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Think Your Money's Safe? You May Have To Think Again
Avoid falling victim to a financial investment scam.
by Daniel I. Maclntyre, Esq.
September 1, 2006
T he North American Securities Administrators Association (NASAA) approximates that investors lose nearly $1 million each hour to investment fraud conducted over the telephone. And the average loss for a victim of investment fraud age 50 or older may top $25,000, according to the NASAA.
Sadly, these statistics represent only a small portion of investment fraud, as many cases go unreported because the victims are too embarrassed to come forward, fear being taken advantage of again, or are in denial of having been scammed.
Many of these victims – reported or unreported – are women. Frequently, they are recent retirees, divorcees or widows who are not experienced in investing. Oftentimes, seemingly reputable brokers or insurance agents who work for major financial companies conduct these scams.
Thankfully, there are ways you can protect yourself from becoming a victim of investment fraud:
1 Never invest with a stranger who solicits your business. Whether on the telephone, by e-mail or by inviting you to a “free” dinner or seminar, this person cannot possibly have your best interest at heart, because he or she knows nothing about you or your investment needs.
2 Get a recommendation from someone you trust. You want to know the basis for the recommendation. Just because some wildly successful trader likes a broker, does not mean that person is the right broker for you – especially if you have a different investment objective or risk tolerance. And be careful – fraud is rampant within affinity groups like religion, ethnicity and ideology. You should not choose an investment professional based upon your affiliation with a common group.
3 Interview your investment professional for the job. He or she is supposed to work for you. Do not take your checkbook or any money to the interview. Do not agree to invest with him or her at the interview. Go home and sleep on it. Do not hesitate to interview more than one person. Selecting your investment professional is one of the most important decisions you will ever make. Alternatively, if you have both the time and knowledge, consider handling your investments yourself. The cost of trading online is minimal, and online brokers and other financial sites have a wealth of financial information available for free.
4 Always ask your investment advisor how he or she gets paid. If you do not get a complete and comprehensible answer, don’t walk away – run away. Investment professionals are in the business to make money. The only way they make money is from your investments. Sometimes they make it directly, through commissions or fees. Sometimes they get paid indirectly from the broker or the investment advisor, or even from the insurance company or mutual fund where your money will be placed. In that case, the broker, investment advisor, insurance company or mutual fund is charging you excess fees to pay the person who sent you to them. Costs and fees make a huge difference in the success of investments, particularly over the long term. Do not invest in anything if you do not know and understand all of the costs and fees involved.
5 Before you invest money, have an overall plan in place.
Analytical studies that form the basis of “Modern (circa 1955) Portfolio Theory” demonstrate that 90 percent to 95 percent of the results of an investment portfolio are determined by asset allocation. The safest (least volatile) plan is to have your investments allocated among and within asset classes (cash, bonds, stocks, real estate, etc). For instance, within the class of stock, you should have small-cap, mid-cap, large-cap and foreign exposure, all allocated among industry groups. You can accomplish this goal with a modest amount of money by using mutual funds. Index funds are often the best vehicle and they generally have the lowest fees. Investment professionals have the ability to work with you to prepare such a plan and most charge a fee for that service. Many of the best planners will have a “Certified Financial Planner” or “CFP” designation.
Once you have selected an advisor, your need for diligence has just begun. Keep the following pieces of advice in mind as you invest:
• Do not agree to allow your advisor to invest your money in anything until you fully understand how that particular investment makes money and how it rewards you for investing. In evaluating your advisor's recommendations, there is a basic and invariable rule of investments that you must always keep in mind – the higher the promised or potential return, the greater the risk.
• Before you invest in anything that is represented as “guaranteed” or “bonded,” find out exactly what is guaranteed and who is the guarantor. A “guarantee” or “bond” cannot be worth any more than the financial strength and integrity of the guarantor.
• Immediately open and read everything that comes from your advisor, from his or her company, or from any company in or with which you have invested.
It is particularly crucial that you read and understand all statements and confirmations of transactions. If you do not fully understand everything you read, ask your advisor. If your advisor cannot or will not give you an explanation you understand, get a new advisor.
• If a transaction that you did not expressly authorize occurs in your account, contact your advisor immediately and insist that transaction be reversed at no cost to you.
Do not let your advisor talk you into holding that position to “see how it does.” Confirm immediately in writing that the transaction was not authorized and that you demand it be reversed. Send this request by registered mail. If you do not receive immediate confirmation that the transaction has been reversed at no charge, contact your advisor's supervisor and the National Association of Securities Dealers (NASD) or your state's Securities Commissioner.
• If you feel that your investments have been mishandled, contact an attorney who is experienced in handling these types of matters and learn what your legal rights are. Investors who are mistreated by investment professionals have substantial legal rights.None of these steps will guarantee you will not lose money in your investments, though, as markets have always gone down as well as up. By following these tips, however, you should minimize your losses, maximize your chance for gains and help prevent you from being scammed out of yourself hard-earned money.
Dan MacIntyre is an attorney with Atlanta law firm Shapiro Fussell. He started his legal career 34 years ago and has participated in internal investigations and proceedings before the U.S. Securities and Exchange Commission, the Georgia Securities Commissioner and the National Association of Securities Dealers) on behalf of individual and corporate clients.
