The collapse of cryptocurrency exchange FTX has sparked an investigation. Fraud issues are a reminder that complaints about investment fraud are on the rise. Good news? You can protect yourself by taking five precautions.
“Given that the market is in bear territory, this is a good environment for scammers to feed on growing investor fears,” said Eric Sterner, chief investment officer at Apollon Wealth Management, based in Charleston, South Carolina. “People are afraid of layoffs, market losses, inflation. This makes them vulnerable to scammers promising easy and quick returns.”
“But you can protect yourself with some basic security measures,” Sterner said.
Provided, of course, that you are never scammed by a banko artist. But perhaps your adult son or daughter or older loved one is more susceptible.
You could benefit from your attentive coaching.
Number of Scams: High and rising
One thing is for sure. Someone needs coaching. The number of investment scams is increasing. As of September 30 of this year, victims have filed 80,000 complaints with the Federal Trade Commission (FTC).
This puts the number of fraud cases comfortably on track to surpass the 82,181 complaints filed in 2021.
And it dramatically dwarfs the 14,797 that were submitted in 2018.
Moreover, these scandals are growing pains. Investors have lost $2.7 billion to fraud so far this year. And that’s before factoring in the FTX cryptocurrency exchange collapse that happened in the fourth quarter.
Victims reported a total of $1.8 billion in scams in 2021. And only $94 million in 2018.
Step #1: Watch out for the red flags
So how can you – or a less experienced loved one – avoid becoming a victim? Step #1 is to beware of an investment request that raises any of the eight red flags:
- extreme willingness The pitch tempts you to act quickly. Scammers want you to act quickly before you’ve had a chance to research investments or investigate sellers.
- wrong attention. “Any qualified advisor should start by asking questions about you as an investor,” Sterner said. “If he’s talking about an investment, get up and go.”
- Fake statistics and testimonials. Do your homework. Try checking the performance statistics. Contact support staff. If you can’t check facts, figures and cheap deals, get out there.
- Guaranteed returns. Huckster Bernie Madoff liked to promise exorbitant returns. The problem is that it’s almost always impossible to guarantee high returns. “If it sounds too good to be true, it probably isn’t,” said Paul Brahim, executive director of Pittsburgh-based Wealth Enhancement Group.
- unregistered securities. avoid them. The Securities and Exchange Commission (SEC) stated, “Generally, an offer to sell securities must be registered with the SEC or be eligible for an exemption. To see if an investment is registered, check the SEC’s EDGAR database (or) call your state’s securities commission for more information.”
more red flags
- Hidden Fees. Many infomercials and online ads offer free seminars and videos. The FTC warns, “But later you find out you have to pay a hefty fee to get the coaching they promised.” Worse, there’s no way to verify the success stories they tell. FTC says don’t get involved.
- Risk-free training. There are many investment incentives. But all investments involve risk, so offers of risk-free training or coaching or investing are by definition fraudulent.
- get rich quick You will not. “The reality is that most people don’t get back the money they invest,” the FTC said.
Step #2: Background Check
Another important step to avoid becoming a victim? Conduct a background check on anyone who claims to be the right financial advisor for you.
Start by doing an online search for the company that contacted you and their executives or promoters.
Next, conduct a background check, including registration or license status, of people recommending or selling investments. “See if they have a history of discomfort,” Brahim said. Here are the places where you can do this for free:
Step #3: Custody of Assets
With few exceptions, investment advisers are required to hold clients’ funds and securities with an external custodian. Qualified custodians include banks, registered broker dealers and futures commission dealers. Ask the manager to check if your belongings will be there.
When cryptocurrency exchange FTX collapsed, FTX reportedly retained the majority of client assets. Investigators reportedly fear the client’s assets could be embezzled. It is said that most of these assets are not taken into account.
Step #4: Publicly Traded Securities
“Most retail investors should stick with publicly traded securities,” Brahim said. “They involve more regulation. The fewer regulations you have, the more opportunities for fraud.”
Step #5: Explore Liquidity
Always check how liquid your investment will be. Brahim said, “Ask how soon you can withdraw your money.” And make sure you see it in writing. Also find out how much you will be charged for withdrawing money. Is there also a prepayment penalty?
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