Think you're too smart, savvy or sensible to fall for investment fraud? Maybe so. According to the 2012 CSA Investor Index, only 4.6 percent of Canadians reported falling for financial fraud. But while that number is small, it's on the rise. More tellingly, most Canadians aren't confident they have the skills to steer clear of the next big scam. In fact, more than half said they felt they were just as likely to become victims as anyone else. How's that for confidence?
The reality is that skilled scammers are pros at avoiding suspicion. But that doesn't mean you have to play ignorant and hope they'll pass you by. In fact, many of the behaviours that are common among investors — especially inexperienced ones — can make them primed for investment fraud.
Are you making yourself an easy target? Here are a few clues ...
1) You don't know the basics
Sure, it's great to rely on a financial advisor or other professional to help you make better investing decisions (we recommend it!), but don't just close your eyes and hope for the best. If you aren't an experienced investor, it's only natural to be intimidated by the complex array of financial products, markets and strategies. And while you may never attain the level of expertise of a financial professional, if you don't know anything, you won't be able to ask competent questions or make informed decisions. The good news is that what you really need to know — things like basic investment types, the relationship between risk and return, and the power of compound interest — is easily accessible. There are tons of both online and offline resources to help you find answers — and your advisor can help, so speak up!
2) You're going for broke
Very few investors get into the game for love; nope, investing's all about the money. But if you go for broke chasing investment returns, that's probably where your journey will take you. There are many investments with high potential returns, 'potential' being the operative word (you also have the potential of winning the lottery, but you're not quitting your day job just yet). Deluding yourself into believing that an investment can't lose isn't just self deception, it's greed. No matter how much you need the money, or how much you've already lost, the market doesn't owe you a thing. In reality, most investors reap the greatest benefits from slow and steady returns. Believing there's an easier way — especially when it involves investing money or taking risks you can't afford — can make you an easy target for scammers touting huge (and often "guaranteed") returns.
3) You're easily dazzled
In the investing world, reputation matters, but it doesn't remove the need for investigation. Remember Bernard Madoff? He pulled off one of the biggest and most damaging Ponzi schemes in history. Part of what helped him do it was the fact that he was a former chairman at Nasdaq who also ran a reputable (and, strangely, legitimate) brokerage business - unlike the completely fraudulent hedge fund he managed on the side. Madoff's reputation allowed people to trust him, often without question. And it was this implicit trust that allowed him to steal money, invent returns and completely evade suspicion until it was too late. According to the CSA Index, only 60 percent of those who have an advisor have checked up on his or her background, and 40 percent of people said they weren't comfortable raising questions and concerns.
But remember this, an advisor works for you. This means you have the right to ensure that whoever you choose is qualified, that they're a good fit for your needs, and that they're willing to answer any and all questions that you have about your money. (Yes, your money.)
4) You can't be bothered
Financial fraud can happen to anyone (just ask Kevin Bacon, who lost millions to Madoff), but just because you don't fall for it, doesn't mean that same scam won't strike a chord with someone else, like that nice older couple next door. According to the Ontario Seniors Secretariat, fraud is the No.1 crime against seniors; Statistics Canada's General Social Survey for 2009 says that victims over the age of 60 suffered more than $4,000 in losses, on average. Unfortunately, the CSA Index found that only one-third of people who were approached with what they believed to be a fraudulent investment actually reported it to the authorities.
If you hang up the phone on a scammer, they'll just move right on to the next number. So pay it forward and contact the RCMP or your local securities regulator to help ensure that other people don't fall prey. If you're lucky, someone else will do the same for you.
It could happen to you
While a relatively small percentage of people lose money to fraud each year, the results can be devastating - more than half of those who fell for scams lost everything they invested. And while it's easy to believe you're too smart to be affected, don't assume you're immune. In fact, if there's one trap that'll increase your risk of becoming a victim, it's believing that it could never happen to you.
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Nothing contained herein is intended to provide personalized financial, legal or tax advice. Before implementing any financial strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances.