The rise of technology that makes it easier for scammers to reach people and more people making financial decisions on their own is allowing investment fraudsters to have a field day. The FTC reported in their 2016 Consumer Sentinel Network Data Book that they had 1.3 million complaints related to fraud in 2016, which made up 42% of their total complaint volume. This is up from last year when it was only 40%.
Now, while the government is increasing their prosecutions and the SEC has posted signs of fraud to look out for, we must take another step in combating this crime. We should look at the risk factors that make people more likely to be victims of investor fraud and see what can be done to mitigate against these factors. Fortunately, both the AARP and the Financial Industry Regulatory Authority (called FINRA) have done some surveys of the victims of investor fraud, and they have found that victims were more likely to have certain traits and behaviors. Let’s look at them and see what can be done about them.
This isn’t a category that can really be mitigated against, but it can at least put you a little more on your guard. According to the 2016 survey done by the AARP, about 50% of investment fraud victims were over 70 years old. 81% of the victims were male, and 66% of the victims were married. This is in contrast to the general population of investors: about 35% of general population was over 70, 42% were male, and 58% were married. Previous surveys found that victims were likely to be making more than $50,000 a year, be financially literate, and well-educated. Investment scammers can hoodwink smart people.
In the 2007 survey done by FINRA, the survey-takers found that victims of investment fraud were more likely to have invested in riskier private investments, such as penny stocks, and less likely to have been invested in bonds. This is consistent with the attitudes that the AARP discovered in 2016. When they asked people what they thought of unregulated investments, 48% of the fraud victims thought that they were more profitable than regulated ones. Only 30% of the general population of investors agreed. The victims were also more likely to agree with the statement, “I don’t mind taking risks with my money so long as I think there is a chance that it will pay off.” The victims also said that they liked to ‘keep their ears open for investment opportunities that others hadn’t heard of yet.’ In other words, victims are still more likely to be risk-takers and receptive to sales pitches.
Another attitude they tended to hold was that accumulating money was a good thing in itself. 60% of the victims in the 2016 survey agreed with the statement “Some of the most important achievements in life include acquiring money.” Only 41% of the general population of investors agreed with the statement.
This is the area where we can do the most good. Victims of investment fraud do certain things, and they can avoid doing those things to slam the door on scammers.
If you go to the FINRA riskmeter, they ask about certain behaviors to evaluate how vulnerable you are to investment scams. (AARP has a similar one, but you have to download it, while the FINRA lets you do it on their website.) This riskmeter identifies three behaviors that make you more vulnerable to this type of fraud: not checking out the brokers licenses and disciplinary history before investing, relying solely on a friend’s recommendation to decide if a salesperson is trustworthy, and not signing up for the Do Not Call List.
The AARP findings generally agree that registering with the Do Not Call List is a great way to reduce your risk. Victims reported being contacted by salespeople more often than other investors, especially by phone.
They might have been contacted more because they were more likely to respond. 24% of the victims made investment decisions when a salesperson called them versus 6% of general investors. More victims made investment decisions to email solicitations and TV ads then general investors, too.
The victims were also more likely to be active traders, making more than 5 investment decisions in a year. 42% of the victims versus 11% of the general populace, in fact.
So, what can we do to avoid investment fraud? Remember to go to government sites to check out a broker before signing up with it. The SEC and FINRA have access to the Central Registration Depository, which has information about everyone who is licensed as an investment broker. You can go to the FINRA BrokerChecker or the SEC’s IAPD program. Here in California, we can go to the California Department of Business Oversight. These are the resources we can take advantage of.
Get on the Do Not Call List. Telemarketers and robocalls are the source of many investment scams, and reducing your availability to them is a good idea.
Be careful about responding to sales pitches. Remember that well-educated and financially savvy people have fallen for these scams. A little caution when dealing with ads will not go amiss.
Of course, sometimes even the best defenses are pierced. If you think you or someone you love may have been the victim of Investor Fraud, contact Aiman-Smith & Marcy, a boutique law firm that focuses on investor fraud, employment law, and consumer fraud.