The topic of investing can be a difficult one to navigate. One survey says 61% of Americans find the stock market scary or intimidating. To make things even more difficult, not every investment is what it is advertised to be — the last decade exposed us to high profile cases of investment fraud.

It’s understandable seeing these cases can cause some trepidation for prospective investors. A key to harnessing the good parts of investing is to make sure you know what to avoid. 

What Happened When I Went to an ‘Investment Presentation’

In the mid-2000’s, my wife and I were invited to an investment presentation. There were not a lot of details, but we were assured by our friends the information we would receive would be “life-changing.” I assumed it was some type of pyramid-style business presentation because they were very popular at the time. I went along with it, because dinner was promised afterward and well…dinner sounded fun.  

Once the presentation started, the red flags were everywhere: no real investment materials were handed out, the people introducing the concept were selling outrageous returns with no risk, the emphasis was on success stories and not the actual methodology of the investment, etc. Questions from the audience about transparency were vehemently challenged. It turns out I was in fact witnessing a sales pitch which would later prove to be a fraudulent investment. 

The Red Flags That Told Me This Was Possible Fraud

Shhh…It’s a Secret 

A reputable investment is not hidden under a rock. If someone is creating a sense there is this secret opportunity only they know about, you should be very cautious about proceeding. One tell-tale sign in the case I witnessed, was the lack of printed information about the opportunity.

The lack of information hinders the prospective investor’s opportunity to research the investment. Publicly traded investments are required to make documentation available about the opportunity. Offerings for smaller and non-publicly traded investments typically require documentation, as well. If you can’t take something official away from the meeting it is a big concern – it’s probably a scam.  

Selling a Fairy Tale

The most obvious red flag should always be the promise of exponential growth with no risk. I’m here to tell you nothing earns significantly better interest than a savings account without some risk. That’s just the way it works. These folks were promising fantastic returns without any risk of loss.

Another red flag is when an unscrupulous salesperson states their track record is perfect. There is no such thing as the perfect investment that yields double-digit returns with no risk. Investment returns are the function of increased risk, not lower risk.  If you are getting this sales pitch, run the other way.  

Pushing Back Against Transparency

One red flag that does not involve paperwork is the attitude of the person selling the investment. If there is push-back against questioning on the front end, it is usually a bad sign. Even if the paperwork checks out and you understand the investment, but you get the impression the salesperson or advisor is not giving you the full story, there is a high likelihood that impression will get worse as time progresses.

By investing in something, you become a partner in that endeavor and you should be treated as such. If you feel your voice is being minimized, you may not necessarily be experiencing investment fraud. But, you are being pushed out of the position of authority to make decisions about your money and that’s still a red flag. If you feel like an investment product is the right one for you but you do not like how it is being sold, find another salesperson from whom to buy it. 

How to Avoid Being Taken for a Ride

Find Out How it Works

One of the great Buffett-isms (sayings of the billionaire investor Warren Buffett) is, “do not invest anything you do not understand.” It sounds simple enough, but people regularly break this rule with disreputable and even reputable investments. I have worked in the financial industry just under 20 years but have been in situations where someone couldn’t explain the investment to my satisfaction.

Asking the Right Questions

My most pressing questions are:

  • How does everyone get paid?
  • What are the risks?

If I cannot get clear answers to those questions, I will not touch the investment with a 10-foot pole. Generally, the more complex the investment, the more likely you are to make a mistake by investing in it.  

If you feel like you may have already experienced investment fraud, FINRA offers a list of steps to take to recover from it. If you are not sure, solicit assistance from a trusted advisor, friend or family member to consider the situation.