How to Spot the Red Flags of Investment Fraud

22 May, 2024

When deciding on where to invest your money or retirement savings you are often relying on your financial advisor to give you complete information in response to questions that you ask.

In some cases, your financial advisor is using deceptive and shady tactics to sell you a fraudulent or unsuitable investment. Hopefully, you are able to spot red flags of investment fraud before you invest and lose your money. However, if you realize after you made the investment that you have been defrauded, you still have legal rights.

Contact Rikard & Protopapas to learn more about how you can pursue compensation from a financial advisor or insurance agent who defrauded you.

Fraud Red Flags

Here are some red flags that you need to be aware of that could be signs of investment fraud. Be on the lookout for these when speaking with a financial advisor or insurance agent .

Excessive complexity

If you do not understand a product, you should not put your money into it. While not every investment is simple, one that seems overly complex is not for you. If the financial advisor or insurance agent is trying to explain it to you, and you do not understand it, stay away from the investment. If the financial advisor or insurance agent refuses to give you copies of documents or insists that you sign up right away, do not invest your money.

High-pressure sales tactics

Brokers, financial advisors, and insurance agents are often paid on commission for what they sell. Many will use aggressive sales techniques, even if the product is completely legitimate. However, a broker who is selling a fraudulent product may be using even more pressure.

A financial advisor or insurance agent should let you take the time to consider the investment that they are trying to sell without aggressive sales tactics. You should not trust a financial advisor or insurance agent who is urging you to act immediately, telling you that the opportunity may not be there tomorrow if you do not purchase now. Sound investments are usually there whenever you want to put your money into them.

Guaranteed returns on an investment

No salesperson can ever guarantee you a return on any investment. It is simply not possible in light of market conditions.

Further, if a salesperson shows you that there is no variation in returns over the years, it may also be a possible sign of market fraud. One of the red flags that investors and auditors missed in the Bernie Maddoff scandal, for example, was that his hedge funds achieved extremely consistent returns each year, regardless of whether there was an up or down market.

The general rule of thumb is that if something seems too good to be true, it usually is. If someone is offering you outside and guaranteed investment returns, you should be very skeptical of why they are telling you about the opportunity as opposed to keeping it for themselves.

Unsolicited offers

Be wary of financial advisors or insurance agents that reach out to you without a pre-existing relationship.

While there is nothing wrong with cold calling a potential client, if the investment opportunity that the broker is selling is so good, they would have pitched it to their own existing clients.

If someone calls you out of the blue with a can’t-miss investment opportunity, you should be extremely skeptical.

The financial advisor or insurance agent will not answer questions

Any financial advisor or insurance agent should take the time to patiently explain things to you and answer your questions. If a financial advisor or insurance agent refuses to give you detailed and proper answers to your questions, it is a surefire sign that something is wrong.

Nobody could ever say to just trust them when they are asking you to invest your hard-earned money.

You should always make sure to ask questions when you do not understand something, and you deserve and expect answers. Excessive secrecy is never a good sign.

Similarly, a financial advisor or insurance agent would need to make certain disclosures in connection with investments. If you are not being given the information that you need, or the broker is not making the required disclosures, it could be a serious red flag.

The advisor or the product being sold is not registered

Not only should you closely scrutinize the investment itself, but you should also dig into the person who was trying to sell it to you.

Brokers and financial advisors need to be registered with FINRA or the SEC to offer securities advice.

FINRA makes information about the broker’s disciplinary history publicly available for you to research. If you cannot find the broker by searching the FINRA or SEC website, chances are that there is something wrong.

Similarly, securities also need to be registered with the Securities and Exchange Commission (and in some cases, with the Commodity Futures Trading Commission).

There are very few exceptions to the rule that the security must be registered. Most unregistered securities fall under special exemptions that are usually available to high-net-worth investors. Especially if you have never dealt with a broker before, be very wary when they try to sell you an unregistered security.

Inconsistent information about the investment

The advisor may change their story every time they tell you about the investment. Pay attention to everything that the broker says to spot any potential inconsistencies in their story. If what they tell you is different from one day to the next, it is a sign that they are trying to defraud you.

You may not have realized until it was too late that a broker sold you a fraudulent product. Rest assured that you have the legal right to take action against them to recover some or all of what you lost.

FINRA rules allow you to file an arbitration claim against a broker, seeking compensation when they have broken the rules. You can file a claim against the broker’s firm for their failure to supervise the representative. First, you would either need to prevail against them in an arbitration hearing or reach a settlement agreement to your claim. You need to be proactive and monitor your investments, taking action at the first sign of trouble.

Contact an Investment Fraud Attorney Today

The attorneys at Rikard & Protopapas can help you take action against the broker who defrauded you. First, you need to schedule a free initial consultation. Call us today at (803)-805-7546 or message us online to discuss your case.



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