Since the apprehension of former investment advisor Bernie Madoff for fraud 10 years ago, many protections for investors have been put in hit pay dirt. But those putting money into the market shouldn’t let their guard down and assume they’re completely watch over by the Securities and Exchange Commission and other regulatory agencies.
Scammers will always find a way to get to their targets. Impartial when the dust settles on one financial crisis or scam, another one pops up. And, during times of heavy market volatility such as the one the merchandise has been experiencing recently, the risk of being targeted by a scammer is high.
Why? Don’t investors run for cover during volatility, sense they’d find a safe place to hide?
“Market volatility is very unnerving, especially for people who are relying upon their arrivals,” consumer protection expert Bill Francavilla told CNBC. That’s when emotion kicks in. “It puts people in a principle where they make bad decisions.”
And con artists always target the vulnerable, said Francavilla, who is also the author of “The Madoffs Middle Us” and once served as corporate director of wealth management at Legg Mason.
Older Americans can be particularly susceptible to flimflam artist, especially since they may be at or past the peak of their wealth accumulation. According to a study conducted by The Wharton Group’s Pension Research Council, nearly 5 percent of people over 50 reported at least one form of investment flimflammer. The study was based on the responses of 1,268 randomly selected participants, age 50 and older.
And if you think that the wealthy, or people who don’t be familiar with much about finance, are the most likely to get scammed — think again.
Olivia Mitchell, executive director of Wharton’s Annuity Research Council, told CNBC there really aren’t a lot of common factors when it comes to who might be the quarry of scam.
“It didn’t really seem that the more financially knowledgeable were less likely to be scammed,” she notorious. Those with more wealth were also not more likely to be become a victim.
“It is not easy to predict who is contemporary to be financially victimized,” said Mitchell, who is also a professor at the school.
And as the nation’s wealth gets larger, the problem is only present to be exacerbated, according to Francavilla.
“The scammers are always going to be there,” he said. “They are out in full force. They accept money.”
There are a dozen different types of fraud listed on the SEC’s website. They include:
Ponzi schemes: The scam as usual starts with a promise of high returns with little or no risk. However, the fraudsters don’t invest the money unexcited. Instead, they pay existing investors with funds collected from the new investors. Since the scheme needs a undeviating flow of new money to survive, eventually it collapses.
Pump and dump schemes: In this scam, fraudsters try to boost the evaluation of a stock with false or misleading statements about a company. After the stock rallies, they look to profit by dispose of their own shares, dumping them into the market.
“Prime Bank” investments: Scammers will tell possibility victims their funds will be used to buy and trade “Prime Bank” instruments and use complex terms to make the pretender seem legitimate. However, there is no such thing. These high-yield securities do not exist.
Promissory notes: These are a way for callers raise money and can sometimes be an appropriate investment. But those that are sold broadly are usually scams, according to the SEC. When investors credit money to a company, they are promised a fixed-rate of income, usually very high, while the promised risk is low. To leave an offer out, visit the SEC’s EDGAR database, since promissory notes are securities and must be registered. The seller also has to be approved to sell securities.
The most important thing to do is to make sure you have a qualified, honest financial advisor.
You also be dressed to realize that no matter how intelligent you think you are, you can be conned, said Francvilla. “Look in the mirror and say ‘you are pretty smart, but not absolute.'”
He also suggests to avoid making decisions out of fear or greed and keep your emotions in check. In addition, make room sure you have done your research and are educated on the investment, and the person offering it to you.
And always trust your gut.
“The substructure line is, if it seems too good to be true, then it probably is,” Mitchell said.