”

No more red flags

• Hidden fees. Many infomercials and online ads offer free seminars and videos. “But later you find out you have to pay high fees to get the coaching they promise,” the FTC warned. Worse still, there’s no way to back up the success stories they tout. Don’t get involved, says the FTC.
• Risk-free training. This is what many investment promotions offer. But all investments involve risk, so offers of training or coaching or risk-free investments are, by definition, bogus.
• Get rich quick. You won’t. “In fact, most people never get back the money they put in,” the FTC said.

Step #2: Background check

The second key step to avoid becoming a victim? Check the background of anyone claiming to be the right financial advisor for you.

Start by doing an online search on the company that approached you and on its leaders or promoters.

Next, check the background, including registration or licensing status, of anyone recommending or selling an investment. “See if they have a history of complaints,” Brahim said. Here are some places where you can do it for free:

Step 3: Custody of Assets

With few exceptions, investment advisers must hold their clients’ money and securities with an external custodian. And qualified custodians include banks, registered brokers and futures commission merchants. Ask the custodian to verify that this is where your assets would be.

During the collapse of the FTX cryptocurrency exchange, FTX reportedly retained custody of the bulk of client assets. Investigators are said to be concerned that this allowed misuse of client assets. The vast majority of these assets would be missing.

Step 4: Listed Securities

“Most retail investors should stick to publicly traded securities,” Brahim said. “These involve more regulation. The less regulation you have, the more opportunity there is for fraud.”

Step 5: Explore liquidity

Always check the liquidity of your investment. “Ask how fast you can withdraw your money,” Brahim said. And be sure to see it in writing. Also find out about any fees you incur to withdraw funds. Also, is there an early withdrawal penalty?

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for advice on personal finance and top mutual fund strategies.