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Have you ever been approached about investing in a startup? Been curious about a former classmate’s social media post flaunting their recent investment gains? Or, perhaps, received a text from a chat acquaintance touting a particular opportunity.
Did some part of you think about the possibility of investment fraud while another part of you wondered if there was an opportunity to make money?
Scenarios and reactions like these are common. After all, being curious and willing to take risks are characteristics of people who become fabulously wealthy. But they’re also universally human characteristics, and they can get us in trouble.
Case in point: People reported investment losses of $4.6 billion due to fraud in 2023, according to the Federal Trade Commission. Since many people don’t report when they are defrauded, due to feelings of shame and helplessness, the true losses are likely higher.
What should you do, then, to protect yourself from investment scams while not forgoing opportunities to grow your net worth? Along with the research-based steps you can take, there are also psychological and behavioral aspects of financial fraud to be aware of that can help you protect yourself.
Be diligent
It’s easy to get excited about an offer and want to jump in without delay. The promise of more money often gives us excitement and hope for a better life. Conducting due diligence on a potential investment not only gives you a chance to uncover helpful information; it gives your emotions time to stabilize.
“Before investing your money, make sure to verify the credentials of the investment company and carefully analyze the investment documents,” said John T. Murphy, a wealth management advisor at Blue Ocean Wealth Solutions, a MassMutual firm in East Hills, New York. “BrokerCheck is a great resource for investors to research and verify the professional backgrounds of brokers, brokerage firms, investment advisers, and investment adviser firms.”
In addition, you might do an Internet search for keywords from the investment you’ve been pitched along with “scam” and “fraud,” as in “clean energy investment fraud” or “cryptocurrency investment scam.”
See what comes up.
If you have a pitch or prospectus, search for exact phrases from the document to see if they’ve been identified in a swindle. At the same time, be aware that scammers may set up fake social proof, such as testimonials from satisfied customers, hoping that you’ll come across it and trust it.
See if the investment is registered
Not all investments have to be registered with the federal Securities and Exchange Commission, and registration does not guarantee that an investment is good, legitimate, or safe. Still, you should check. Start with the SEC’s free online EDGAR database to look up any mutual fund, ETF, variable annuity, or publicly traded company someone wants you to invest in.
Examples of investments that don’t have to be registered include restricted securities, microcap stocks, and some hedge funds. These can be harder to research, and the most prudent approach may be to steer clear.
“While some clients may qualify as investors in unregistered securities, we believe they are unsuitable for most portfolios,” Murphy said. “These private investments lack regulatory oversight by the SEC and often promise high returns that can be unpredictable. Instead, we prioritize regulated investments that comply with securities laws and regulations to mitigate unnecessary risks.”
Explain it to a friend
It’s important to understand any investment you put your money in. If you can’t explain it to a friend in a way that they can understand, then you may not know enough about it.
Your friend can also give you their opinion on whether this investment passes the smell test. Even someone who isn’t an expert in the type of investment you’re being pitched can give you valuable feedback. Or, they might know who to ask for advice. Harnessing collective knowledge can be a good way to protect yourself.
If you’re too trepidatious to share the potential investment with anyone you know, maybe your subconscious is trying to warn you. Think how much more embarrassed you’ll feel if you go through with it anyway and get ripped off. Victims of investment fraud often experience psychological consequences like anger, self-blame, anxiety, and depression that compound the financial consequences.
Look up the company’s website
Use a free domain registration lookup tool to see how long the investment company’s website has been around. If it was recently registered, it could be a red flag — especially if you’re being told that the company has a track record.
Don’t let a well-designed website convince you of a company’s legitimacy, either. It’s easy and inexpensive to set up a professional looking site — especially now that artificial intelligence programs can write grammatically correct (if not always factually accurate) marketing copy.
Also, be wary of setting up an account with such websites. And never create an account online from a link a third party sends you.
Call the regulators
Can’t find the answers you want? Organizations meant to protect consumers want you to call them for help — even if you just have a question about an investment and don’t necessarily suspect fraud.
