There are many self proclaimed "experts" out there who seem to have figured out the secret to making money fast. All you have to do is give the self proclaimed expert your credit card number and social insurance number and you will be well on your way, right?
Investment fraud is every where, but sometimes it doesn't always appear obvious. Fraud and illegal schemes and scams cost Canadians millions of dollars each year, commonly targeting older and perhaps "ignorant" demographics. Being able to detect investment fraud, as well as getting into the habit of probing and asking questions, will ensure that you are protected from these various scams and farces. There are many techniques out there that you can put in your toolbox to have ready once you come across something fishy. Let's look at some techniques:
FRAUD AVOIDANCE TECHNIQUES
Always ask questions
There's no harm in asking questions. Be inquisitive and educate yourself. Many scams and scam artists attempt to play on other people's ignorance and naivete for personal gain, so throw some hard and testing questions at them. Again, fraud isn't always obvious, so asking questions can open up the discussion and surface what's really behind a potential scheme or opportunity.
Secure personal information online
This seems like a very obvious point, but nowadays, a lot of personal information is more willingly shared and available online either via social media, or through more secure services like bank websites or Paypal. Look for the green "Secure https" in the web browser when doing online banking, investing, or other online financial activity. Never post personal information regarding bank account numbers, credit card numbers, or passwords openly online. Adjust your restriction settings on your social media accounts to ensure only people you know can see your personal information, and to ensure only the personal information you want is showing in the first place.
Do your due diligence
This ties nicely in with the first point. Do your own research and see what kinds of investment vehicles and investment options are out there. Don't get lured in by others into options you are not aware of. Do your due diligence and find out the true benefit and potential risks involved with a potential investment opportunity before putting your hard earned money into such ventures. Don't base your decision only on what someone else said or one single source like a website or social media advertising. Conduct some research and see if something you saw online or a stock that was raved about on MarketWatch really suits your strategy and risk tolerance. Don't be afraid to get a second opinion from a finance or investment professional.
Now that you've got some basic tools under your belt, let's look at some common red flags to detect fraud or scams:
FRAUD RED FLAGS
It's too good to be true
If something sounds too good to be true or like an ideal perfect investment, then it's probably a bunch of bogus. Think of it this way... if some stranger is offering you the investment of a lifetime or a strategy that will make you a millionaire... well why would they be offering you that strategy in the first place? If it works so well, then wouldn't they just do it themselves and make a ton of money for themselves? What reason would they have to be offering it to you? The answer is because what is being offered isn't a perfect ideal investment and the stranger wants to make commission off of your, or simply scam you into paying them huge fees. Every investment has risk and it's a matter of choosing a strategy that works with your risk tolerance, as well as being able to effectively manage the risk you carry in your portfolio.
Request for personal information and money
Urgent request for your personal information and commission or fees is a huge red flag. Avoid any interaction with such "opportunities" and be weary of these likely scams. Only give out personal financial information to financial professionals or institutions who are licensed, and who you trust and know. Don't shy away from asking questions.
Guaranteed Returns
There's no such thing as "guaranteed returns". No one can predict the future and can know what the stock market will do in the future with 100% certainty. Investing professionals use probabilities of particular performance metrics being met based on macro economics, company fundamentals, and historical trends to manage portfolio risk to maximize returns over a long period of time. Some scams (or some mutual funds actually) will guarantee a rate of return of, say 4%, per year over a 10 year period. This can be done because the stock market has never returned anything lower than 4% over a 10 year period in its history! Sneaky right?
It's easy to get obsessed with the "get rich quick" mentality and get lured into schemes and traps aimed to scam an individual and take advantage of ones knowledge and thirst for getting wealthy fast. Sorry to break it to you, but there is no such thing as a get rich quick scheme. Trust me I really wish there was... it would save me a lot of headache with my own investments. If there was a get rich quick scheme, then we'd all be doing it. And certainly the individual who discovered it wouldn't be sharing their strategy publicly (or maybe they would for a fair price).