4 Rules to lower your chances of falling for a Ponzi scheme or rip off when investing.

 

            Greed has an interesting (and very effective) way of getting in the way of common sense.  I know a handful of people that have fallen for a Ponzi scheme and let me be perfectly 100% clear about one thing; those people are just like you!  Most of you who read my monthly blog are hard working, educated, sensible government workers (past and present).  That doesn’t always keep you from falling for a trap, so please take a few moments to carefully review my suggestions on how to lower your chances of falling for a Ponzi scheme or any other type of rip off. 

             A very good friend of mine used to work for FINRA, which is short for  Financial Industry Regulatory Authority.  FINRA is the organization that not only licenses professionals like me, they also act as the securities industry’s watchdog.  Since 1939, FINRA’s (originally the National Association of Securities Dealers) job has been to "protect investors and the public interest, and to remove the impediments to and perfect the mechanism of a free and open market.”  Although not part of the federal government, Congress gives them the responsibility of licensing and monitoring individuals and companies operating in the securities industry.

             My friend’s job at FINRA was to audit companies that operate in the financial services industry.  When I interviewed her about this article, she gave me some great advice to pass along to you.  Even though some of what she said seems basic, her advice can save your 457 deferred comp plan or other savings.

             Below I’ve listed four rules you should use to avoid getting scammed and hopefully save you or someone close to you from a financially devastating mistake.  After all, it’s my job to help get you to and through retirement as safely as possible, so here goes…

 Rule #1: Background Check Background Check Background Check!

             Did I mention that you should do a background check?  100% of the time, no matter how well you know your advisor, 457 plan rep, cousin, uncle, best friend - it doesn’t matter - do yourself and family a huge favor and check that person’s background at FINRA’s BrokerCheck®.  This is one of the best tools to use for looking into the background of the person you have hired (or will be hiring) to handle your investments.  Why?  Because licensees like me have to divulge pretty much everything about ourselves to you through FINRA.  So if your advisor filed for bankruptcy, has an outstanding lien or judgment or has customer complaints filed against him or her, those things have to be disclosed to the regulators and something you should be concerned about.  If those types of things aren’t disclosed, when - not if - but when the regulators find out, an advisor can be fined, have his license suspended, or even have it permanently taken away.  So use BrokerCheck®.  It’s free and could save your retirement savings! 

 Rule #2: Watch Your Checks

             You’re probably aware of this already, but maybe some of your family members aren’t - especially if they’re older and their judgment has slipped.  If you or someone you know is going to invest, never write a check directly to the person who is suggesting that you invest with them - whether they’re licensed or not.  Whatever story someone gives you is pure B.S.  We as licensed advisors simply cannot accept cash, checks, or any other type of payment directly from our customers.  There are no exceptions to this rule or gray areas.  A good con artist will persuade you or a family member that “it’s just how things are done.”  They’re not, so keep your pen and checkbook in your pocket.

 Rule #3:  Hang Up The Phone

             Cold calling isn’t quite dead yet, and it’s probably a con artist’s most effective way to fish for victims.  The worst part about it is older people, let’s say those in their 80s and 90s, are more likely to use a home phone than a cellphone, so it’s easy to crack open the yellow pages and start calling these potentially vulnerable people. 

            The combination of a smooth-talking scam artist and someone who may have lost some of his or her judgment is a very bad combination.   There are stories about elderly people getting ripped off, then the same scumbags will call them back some time later posing as attorneys that have been assigned to get their stolen money back, and then hit them twice!  Keep a very close eye out for your mother and father or other older family members.  Approach the subject of money protection gently and make sure they know you’re looking out for them. 

Rule #4:  Just Don’t Give a Damn

             I mentioned at the beginning of this post that I know a handful of people that have been taken by a Ponzi scheme.  One person actually got his money out in time, but the others weren’t as lucky.  What was the common theme when I spoke with these people about how they got scammed?  They all said “my friend/brother/cousin knows the guy [running the scheme] really well…”  Sure he does. 

            Let me tell you something from someone who’s been investing since he was 15 years old: there are very, very few guarantees when it comes to money.  Very few.  The guaranteed interest rates that are offered right now are very low and because of this, now is actually a prime time to pounce for scammers.  Why?  Because interest rates are practically non-existent and stock markets are hovering near all-time highs.  It’s the perfect condition for criminals to lure victims in with “guaranteed” rates of return of something small, say 3-4%.  It doesn’t sound like much but to someone on a fixed income getting practically nothing at the bank, 3-4% sounds like a gold rush.  Be very careful of low “guaranteed” interest rates, no matter what form they come in! 

            On the flip side, with the stock market sky-high right now, it’s easy to get sucked into a “can’t miss” opportunity with sophisticated sounding terms like “currency swap agreements” and “leveraged futures.”  It’s garbage.  Turn and run the other way.  You could have your 457 plan, savings, or other types of deferred comp accounts wiped out in a heartbeat. 

            The friend of mine that used to audit financial companies said a time-honored trick of scammers is to ask investors to smart small.  We’re not talking tens of thousands of dollars.  They usually ask a victim for something modest; $5-$10 thousand to start.  As the “returns” come in, and the investor’s confidence (and greed) grow, the schemer ups the ante.  More often than not, the victim takes the bait and in the process waves goodbye to his 457 plan or other deferred comp plans.

            The old saying is a fool and his money are soon parted, but the truth is, a polished con artist can steal money from the smartest, most sophisticated investor.  You don’t have to look any further than Bernie Madoff.  Not only did he scam smart, hard working individual investors, but he conned entire organizations!  Organizations that have plenty of accountants and financial professionals who are trained to look out for rip offs!

            Even with unannounced surprise audits, FINRA can’t be everywhere and monitor everyone all the time, so you really are the very last line of defense between your money and someone who wants to steal it from you.  Keep an eye out also for your friends and family, especially if they’re older and their judgment has slipped.  Just keep this one last thing in mind; it’s hard to earn money and there’s risk involved in making it grow.  If you don’t understand what you’re investing in, then just turn away.  Find a way to multiply your savings with something you can easily explain to someone.  If you don’t understand or can’t explain what you’re investing in, then just back away.