How to spot and Avoid Investment Scams – A practical Guide
In the complex world of finance, even the most astute people can fall victim to deceptive schemes. Recently, I learned of a relative who, despite their success in business, was persuaded to invest in what can only be described as a dubious offering.
A common phrase often repeated when considering an investment is “do your own research.” But can “doing your own research” really replace expert financial advice or put you on a level playing field with seasoned market participants?
Does managing your own financial affairs and thus avoiding the added expense of a financial professional equate to taking less risk? Think DIY Share trading versus using a broker, or managing your own portfolio versus using a fund manager.
You wouldn’t fly a plane, perform open-heart surgery, or compete in the world chess championship without suitable education, training, and experience. Even the best-trained and equipped mountaineers still use a sherpa when climbing Mt. Everest.
Yet, many still venture into investments after reading popular finance books or listening to podcasts, hoping to find the one investment that will change their lives forever. Sometimes, they succumb to promises of unrealistic returns coupled with zero risk and wind up losing everything.
Here is a short list of some of the things to look for:
Practical Guide to Recognise and Avoid Dubious Investment Scams:
Red Flags to Avoid:
- “A Once in a lifetime opportunity”: High-pressure sales tactics often disguise undisclosed risks. Unfamiliar strategies, asset classes, or investments add levels of complexity that cloud the decision making process. Warren Buffett suggests that you should invest in businesses you understand… and if you don’t understand it, it’s okay to turn it down. Think Tulips, day trading, cryptocurrency and Web 3.0, NFT’s, ostrich farming…
- “Exclusive offer”: Be wary of offers targeting only “sophisticated” or “wholesale” investors especially if you have never invested before and know that you are neither. Everyone likes to be thought of highly and be on the inside of what is perceived to be an exclusive group, but being part of such a group is as much about knowing which offers to walk away from.
- Recommendations from acquaintances: Legitimate firms do not typically solicit through unconventional channels… their sales pitch makes sense and you cannot ask enough questions… If you sense they feel put out answering your questions… then you have your answer.
- Urgency: Scammers often create a sense of urgency to prevent thorough research and consideration. Phrases like “act now!” or “we need to know by this afternoon” are designed to subconsciously prioritise the Fear Of Missing Out (FOMO) above the need for due diligence. Legitimate investment opportunities provide time to make an informed decision… Investments are more like busses than trips to space… there is always another coming along soon enough*.
Key Checks Before Investing:
- Australian Financial Services Licence (AFSL): Go to the effort to ensure the entity is licensed and verify its AFSL number through something like the AFSL search.
- Authorized Representatives: Check the Financial Adviser Register to confirm the legitimacy of those offering financial advice.
- Offer Documentation: like an investment prospectus, Product Disclosure Statement (PDS) or a personalized Statement of Advice (SOA)… all will detail investment specifics like, fund mandates, costs, risks, recommended minimum investment periods, limitations etc… for comparison, check out these seven investment firms… Manager 1, Manager 2, Manger 3, Manager 4, Manager 5, Manger 6, & Manager 7
- Disclaimers: Pay attention to disclaimers, like past performance not guaranteeing future returns, risks of loss… hallmarks of legitimate investments.
- Credible Presence: A reputable website with detailed information about the team and contact details add legitimacy… look for a social media presence of the company or fund managers (LinkedIn, twitter or Youtube)
Warning Signs:
- Grammar: Professional firms invest in quality presentations. Grammatical errors suggest a lack of professionalism.
- Design flaws: Genuine investment firms do not cut corners on marketing; they present confidently and professionally and own their copy.
- False endorsements: Avoid investments falsely associating with respected institutions like ASX or ASIC.
- Personal details: Legitimate firms provide their history, founders journey, experience and personal details, the investment team and their experience, contact details, phone, email, address… if they want your business, there will be few barriers to contacting them… why would they?
Conclusion:
The allure of quick gains can lead to significant losses that take years to recover. Approach investments cautiously, don’t go all in on a longshot and don’t invest money that has been earmarked for other essential projects or goals.
In today’s challenging financial landscape, there are no shortcuts. Protect yourself by staying informed, verifying credentials, and seeking advice from experts.
Here is a sample of the newsletter from this particular firm, see if you can spot what’s NQR, and if you would see what such a firm’s website looks like, take a look at this…
* Please Note: this blog has been written prior to Elon Musk making trips to Mars as regular as bus trips to town.
