Financial Fraud: Self-Defense Moves to Avoid Becoming a Victim

There’s no shortage of unscrupulous financial brokers who are willing and able to con investors out of their money with so-called “guaranteed” investment opportunities. The promises of profit that these fraudsters make to their unsuspecting victims can involve a variety of legitimate financial products and investments – from private placements, to variable annuities, to non-traded real estate investment trusts (REITs).

A new resource from the Certified Financial Planner Board of Standards gives investors a heads-up on behaviors that warn of fraudulent or unethical practices on the part of a financial advisor. Titled the Consumer Guide to Financial Self-Defense, the 28-page informational booklet includes 10 “red flags” of potential fraud or abuse, and follows with insight on what investors can do to avoid being victimized.

The likelihood of becoming a victim is high. According to 2009 and 2010 surveys by the CFP, 60% of respondents stated that they knew an investor who had experienced fraud or abuse at the hands of another advisor. Making matters worse is the fact that the most likely targets of financial abuse are also the most vulnerable because they are older adults, ages 61-75.

Some of the top red flags of potential financial fraud cited in the Consumer Guide to Financial Self-Defense include:

• No risk, high return. If it sounds too good to be true, that’s because it probably is. The No. 1 rule in investing is “there’s no free lunch.” If an advisor tells you otherwise, it’s time to take your business elsewhere.

• The “Scarcity Tactic.” This happens when someone implies that an investment or financial opportunity is rare or scarce. When it comes to investing your money, allot yourself plenty of time to think over the investment. Above all, make sure your thoroughly understand what you’re actually putting your hard-earned money into.

• Churning. Churning means excessive buying and selling of securities in a client’s account by his or her broker for the sole purpose of generating commissions. Whenever an investment advisor proposes a transaction, find out what it will cost you, the client, for the transaction to take place. In particular, ask about surrender charges, loads, commissions, internal expenses, or other transaction charges. As the Consumer Guide to Financial Self-Defense points out, the existence of such charges isn’t an abuse in and of itself, but not being told about them is.

“It’s complicated; let us handle the details.” Investments in general are complicated; that’s why you hire a professional financial advisor. If an advisor is hesitant to explain something about your investment to you, it could be time to look for a new advisor. Elderly clients in particular are vulnerable to financial abuse. The CFP book cites the example of one elderly client who asked her bank for a better rate on her CD. Instead, she walked out with an annuity that could not be surrendered for more than 10 years without a steep sales charge. The client had no idea that her new investment worked very differently from her old one.