These are the numbers to call:
- U.S. Securities and Exchange Commission, Office of Investor Education and Advocacy: (800) 732-0330
- Financial Industry Regulatory Authority (FINRA): (301) 590-6500
- North American Securities Administrators Association (NASAA): (202) 737-0900
Not sure which one to call? Don’t worry about it: Just pick one. If you’re wrong, ask whom to contact instead, or move down the list.
The NASAA website can also help you find your state regulator — another resource for your questions and concerns.
Assume you’re susceptible
We all think we’re too savvy to fall for an investment scam — until it happens to us. Many scam victims are neither poorly educated nor gullible. They’re just human.
Scammers know how to exploit our natural flaws, from greed to desperation to the desire to see the best in others. No one is too smart to get scammed. Financial literacy may not protect you: It may give you too much confidence in your ability to spot a scam.
“Investment victims were more likely to be between 55 and 62 years old, male, married, wealthier, more financially literate, more open to sales pitches used by con men, more likely to have invested in high-risk investments, and not likely to have checked the background of a broker before investing,” the Stanford Center on Longevity observed in a survey of financial fraud.
Also, factors you can’t even control, like how often you’re targeted by scammers, can increase your odds of victimization.
Don’t rely on SIPC coverage
When you invest through a brokerage firm, the Securities Investor Protection Corporation offers up to $500,000 in protection per account. But this doesn’t mean that you’re protected against fraud-related losses when you buy a registered investment.
SIPC coverage only applies when a brokerage firm becomes insolvent and customer assets are missing. This rarely happens because of federal laws and oversight. Further, SIPC coverage does not apply to certain types of assets, including commodities and futures contracts, foreign currency investments, crypto assets, unregistered investments, and limited partnerships.
Consider how it fits into your financial plan
Can you afford to risk $20,000 on a speculative investment when you aren't maxing out your retirement accounts and you haven't paid off your student loans? Maybe not, but it's awfully tempting to play the investment lottery when a quick win could be life-changing.
Then again, a loss could be devastating, especially when you consider some safer alternatives and their potential long-term rewards.
If you owe $80,000 in student loans with a 6.5 percent interest rate and a 15-year term, your monthly payment is almost $700, and you stand to pay more than $45,000 in interest. If you put $20,000 toward your loan principal, you’d owe $60,000, reducing your monthly payment to about $525 and your total interest to about $34,000. Paying off debt gives you a guaranteed return. You’ve also freed up $175 a month to invest in a tax-advantaged retirement account.
If you’re comfortable with more risk, you could put that $20K toward your retirement — say, by making Roth 401(k) contributions through your employer’s retirement plan. After 15 years of investing in growth-focused investment options, you could have more than $64,000 — none of which would be taxable — assuming a hypothetical average annual return of 8 percent. And after 30 years, you could have more than $220,000. The U.S. stock market can be volatile in the short term, but over the long term, it’s been a consistent winner. (Learn more: Why you can win with a steady investment strategy)
Sleep on it
High-pressure sales tactics are never a good sign when you’re considering an investment. At best, they’re a warning that a salesperson is willing to put their own interests ahead of yours.
At worst, they’re hoping to get your money before you realize it’s a bad idea. “Those who cannot fill your pocket will confidently fill your ear,” Warren Buffett once remarked in a Berkshire Hathaway letter to shareholders.
There’s no investment that’s so amazing or time sensitive that you can’t take your time to evaluate it. Don't let someone rush you into giving them your money, especially via wire transfer.
Consult a financial professional
“Seeking the advice of a financial professional can also help you make informed decisions and avoid fraudulent investment opportunities,” Murphy said. (Learn more: 3 ways a financial professional adds value)
People who have a trusted contact are less likely to get scammed. If you want to take things a step further than getting a sense check from friends or family, seek out the opinion of a financial professional who has no connection to the person offering you the investment. (Need a financial professional? Find one here or let us know)
Conclusion
“When it comes to investing, it is crucial to protect yourself from fraud by conducting your own research and taking advantage of the resources you have available to you,” Murphy said.
Even if everything seems to check out, never ignore your gut feeling. We can’t always articulate why something feels off, but that message your mind or body has picked up on is worth listening to. Your future financial security may depend on it.
Discover more from MassMutual…
How to set up your first retirement plan
What is your risk tolerance in investing?
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