Protecting Your Investments: Five Ways to Avoid Fraud

Barbara Marquand | guest writer for GoTalkMoney

Too many lives have been shattered from investment scams in the last year--from Bernie Madoff's $65 billion Ponzi scheme to the alleged sale of phony CDs by Texas financier R. Allen Stanford, accused of swindling more than $7 billion from investors.

Shady financial deals victimize people of all types--from wealthy, sophisticated investors to earnest folks of modest means. Don't let this happen to you. Follow these seven tips to avoid investment fraud:

1. Beware of "Sure Things" with Big Returns

If an investment sounds too good to be true..... A high return means high risk. The safest investments, such as money market accounts and certificates of deposit, pay low returns, but your money is guaranteed even if the bank fails, as long as your deposits at that financial institution are within the $250,000 FDIC insurance limit. Stock market investments can pay higher returns, but they also carry the risk of heavy losses.

2. Understand and Monitor Investments

The investment strategy should make sense. You should understand how the investment works and exactly how you can exit. Learn what regulatory body oversees the investment and what the regulatory protections are. Some investments are more heavily regulated than others. Ask for explanations if a financial advisor uses terms you don't understand. (con artists are good at using jargon to cover up inconsistencies). And don't ever let other people make financial decisions for you. Once you decide to invest, monitor the investment, and insist on getting regular written reports. Beware of red flags, such as an advisor stalling you when you try to get your money out.

3. Get a Reality Check

Check out the investment performance claims of the advisor against a reported benchmark to see if the claims are believable, suggests the CFA Institute, a global association of investment professionals. Madoff, for instance, reported unrealistically consistent performance to his investors, which should have been a tipoff that something was awry. The CFA Institute says to find out if a firm has its performance figures independently audited, who audits them, and whether the firm complies with the Global Investment Performance Standards, a set of standards for calculating and reporting investment results.

4. Know Who You're Dealing With

The old saying "Don't judge a book by its cover" applies to investment professionals. Con artists are practiced performers. They can sound professional and be remarkably charming to win your trust. Check into investment advisors' backgrounds and registration. How much experience do they have? Are they targets of any censures, pending investigations, or lawsuits? Check the Financial Industry Regulatory Authority and the Securities and Exchange Commission for information about firms and advisers, the CFA Institute suggests.

5. Beware of "Reload" Scams

Here's how it works: A con artist gets you to invest in a scam, and you lose a ton of money. Then, while you're in panic about your loss, the scammer preys on your fears and persuades you to invest again to recoup your money and perhaps earn even higher returns than were expected the first time around. Don't fall for a lousy deal twice. If you think you might have been a victim of fraud, talk to your state's financial regulators.

Investment fraud is tragic. Too often people who have been conned feel embarrassed to come forward, but the sooner you report fraud, the better your chances are of getting back some of your money. You'll also save others from becoming victims, too.


JULIE CRESWELL and LANDON THOMAS Jr. • The Talented Mr. Madoff • nytimes.comhttp://www.nytimes.com/2009/01/25/business/25bernie.html
Laurel Brubaker Calkins and Karen Gullo • Stanford Fails to Win Bail on Verge of ?Breakdown? • Business Week • /news/2009-12-23/stanford-fails-to-win-bail-on-verge-of-breakdown-update1-.html
Securities and Exchange Commission • SEC Charges R. Allen Stanford, Stanford International Bank for Multi-Billion Dollar Investment Schem • http://www.sec.gov/news/press/2009/2009-26.htm
CFA Institute • Ten Ways To Avoid Investment Fraud • http://www.cfainstitute.org/aboutus/investors/pdf/avoid_investment_fraud.pdf
Washington State Department of Financial Institutions • How to Avoid Scams & Fraud • http://www.dfi.wa.gov/consumers/invest_scam_avoid.htm

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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