Posted By: CFP&WM On: Feb 22nd, 2010 In: In the news

Senior Spectrum – July 28, 2009

Protect Yourself From Investment Fraud

The media are full of stories about investment fraud and sales abuse. Wells Fargo was sued by the State of California for selling investments that were not as safe as they reported. Bank of America was sued for its involvement in a Ponzi scheme. Ameriprise paid a fine for selling products unsuited to clients’ retirement accounts. And, of course, we all know about the Bernie Madoff hedge fund scandal, where people lost millions.

Now is a great time to review 12 methods to protect yourself from possible investment fraud and misrepresentation.

(1). If an investment salesman uses phrases such as high rate of return; risk-free; your investment is guaranteed against loss; or you must invest now, then you should be extra cautious.

(2). Security laws protect investors by requiring that companies provide investors with specific written information about the company. Unfortunately, this information is very detailed and is buried among dozens of pages of the prospectus. Security laws and safeguards are of no value if you don’t read the information prior to the purchase.

(3). Be aware of the risk associated with an investment. Most people know that a certificate of deposit (CD) at a bank is less risky than investing with someone who contacted you by phone or by investing with someone you know through your church or a friend. Many people do not know how to assess the risk of bonds, mutual funds or stocks.

(4). Suppose a friend tells you about an investment opportunity that has earned returns of 20 percent during the past year. Your investments have been performing poorly, and you’re interested in earning higher returns. This person is your friend, and you trust him or her. DO NOT invest until you call your securities regulator to see if the investment has been registered to be sold legally. It would also be wise to get a second opinion from an investment professional who is not selling the investment.

(5). When making an investment, do not rely on the testimonials of others, advertising, and/or news stories in the media or on the Internet. And don’t rely on technical data that you don’t really understand. You should depend on information that has been filed with your securities regulator. If you don’t understand it, don’t buy it.

(6). The best way to protect yourself from investment fraud includes: read all disclosure documents about the investment, be skeptical, and ask questions. Never write a check for an investment in the name of your salesperson. The NASAA recommends investors seek the advice from an independent, objective source (a professional who is not selling the investment).

(7). When dealing with an investment salesperson who you consider reputable, you should request copies of opening documentation to verify that your investment goals and objectives are stated correctly; evaluate your salesperson’s recommendations by doing your own research before you buy; review all correspondence and account statements when received; and never allow the salesperson to manage your assets as he or she sees fit.

(8). Numerous investments have been used to defraud the public, including short-term promissory notes, deeds of trust, offshore investments to avoid taxes, Nigerian advance fee letters and many others. If it sounds too good to be true, it probably is!

(9). If you work with an investment salesperson and he or she asks you to invest in a product they’re really excited about — but the recommendation is different from the financial products you have previously invested in — be sure to check with your security regulator to see if there’s any information on the investment product and that the salesperson is authorized to sell that product.

(10). Do not assume an investment is legitimate just because the promotional materials and company Web site look professional, it has a prestigious office location, other investors report quick upfront returns, or the company has an official sounding name. Make the decision only after completing your due diligence.

(11). Remember, no one insures you against investment loss. Make sure your investments are appropriate for your risk tolerance (your ability to mentally handle the ups and downs), your risk capacity (your financial situation), and your goals and timeframe.

(12). Whenever the sale of an investment generates a commission for the salesperson, there is a possibility of misrepresentation or that it may not be as well-suited to your circumstance and situation. This is the reason investors are wise to get a second opinion from an investment professional that does not sell product and only provides objective advice.

Michael Chamberlain is a Calif. Registered Investment Advisor. Send your questions to him at or call (800) 347-1340.


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