7 February 2019

7 Ways to avoid an investment scam

Investment scams have now overtaken romance and dating scams to become the most lucrative method of fraud, according to Australian Government’s Securities & Investments Commission.

Interestingly, the 10-year anniversary of the world’s largest investment scam is nearly upon us. In 2009, Bernie Madoff defrauded clients of over US$60 billion and was sentenced to 150 years in prison. Around the same time, tens of thousands of Kiwis lost money from the collapse of numerous finance companies. The New Zealand Government estimates that up $200,000 deposit holders lost around $3 billion.

Fortunately, legislation and supervision has improved significantly since these events, especially in New Zealand. However, there will always be those who operate outside the rules, so here are seven of the top ways you can avoid them.


1. Research


Before you make any investment, ensure you understand how the it works. When you know what type of investment would fit with your financial goals (and other investments if you have them), start researching the investment on offer.

If you’re unsure on whether the one on offer is right for you, seek the opinion of an Authorised Financial Adviser. Not only will they be able to help you check the legitimacy of the investment, they can offer advice on whether the investment fits your financial goals.


2. Take your time


Be suspicious of time-limited offers and high-pressure salespeople. If the investment is legitimate, you should not have to invest on the spot.

Many investment scams have an undercurrent of urgency. Scammers are renowned for making people feel like they will miss out if they don’t commit now – this is a ploy to get you to hand money over before carrying out any due diligence about whoever’s offering the investment.

Don’t jump at an opportunity – if it sounds too good to be true, there’s a very high chance that it’s going to lose you money.


3. Check legitimacy


There are several ways to do this:

• In New Zealand, investment providers must hold a licence issued by the Financial Markets Authority, which includes being listed online.

• You can also check the Financial Markets Authority’s suspected scam list for the provider name – or any similar or related name that comes up in a search of the provider.

• Lastly, searching the Financial Services Provider Register for the company, plus any names they give you as ‘advisers’.


4. Choose your investments, don't let them choose you

If you have a financial plan, you can evaluate any new opportunities in tandem with your plan. With consideration of how new investment offers fit with your goals and your risk tolerance, you’ll be more likely to choose an appropriate investment – and not a scam.


5. Be wary of high returns with low risk


Investment markets fluctuate and there is always a level of risk involved. Even money deposited in a New Zealand bank is at risk, even if the risk is low. While some investments are relatively low risk, those low risk investments also offer similarly low returns. A high return investment almost always has more risk - that’s how you get higher returns in the first place.

However, investment scams offer high returns with low risk. This scenario is too good to be true, but scammers pray on people’s trusting nature and naivety about investing in order to get a commitment to a dodgy investment.

Occasionally, an investment scammer might tell you the offer is made only to a select few people and should be kept a secret. This is a ploy to make you feel special and to stop you speaking to the authorities or an actual financial adviser.


6. Avoid one-man-bands

The fewer people involved in an investment scam, the easier it is to run. While scammers can have elaborate operations with falsified statements and professional websites, a sole operator should definitely be a sign of alarm.

At absolute minimum, investing in a fund that uses a third-party custodian (like Public Trust or Guardian Trust) that holds your invested funds in trust, reduces your exposure to scams.


7. Don’t be a target


The more public your contact information is, the easier it is for scammers to target you. One of the easiest ways to research an individual is through social media. For example, a Facebook account is often linked to a phone number, and data such as your age, address, and email can be on display to anyone who comes across you.

We strongly recommend increasing your privacy settings so that personal information is not displayed. Also, be very wary of unsolicited emails, avoid clicking on links contained in them, and ensure you have a robust anti-virus system on your computer.


In summary:

1. Research

2. Take your time

3. Check legitimacy

4. Choose your investments

5. Be wary of high returns and low risk

6. Avoid one-man-bands

7. Don’t be a target

This article has been contributed by Joseph Darby, CEO and authorised financial adviser at Milestone Direct Ltd. This article first appeared on the Milestone Direct website. The views and opinion expressed in this article are those of Joseph Darby and not necessarily those of Milestone Direct Ltd. The views and opinions expressed in this article are intended to be of a general nature and do not constitute a personalised advice for an individual client. A disclosure statement relating to Joseph Darby is available, on request and free of charge.