It can be a dangerous world out there for the unwary investor. The Texas State Securities Board (“TSSB”) recently updated its annual list of Top Investor Threats. Some of these threats have been around for decades, while others are relatively recent additions.
Before buying any investment product, make sure the individual selling it is registered with the SEC or TSSB. Visit brokercheck.finra.org and type in the name of the individual or firm for registration and compliance information. If you cannot find them in this database, run away!
Private Placement Offerings
Companies raising money through private placements often have limited operating history, making proper due diligence almost impossible. Often marketed to unaccredited investors, these products are among the most frequently tied to regulatory enforcement actions.
Oil and Gas Investments
Highly speculative and complex, it is virtually impossible for the average investor to investigate a promoter’s claim about estimated reserves, production reports, potential start dates or commissions and fees that may be paid before investors receive any payments.
Foreign exchange trading, as well as cryptocurrency, is enormously complex and often involves claims of specialized expertise and promises of stellar returns. These currency trades often involve extremely volatile markets, where large losses can pile up quickly.
Non-Traded Real Investment Trusts (REITs)
These products have appealed to investors with claims of “hard asset” backing and high yield. However, Non-Traded REITs are highly illiquid and generally must be held for 7-10 years, and have limited redemption options. Non-Traded REITs usually charge significant commissions, which can lead to high pressure sales tactics.
Other Red Flags:
- Affinity Fraud: Con artists frequently exploit affiliation with a group or organization (churches, community organizations, nursing homes, etc.) to gain investor confidence or trust
- Social Media and Traditional Advertising: Be wary of claims of outsized gains with little or no downside risk. It is easy to create sophisticated appearing websites and advertising.
- Free Dinner Presentations: Often portrayed as educational seminars, these events are often pure marketing events that serve as a sales pitch for high-cost, unsuitable investments.
- Pressure to Act Now!: There are very few legitimate investments that must be purchased today. If it is a good investment today, it will be a good investment tomorrow or the next day, after you have had to time to investigate it thoroughly.
So what are some ways you can protect yourself from unscrupulous financial salespersons?
First, work with advisors who adopt a Fiduciary level of care with their clients. These advisors, often CFPs or CFAs, members of certain trade organizations, such as NAPFA (www.napfa.org), or firms structured as Registered Investment Advisor firms, are required to put their clients’ interests ahead of their own.
Second, check out your advisor on brokercheck.finra.org
Third, listen to your intuition…. If it sounds too good to be true, it usually is.
Contact Morgan Stone or Kacie Swartz at firstname.lastname@example.org
or 512-469-9152 if you would like to learn more about protecting yourself.