8 Red Flags to Spot Investment Fraud & Scams

Investing your money is necessary and smart, but that doesn’t mean you don’t need to take precautions. It’s an unfortunate fact of life that investment scams exist and scammers are willing to do whatever is necessary to take advantage of investors.

At Addition Financial, we consider it our responsibility to help our members recognize signs of investment fraud, like a Ponzi scheme, securities fraud, or really any kind of scam that would lead to financial loss.  With help from some financial experts, we’ve compiled this list of eight red flags to help you evaluate investments and decide whether they’re genuine opportunities or fraudulent efforts to take your money.

#1: Promises That Are Too Good to be True

All investments carry some risk. That’s the nature of investment. It’s for that reason that the red flag for an investment scam that many of our experts mentioned first is a scammer promising returns that sound too good to be true, what we call high yield investment fraud.

Ann Martin, the Director of Operations at CreditDonkey, told us:

“You should look out for any kind of investment service that promises it is risk-free, will make you a millionaire overnight, or carries a similar too-good-to-be-true slant.”

We got a similar response from Dave Herman, the President of EZ Security Bonds. He said:

“Online investments have been a cradle for get-rich schemes. When you see a platform that offers guaranteed returns, run as fast as you can. Investments always have risks involved. One of the basic tenets of investing is the higher the potential return, the higher the risk.”

If someone promises that you’ll get rich from an investment offer or that they can guarantee your return, it’s a red flag and an indication that you should not give your money to them.

#2: Emotional Pressure or Manipulation

When you evaluate an investment, it’s important to keep a clear head and use logic (and not emotion) to decide whether it’s worthwhile. A common tactic of scammers is to play on your fears and emotions to try to get you to give them your money.

Jake Hill is the CEO of DebtHammer. He told us:

“People [sometimes impersonate] family members to ask for funds to get them out of a desperate situation. I saw one insidious scam email that was written from the perspective of a woman who was trying to flee an abusive home with her infant son. Truly heinous stuff.”

Mason Miranda is a Credit Industry Specialist with Credit Card Insider. He said:

“Phone calls and emails usually try to create a sense of urgency through fear, or they’ll try to excite you into giving out your information.”

If someone tries to scare you or make you feel guilty about not investing, it’s a sure sign that they’re out to scam you. No legitimate investment opportunity comes with a side order of emotional manipulation.

#3: Lack of Transparency

Putting money into an investment comes with the expectation that you will be kept informed of what’s going on with your money and how it’s being invested. If a person or company tries to withhold information, you should be wary about trusting them.

Jake Hill mentioned this issue in his advice:

“Your broker is obliged to give you detailed information about your investments whenever you ask for it. If at any time they're evasive about this, you at best have a broker who's not worth what you're paying and at worst are being scammed.”

Dave Herman cautioned about evasive behavior as well:

“If the company is trying to oversell using complicated jargon and opaque pitches, it is likely to be a scam. Some investors think that if it sounds complex, it is a revolutionary idea. It’s not.”

Some investments are more complex than others, but nobody should be trying to confuse you with unclear language and evasive answers. It’s a good idea to avoid any investment that you don’t understand or where you don’t feel confident that you can get the information you need, when you need it.

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#4: Cold Calls and Email Queries

It’s one thing to seek out an investment opportunity and another to have someone call you or email you with an unsolicited query. You should view unsolicited requests in the same way you would spam. 

Ann Martin offered this perspective:

“Many investment scams start with a phone call or email from someone who claims [to] be an investment advisor. Keep in mind that real investment advisors do not reach out to people in this way.”

Legitimate advisors don’t need to cold call potential clients because their clients come to them. We got a similar warning from Mason Miranda:

“A common investment scam comes in the form of an email or phone call from someone impersonating a legitimate business.”

If you think there’s a chance an unsolicited query might be legitimate, it’s important to do some research. For example, if someone says they work for a legitimate business, look up the main number, call it and ask for the person by name. If they’re legitimate, then you’ll be able to reach them this way. Make sure to look up the contact information independently and not take a cold caller’s word for it.

#5: Recruitment Requests

Legitimate investments don’t require you to convince other people to buy in with their money. Requiring investors to recruit others into the scheme, or pressuring them to do so, is a surefire sign that there’s something nefarious going on – like a pyramid scheme.

Dave Herman had this to say about recruitment:

“If a platform asks you to invite new investors to earn more money, leave right away. Investments should only involve you as the investor, the asset you bought, and the platform you are using to grow your money.”

Recruitment is also a common characteristic of MLMs and pyramid schemes. It’s one thing if you decide independently to recommend an investment based on your experiences with it. It’s another thing to be asked by the person managing the investment to convince your friends and family to buy in as well.

#6: Incorrect Grammar and Other Irregularities

One of the most obvious signs that you’re being targeted by a fraudster is a query that comes with a host of grammatical errors, spelling mistakes and other irregularities.

Mason Miranda offers this perspective:

“Look for grammatical errors, irregular email formats, and weird email addresses to find scams. These don't guarantee you're facing a scam, but they could be indicators.”

You should always read emails with a critical eye. Anybody can make an occasional spelling mistake but an email that’s full of them is far more likely to be a scam than not. You should also review email addresses to make sure they’re legitimate. A lot of times, scammers will use an email address or URL that’s similar to that of a legitimate company. An example would be 1amazon.com, which at a glance might seem to be from Amazon but is not.

Legit Investment Opportunity or Financial Scam?

#7: Unusual Payment Methods

A legitimate investment opportunity is one you can fund using traditional payment methods, for example wiring money from your bank to an account belonging to an investment advisor. If an investment opportunity comes with a funding request that’s unusual, you should avoid it. Here are some examples:

  • Requesting payment with a gift card or credit card
  • Asking for money to be sent to a foreign account
  • Asking for money to be sent to a personal bank account

One of the common scams of the past was a request from a Nigerian prince (or some other self-described “important” person) who claimed to have access to an enormous fortune and needed help getting the money. No legitimate person would ask you to send money to their personal account.

#8: High-Pressure Sales Tactics

When you’re eager to invest money and plan for your future, you may feel a sense of urgency to choose the right investments. That said, no qualified financial advisor or investment expert would pressure you to invest.

Never let anybody pressure you into doing anything with your money. If you find an investment opportunity that you like, do some research and make an informed decision. You should be wary of anybody who implies that there’s a time limit on an investment or tries to convince you that you’ll be missing out if you don’t act quickly.

The same thing is true of anybody who tries to convince you that “everyone” is taking advantage of an investment. FOMO is real and it’s a psychological trigger that can make people act in ways that aren’t in their best interest. A scheme that implies universal popularity may also employ other deceptive tactics, such as posting fake reviews and testimonials.

Whatever age you are, it’s a good idea to set aside some of your income to invest. A diverse portfolio that balances risk with reward can help you build a secure financial future for yourself and your family. It’s worth taking the time to research potential investments and understanding the eight investment scheme red flags that we’ve listed here will help you make informed decisions and avoid investment loss.

Do you need help building an investment portfolio or just need some solid investment advice? Our Addition Financial MEMBERS Financial Services program can help.

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