5 Investment Scam Red Flags

Investment Scam Red Flags: When Bernie Madoff was arrested in December 2008, the world was stunned. Madoff had been operating a $65 billion Ponzi scheme for at least 17 years.

More than 37,000 investors from 136 countries were victims of Madoff’s fraud. They came from all walks of life and included professional investors, celebrities like Steven Spielberg and Kevin Bacon, and thousands of everyday people who had been persuaded to trust their life savings to Madoff.

The truly extraordinary thing about this scheme was that, in retrospect, there were plenty of red flags. For example, there was an unusual amount of secrecy around the fund, and Madoff’s returns weren’t mathematically possible. Nonetheless, Madoff’s scam continued until the global financial crisis brought the whole thing crashing down.

Unfortunately, Madoff wasn’t the last conman to swindle cash from investors. New schemes crop up every day. In 2021, more than 81,500 investment scams were reported to government agencies. While none have succeeded in matching Madoff’s size and scope, collectively, they were responsible for the theft of almost $1.8 billion that year.

If the world’s best investors couldn’t spot Madoff’s fraud for decades, what chance do average investors have of avoiding an issue? The key is spotting red flags early – preferably before putting money into the program.

Watching for these five investment scam red flags can mean the difference between building your own wealth or contributing to the wealth of swindlers.

Guaranteed Returns

There is one disclosure that you can count on receiving with any legitimate investment. It says past performance is not a guarantee of future performance. Though the sentiment can be worded in several ways, the underlying statement is the same. There are no guarantees when it comes to investments.

Any guarantee of exceptionally high investment returns is a red flag, especially when that promise is coupled with the suggestion that there is little or no risk of losing your principal.

In other words, if it sounds too good to be true, it is. There are no exceptions when it comes to investing.

Missing Credentials

Having a license doesn’t automatically ensure your broker or financial advisor is honest, but it’s a good start. Conversely, anyone who encourages you to invest despite being unlicensed and unregistered is likely to be a grifter.

Before you trust your hard-earned money to any financial services provider, check out their background for free through Investor.gov, Brokercheck.finra.org, and Adviserinfo.sec.gov.

Assuming you can validate credentials, ensure you clearly understand how the advisor or person enlisting you to invest is getting paid. In some cases, the investments are legitimate, but you won’t see the returns you are entitled to because excessive fees and commissions are hidden in your agreement.

Unexplained Increases In Account Values

Most con artists aren’t satisfied with swindling you once. After they put effort into persuading you to invest, their goal is to keep the con going until you are thoroughly cleaned out.

One of the most effective methods of keeping victims interested is demonstrating how “easy” and “risk-free” it is to make a lot of money through the fraudulent investment.

That is accomplished by showing you “proof” of your skyrocketing account values. Of course, upon closer inspection, the gains can’t be explained by examining the underlying assets.

When you see a sudden, rapid increase in the value of your account, consider it a red flag and do more research. Better still, pass on the “opportunity” in favor of a more reliable product.

Too Good To Be True Testimonials

Some review platforms have safeguards to ensure reliable feedback from real customers. Examples include Amazon, Facebook, and Yelp. Sure, some fake reviews slip in undetected, but for the most part, these sites have verified that the accounts posting the reviews are legitimate.

Scammers are known for pointing unsuspecting investors to their own sites for an extensive collection of enthusiastic testimonials from “real” clients. The trouble is, the testimonials aren’t real. Hiring reviewers to post positive feedback for a small fee is easy.

If you have spent time researching a product or service, you are familiar with the patterns of typical reviews. There is a mix of positive and negative feedback that includes specific details about the experience. When there are no negative reviews and the details are missing, it is a red flag that something is not right.

Social Networking Scam

The final red flag is by far the most egregious because it exploits your connection with friends and family. Swindlers gather information about your history, contacts, and interests from your social media profiles, and then they use that information to establish a relationship with you.

It’s common for scams to begin with a friendly message that appears to be coming from a friend or acquaintance. Sometimes, con artists take a bolder approach and introduce themselves as a friend of your friend or family member.

Proceed with caution anytime you receive a message from one of your contacts that seems out of character and be even more careful with new contacts who say you have a mutual acquaintance. When in doubt, don’t agree to any financial commitments until you have validated the proposal with your contact directly.

Avoiding Investment Scams: The Bottom Line

These five red flags are the most common signs of a scam, but there are plenty of others to watch for as you plan your portfolio. For example, when Bernie Madoff’s clients reflected on their experience after the scandal became public, they realized they had overlooked important clues. One of the most telling was that they weren’t given online access to their accounts. They received all of their documents by mail.

The best way to protect yourself from investment scams is by sticking with standard investment strategies. They might not come with a guarantee of huge, risk-free returns, but with patience and discipline, you can grow your wealth over time.

Watch for red flags if you consider an investment that falls outside of regular trading through a reputable brokerage firm. Guaranteed profits don’t exist in the real world, and get-rich-quick schemes are unlikely to end well.

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