Protecting yourself from fraud
Phony investment schemes claimed $11 million from state residents last year
Americans lose about $10 billion each year in fraudulent investments. According to the Federal Trade Commission, Hawaii ranked seventh in the nation last year in the number of fraud complaints relative to the size of our population. Overall, island consumers lost a reported total of more than $11 million to fraud in 2006.
Anyone can fall victim to investment fraud, but older investors are a favorite target of con artists.
The investment could be an outright fraud, like a Ponzi scheme, or a completely legitimate product that is unsuitable for the investor's circumstances -- such as a variable annuity.
Research shows that boomers and older investors are natural targets for a wide variety of unscrupulous marketing practices because they have had more time to accumulate significant assets for retirement.
To help investors do their homework to avoid fraudulent or unsuitable investments, the AARP Foundation has teamed up with the Investor Protection Trust in a national campaign to slow the rise in investment scams that erode investors' financial security. In Hawaii, AARP is collaborating with the state Office of the Securities Commissioner to provide island consumers with information that will enable them to achieve financial security and steer clear of fraud and other marketplace hazards.
Check Before You Invest
No matter what that "great opportunity" is -- or who offers it to you -- there are steps to take before you invest. It doesn't matter whether the offer comes from a financial professional, a pop-up ad, your brother-in-law, a stranger on the phone or the nice young man at your church. The steps are the same:
Call the State Securities Compliance Branch, (808) 586-2722. This office can help you verify the registration and licensing of your broker-dealer and their salespeople, or your investment adviser and their representatives.
Check the firm -- Is the firm offering investment advice or selling investment products registered with the state Securities Commissioner's office? If not, beware.
Check the person -- Is the individual selling the investment or giving investment advice licensed with the state Securities Commissioner's office? If not, beware.
When you call, have the name of the firm and the individual's first and last name and middle initial, if available. One call can make a difference.
Warning Signs of Investment Scams
The job of a con artist is to convince you to part with your money. They will tell you what you want to hear and prey upon your desire to get a great return on your investment at little or no risk. Investors can avoid falling victim to investment fraud by listening carefully to the phrases salespeople use. If you hear any of these pitches, be aware that you might be part of a scam in progress:
"Your profit is guaranteed."
"It's an amazing rate of return."
"There's no risk."
"You can get in on the ground floor."
"You would be a fool to pass this by."
"This offer is only available today."
"I'll get you the paperwork later."
"Just make your check out to me."
Fraud comes in many forms
Here are some of the most common actual investments used by con artists, followed by two common scams that masquerade as investments:
» Gift annuities are designed to be a source of retirement income. They allow you to make a donation to a charity and then get fixed payments for life, at a good rate of return, with some tax advantages. The scam: Con artists sell gift annuities issued by fly-by-night companies. Experts advise doing your homework carefully before investing in gift annuities.
» Variable annuities are tax-deferred, long-term investments that allow investors to receive periodic payments for life. The scam: Since these are long-term investments, often they are not a good option for older investors. Con artists promote only the advantages to these annuities because of the high commissions they get paid. Be sure that you understand all the disadvantages before you buy. Because of big termination fees, be extra-cautious on changing from one annuity to another.
» Viaticals are life insurance policies of terminally ill people that are sold at less than face value. The sick person gets cash, and the investor eventually collects the face value of the policy. The scam: Crooked brokers might sell the same policy to several investors, sell policies of people who aren't sick, or simply go out of business and take your money with them.
Common frauds that masquerade as investments:
» Ponzi schemes are classic get-rich-quick scams in which con artists "guarantee" high returns to investors. Previous investors get paid from new investors' money and then are encouraged to roll their "earnings" right back into the scheme. Eventually, the whole scheme collapses and investors lose everything. Only the con artists make money.
» Promissory notes often promise high interest rates to investors willing to loan money to a company. However, most legitimate companies do not sell promissory notes to the general public. Some independent insurance agents sell these notes, promising high returns with little or no risk. The notes are often issued by nonexistent companies. While some promissory notes are legitimate, these are a risky investment.
Whatever type of investment you or your loved ones might be considering -- real estate, stocks, bonds, businesses or collectibles -- it is important to know as much as possible about the investment and the company or individual selling it.
Before committing yourself to any investment, check with the Hawaii State Office of the Securities Commissioner to make sure the investment company is registered and the seller or the person giving you investment advice is licensed. Call (877) HI-SCAMS (447-2267) to report fraud, or visit www.hawaii.gov/dcca/areas/sec for more information.
» North American Securities Administrators Association: www.nasaa.org or (888) 846-2722
» Securities and Exchange Commission: www.sec.gov/complaint.shtml
» To learn more about financial planning and retirement resources, visit www.aarp.org/money/financial_planning.