6 Tips To Avoid Financial Fraud And Guard Your Investments


Financial frauds are more common than you think. Most often, until someone has been a victim of financial fraud, they fail to recognize the growing intensity of these crimes. However, the numbers tell a different story. According to the Federal Trade Commission (FTC), in 2021, American consumers lost over $5.8 billion because of fraud, which is nearly $3.4 billion higher than the 2020 estimate. In 2021, over 2.8 million consumers filed a fraud report, the highest number since 2001. Approximately 25% of these scams were financial frauds, with a person losing an average of $500. However, the FTC expects the actual numbers to be higher than the reported numbers since multiple scams go unreported.

The FTC report also excludes any identity theft, which has affected over 1.4 million Americans in 2021. Further, another 1.5 million consumers filed complaints about frauds registered as other categories, such as credit reporting companies not investigating details of the assesses or debt collectors not giving an accurate representation of the debt amount or status of debt (unpaid, half-paid, fully-paid, etc.). Overall, financial frauds in the country boomed during the COVID-19 pandemic as fraudsters started to use consumer fear and confusion to cheat them of their financial details. Imposter scams in the country were one of the most prevalent forms of fraud in 2021, where a typical victim lost about $1,000. In these frauds, the criminals pretended to be someone else to extract important financial information or indirectly steal money. These people could pretend to be a relative, bank officials, government employees, technical support staff, etc.

Apart from these, investment frauds are also quite common. According to the FTC report, investment fraud cost $3,000 per victim in 2021. This is the highest cost-per-person in comparison to other frauds. Job and opportunity scams were also tallied and resulted in a loss of $2,000 per victim.

In terms of the age group, younger people were targeted more by different fraudsters. However, the maximum money was lost by those over 70 years old. A fraud victim over 80 lost nearly $1,500, which is three times the money a 20-year financial fraud victim lost. With the steeply rising number of frauds in the country, the birth of crypto investments, changing fintech rules, etc., as a consumer, it is wise to be aware and prepared with the right tactics to know how to avoid investment fraud and protect your money. You can reach out to a professional financial advisor to help you in safely managing and growing your finances and avoiding offers/investments that may seem risky or fishy.

Here are some tips that can help you learn how to avoid investment fraud and how to protect your investments:

1. Ask questions before making a decision:

When a fraudster approaches you, they rely on you to not ask any questions. Hence, be careful and adopt the opposite approach. Whenever you get a call to make a prospective investment (genuine or fake), dig in deeper and ask in-depth questions. Ask about the investment, returns, company backing, market experience, product features, specifications, and other details. If the person dodges the questions, it could be a red flag. In some cases, they might give you an instant answer to justify their point. However, before you trust them, do your research to check if any answers are true. If you are unsure or have an instinct that something seems odd, be careful before trusting them with your financial details. The objective is to thoroughly understand the background of the broker or investment advisor from whom you intend to buy a product or engage in a business. It is important to ask questions to be sure that the person you are giving your hard-earned money to has your best interest at heart. If the concerned person is making an urgent request, pause and reflect; ask them – why is this so urgent? What if you wait for a few days before investing? What does the dealmaker (the person proposing the investment) gain from this? Why are they offering you this? Whether you are a new or seasoned investor, it is always advisable to ask questions. Do not feel intimidated because it is your money at stake.

2. Do your own research:

Before investing in anything, do the necessary due diligence and study the company whose product you are investing in. Read about the current news, its history, check its reputation, analyze the reviews of its products and services, etc. Avoid relying solely on unsolicited emails, company news releases, postings, messages, etc., to make your investment decisions. Understand the company’s business and obtain a holistic view of its products and services before investing. You can check the company’s financial statement on the Securities Exchange Commission (SEC) EDGAR filing platform. The EDGAR database has detailed corporate information, allowing you to check the financial data of a public company. You can also assess the company’s financial standing by reviewing the company filings with the SEC. If you are investing in mutual funds, Exchange Traded Funds (ETFs), and variable annuities, you will get detailed information about the company, investment portfolio, strategy, etc., in the brochure of these schemes. Before you go ahead with an investment product, you can also ask your peers and friends about their experiences.

3. Keep your financial information confidential:

Before the COVID-19 pandemic, most people were wary of sharing their financial information online. However, the pandemic has changed the take on this aspect. From opening bank accounts, applying for loans, filing licenses, opening investment accounts to buying a home – everything is now online. While you cannot completely restrict yourself from sharing some necessary information, you can be sure about who is getting this information. Avoid giving any banking information, credit card pins, personal identity details, etc., on social media. Keep your banking username and password confidential. Also, be careful about giving your financial documents like tax certificates, government identity cards, etc. If you have to share any financial document, self-attest the form and sign it stating the purpose for submitting the papers. Refrain from signing on a blank paper or signing a blank check, irrespective of how trustworthy the other person is.

