5 Investment Scams You Must Avoid


That salesman may seem nice but take some precautions before signing away your savings (Thinkstock/Getty Images)

Bernie Madoff got our attention. We wondered: could it happen to us?

The reality is that these scams are as old as time, and are going on right now. There are also ways to avoid them. Here’s how:

“We truly, truly believed this man.”

This was a quote from a recent victim of a 38-year-old real estate entrepreneur from Oakville, Ontario. Trusting someone takes time and is an important thing. The problem is that all victims seem to say the same thing. If someone seems honest and respected in the community, they probably are. However, don’t invest your money based on that. It has cost people billions of dollars. There needs to be something much more tangible beyond personal trust.

“The rates of return are so good.”

One of my clients made a comment about the GIC rates at Stanford International Bank in Antigua. They wondered if they should put some of their safe money there because they could get 5% and 6% rates on short-term GICs. The questions that need to be answered fully are always, ‘why such a good return? What is the investment in? What is so special about how the underlying investment is to achieve this extra return?’  If you keep asking questions and get clear answers, then it might very well be a good investment. The problem is if you are not in a position to know what questions to ask, it can be difficult to discern between a real investment and a not-so-real one. The other obvious sign to run is when you ask questions about the investment or its structure and you don’t really get straight answers.

“Can I see the value of my investments?”

This is another warning sign. In most Ponzi schemes, the value shown on a statement was a made-up number. The value behind the number was not entirely clear. Anytime you invest in something that isn’t publicly traded or held at a large financial institution, you are taking greater risk.

For example, if you own 100 shares of Royal Bank according to your custodian at TD Bank Financial Group, you can be pretty certain you actually own 100 shares of Royal Bank. You can then look on the public and open stock market and see the value of those 100 shares. If you have money in Stanford Bank (even though it was very large) in Antigua, you will get a statement showing a balance of dollars. You had better be confident in the banking regulator in Antigua that they have a strong enough system to ensure those dollars are actually there.

“First I put in $20,000. It did well, so I put in $50,000. It did well, so I put in $250,000.”

Humans are greedy by nature and it’s tough to overcome. When something appears to perform well, it is natural to want to have more money invested in it. If the investment is growing on paper, how certain are you that it represents a real number? The toughest scenario is when you put money in and take it out before making further investments. It is then real cash. It instills confidence. It builds trust. This is why Ponzi schemes are so successful. Unless there is a run on the money, as long as new money is going in, most investors can get their funds out. Don’t be fooled by an initial good investment by betting the farm.

“I trusted my gut feelings that this was a good investment.”

Don’t trust your gut. Trust your brain and do your homework. Your life savings are too important to risk on “liking the guy” or “they seemed honest.”At the end of the day, investment is always a balance of risk and reward. Always understand the true risks you are taking. If the cheque is written out to a small entity or person — please do a triple check before handing the money over. The next Ponzi scheme is being set up right now.

Do you have an additional tip for avoiding a scam? Leave a comment below or message us on Twitter or Facebook!

Ted Rechtshaffen is president and CEO of TriDelta Financial, a firm that provides independent financial planning and investment advice. This article was originally published in National Post.