How To Avoid Investment Fraud

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We’re living in the information age, so it’s hard to imagine that an individual, claiming to be an investment professional, can get away with any type of scam. But it just happened again.

I am not talking about an advisor exposing your portfolio to undue market risk or failing to implement a stop loss discipline to limit any potential losses. I am talking about intentional fraud and deception.

A recent article in MarketWatch described a 38-year old, who was arrested in Las Vegas on charges of defrauding senior citizens of some $2 million. The “clients” were impressed by his obvious display of wealth via fancy automobiles and expensive watches. They did not know about his gambling debts, or his $5,000 per day strip club habit.

The article went on to say that none of the alleged victims had bothered to verify whether that individual was actually registered as any type of advisor. That’s hard to imagine.

Besides the obvious, what else can you do to avoid becoming a victim when selecting an advisor to manage your assets?

Here’s the most important advice I can give you. Any independent investment professional works with a reputable company that functions as the custodian for clients’ assets. There is no reason to ever make a check payable to anyone else but the custodian. Read that sentence again!

Most advisors work with well recognized custodians such as Fidelity, Schwab, Vanguard, TD Ameritrade and others. If it’s not a household name, you can certainly find out a lot by doing quick internet search or contacting the SEC.

In my advisor practice, it happens from time to time that a client sends me a check, maybe for an IRA contribution, and it is made payable to my company. I am not allowed to endorse it, I have to return it and get another one from him made payable to the custodian.

Bottom line is that, if anyone, pretending to be an investment professional, wants to have you make a check payable to him or his company name, run as fast as you can. You may have just avoided an expensive learning experience.

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Comments 2

  1. Another scam is the pump-and-dump business. I get ‘free’ advice every day on the hottest new penny stocks that are certain to rise dramatically.

    The promoter probably loads up at a penny a share and the suckers drive it to three or four cents and the promoter dumps it and it sinks back down and finally goes bankrupt.

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