4. Get a monthly account and credit report:

Often, the easiest but most neglected way to understand how to protect your investments is by keeping a check on your bank accounts, credit scores, etc. Check your bank statements regularly and evaluate if the listed transactions are in your knowledge. You can also set up phone notifications that will send an alarm if anyone tries to change or open an account in your name. You can get notifications of transactions or changes made to your bank account, too. This will also include transactions you make and the debit and credit to your account. If you notice any discrepancy in your analysis, notify the concerned financial institution, like your bank, SEC, etc., immediately. For future reference, try to keep a written record of the complaint you register. Apart from reviewing your bank account statements and credit scores, ensure you keep your account information safe and password secure. Avoid reusing passwords for different bank accounts and also aim to keep complex passwords and refrain from using common passwords like your name, mobile number, parent’s name, birth date, etc.

5. Be cautious of unsolicited offers:

As an investor, you are likely to get tempted when a potential fraudster assures you a high investment return. However, be especially careful in such situations. If you receive an unsolicited pitch about a company or a particular investment product or see the product/company being unduly praised online but without any solid publicly-available financial records, you might want to reassess your investment decision. It could be a scam or a pump and dump scheme. Recheck the email account you receive the company details from. Be careful and assess the credentials of the company and check whether the email is valid or not. For example, an extra O in Amazon or an off LinkedIn logo, etc., could indicate possible fraud. Scammers usually use famous brand names to dupe customers into investing. You might think you are working with a trusted company, whereas in reality, your money is going to an unidentifiable source. Ensure you are working with the right company and authorized person before sending over any financial information or making any money transfers. This is even more critical in the case of foreign or off-shore investments, where it is difficult for you to track where you sent your money or who the concerned person is. Plus, regulatory and geographical jurisdiction restrictions of financial institutions might limit you from pursuing any legal action against an off-shore fraudster.

6. Know the salesperson: 

In most cases, a salesperson would reach out to you suggesting a particular investment or scheme. Irrespective of whether you know the person socially or not, it is always wise to conduct an in-depth background check of the salesperson before investing your hard-earned money. Ideally, you should know if the person offering to sell securities has the authority and the license to do so. Check if their license is valid in your state and if they or their firms are registered with the financial regulators like FINRA (Financial Industry Regulatory Authority) or SEC. You can easily do this by visiting the SEC or FINRA official website that has disciplinary records and license registrations for brokers and advisors. You can access the FINRA and SEC online databases for free. Further, your state securities regulator can give you further information about the salesperson.

Red flags and persuasion tactics to help you understand how to avoid investment fraud:

Despite knowing how to ward off fraudsters, even the most successful investors fall prey to financial scams. One of the prime reasons is that fraudsters appeal to your psychological profile and choose persuasion techniques that fit your side view.

Here are some red flags you should look for when investing your money:

1. Flamboyant claims or guaranteed returns:

If a certain salesperson approaches you with an investment product promising a guaranteed return (generally much higher than the market average), you could take a moment or more to reflect on your decision. Further, promises of high yield on well-established market indices could be a sign of worry. Any investment claim that promises that you could receive a higher return could also be highly risky, causing a significant loss. Look out for words like “incredible gains”, “outstanding performance”, “assured returns higher than the market”, “assured returns, no risk”, and other similar ones.

2. Watch out for the ‘Halo’ effect:

Fraudsters usually have the power to influence you to decide in their favor. However, do not trust someone blindly or take their credibility as the hallmark. Credibility can be fake, and even a con artist can come across as likable or trustworthy. Hence, before the final decision, check the actual qualifications, experience, expertise, licenses, etc., of the salesperson.

3. “The market is buying it fast”:

As humans, we are often persuaded when someone tells us that everyone else is also doing the same thing. Moreover, indicating a shortage or situation of fast-sale could intimidate you into making a hasty decision. Watch out for sales pitches that convince you to buy an investment product because everyone is doing it. It could be a red flag.

4. Pressure to transfer funds instantly:

One of the loudest scam red flags is when the other person pressurized you (directly or indirectly) to instantly transfer funds to a specific account. Statements like “limited time offer”, “sold-out but last buy”, “once-a-lifetime purchase”, etc., could be indications of fraud. Someone asking you to take a particular action to avoid a penalty or fee can also be a scam.

5. Reciprocate the favor:

Sometimes scammers adopt a more ‘get into your zone’ approach, where they approach you indirectly by offering discounts, free lunches, event passes, etc. They expect that you would accept the offer and, in return for the favor, sign up for their recommended investment idea. But there is never enough reason to make a hasty investment decision. If you get a free lunch from a salesperson at a seminar or event, take their material (brochures, pamphlets, etc.) home and read it thoroughly. Do background research to know if the person or company is genuine and authorized to seek investment from people. Before you invest, understand if the product is right for you and fulfills your financial agenda.