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Investment Scams: How to recognize and respond

A down economy means a lot of things, but one of the most harmful can be all of the con artists who come out of the woodwork trying to take advantage of people's desperate need for quick money.

Although everyone is at risk of becoming a target, chances are con artists tend to go where the money is. This means older people with plenty of retirement savings, as well as baby boomers who have been accumulating sizeable retirement nest eggs with their company 401(k) plans and other accounts.

This year, the North Carolina Secretary of State's Office identified Ponzi schemes, real estate investment schemes, private placement offerings and precious metals investments as the greatest potential threats to investors. However, you may encounter one of hundreds of other schemes. The good news is, you can protect yourself by learning how to recognize these scams, and how to respond accordingly.

There are several common strategies scammers use to when trying to persuade someone to "invest" money with them. Be on the lookout for these tactics:

    Phantom Riches - This is when the scammer dangles the prospect of wealth, such as guaranteeing double-digit returns. This is a classic case of something being too good to be true.

    Source Credibility - When you are being oversold on the idea that the firm is reputable, or that they have special credentials or experience, watch out!

    Social Consensus - This is when you are lead to believe the investment strategy has already produced great results for others. This is an example of "everybody else is doing it, so should you."

    Reciprocity - This occurs when you are offered something in return for your business, such as a free lunch or break on commission fees. Don't fall for it!

    Scarcity - If you are hearing words like "limited supply" or "need to act now," this is just a way of creating a false sense of urgency.

Now you know what to look for! But, what next? If you are encountered by someone you feel is running a scam, here a few actions to take:

End the conversation

This is the simplest thing you can do. While it makes some people uneasy, you should get comfortable saying things like, "No," "I'm not interested," and "I never make decisions like this without consulting with my spouse or attorney." Knowing an exit strategy in advance makes it easier to end the conversation.

Ask questions

A legitimate investment professional should not hesitate to answer the following questions:
  • Are you and your firm registered with the Financial Industry Regulatory Authority (FINRA)?
  • Are you registered with the Securities and Exchange Commission (SEC)?
  • Are you registered with the state's securities regulator? Which one(s)?
  • Is this investment registered with the SEC or my state securities regulator?

Depending on the type of business the firm conducts, it should be registered with at least one of the aforementioned agencies. In addition, almost all companies must register their securities with the SEC before they can sell shares to the public.

Report them

There are several agencies who are ready to help consumers who think they may have been the target of an investment scam. Visit the SEC's website at www.sec.gov, the N.C. Secretary of State's website at www.secstate.state.nc.us, or call the N.C. Secretary of State Securities Investor Hotline at 800.688.4507.

As always, a financial planner at Local Government Federal Credit Union (LGFCU) is always happy to help members who are considering a real investment strategy. This service is free by calling 877.367.5428.