Regulators are warning seniors to watch out for invitations to free-meal investment seminars, cold calls from telemarketers, and radio and TV advertisements pitching investment deals. And even if you think you’re a savvy investor, that doesn’t mean you can always tell the smooth talker from the real thing.
Consider this finding: Seniors who were victims of investment fraud scored higher on financial literacy questions than nonvictims, according to a study for the NASD Investor Education Foundation. They also tended to be wealthier, more educated and married.
To helpÂ seniors toÂ learn to protectÂ their nest egg, Kiplinger has these advices:
Protect Yourself Against Investment Fraud
You can reduce the chances of investing in fraudulent or unsuitable products by rejecting invitations to free-meal seminars, tossing out unsolicited mail and hanging up on cold callers. But if you find yourself tantalized by a prospective investment, be sure to take steps to safeguard your nest egg.
Be skeptical of promises of above-market returns. Keep in mind the adage: If it’s too good to be true, it probably is. In March, the SEC charged two people in Allentown, Pa., with selling $3.9 million in fictitious certificates of deposit to at least 50 investors. The complaint said that the two promised rates of 7% to 9% and created fake monthly statements.
Few investments, with the possible exceptions of Treasuries and traditional bank CDs, can actually guarantee a return. The SEC warns, for instance, that many investors believe that they can’t lose money with equity-indexed annuities. But if you need to cash out early, a large surrender fee could turn the investment into a big loser.
Recognize the trouble investments. The SEC warns consumers to watch out for “prime bank” schemes, where fraudsters promise huge returns by claiming to buy and trade financial instruments in overseas elite banks; these instruments don’t exist. If you hear TV pitches for “IRA approved” investments, turn off the tube. In those ads, marketers are selling products with high fees, which will erode your returns.
Also, watch out for “sale and leaseback” contracts, which occur when a salesperson sells an investor a piece of equipment or property, such as a pay phone, ATM or a long-term lease. As part of the deal, the company agrees to pay investors a fee to lease back and service the property, which is usually fictitious.
Avoid promissory notes as well. With a promissory note, an investor lends money for a fixed period to a company, which agrees to pay a fixed return. But regulators warn that legitimate notes are marketed almost exclusively to corporate investors. Notes marketed to the general public are usually cons. If you can’t resist, make sure the securities are registered with the state or the SEC and that the seller is a registered broker.
Take your time. When you’re told that you need to act immediately, it’s likely that the salesperson is trying to hide something from you. Never sign anything without taking time to conduct research.
And don’t follow your friends’ advice. Con artists often seek out members of the same group to spread the word. Churches are a favorite target. “If your pastor tells you about an investment, you may go for it because you trust him. But he could be getting taken, too,” says Jacqueline Wiley-Sistrunk, coordinator of Seniors Against Investment Fraud, run by California’s Department of Corporations.
Insist on written information. Make sure that the fine print includes information on commissions, penalties and returns as well as the risks and assumptions underlying the plan. It’s possible, however, that even the materials are fraudulent, so check out the investment with someone you can trust and ask your state securities regulator for help.
Check out the adviser. Don’t be swayed by fancy titles. Salespeople often use designations that could include the words senior, elder, registered or certified. Advisers often attain these titles after attending a sales-related course. Bogus advisers do not have the licenses or expertise to sell you products. For instance, a “senior estate planner” is not a lawyer who is qualified to devise a living trust.
Ask for the license numbers of the person purporting to be an insurance agent, broker or investment adviser. Then check out the adviser with a government entity. Note that an insurance agent can’t sell securities. Even if a broker is registered, ask the broker’s firm if it’s authorizing the products. In the Los Alamos case, regulators say that Weis began selling products not backed by his firm. “People are freelancing without the company’s knowledge,” says Joseph Stein, regional director of the Seniors Vs. Crime Project of the Florida attorney general.
If you allow an adviser to trade in your account, review your monthly statements. Make sure you understand the investments, and watch out for high trading activity that could generate a lot of fees for your broker and low returns for you.