Personal Finance Essentials
Warning Signs of Fraud
Fraud Rarely Announces Itself. Know These Warning Signs Before You
Hand Anyone Control of Your Money.
Fraud in the financial services industry is relatively rare, but it does happen.
The following warning signs are worth knowing before you hire anyone.
Advisors Who Prominently Tout Their Own Honesty
Ethical conduct can be assumed in any professional. There is no reason for a trustworthy advisor to make their integrity the centerpiece of their pitch. When an advisor makes their ethics – or their religious affiliation – a primary marketing tool, treat that as a red flag, not a recommendation. Federal regulators call this affinity fraud: bad actors ingratiating themselves with religious, cultural or social communities to exploit trust and sell investments that don’t deliver on their promises.
Unusually High or Unusually Steady Returns
Legitimate investments fluctuate. Claims of consistently high or unusually stable returns over a long period should be viewed with great skepticism. In the most notorious investment fraud in recent memory, a firm reported small but steady monthly gains for nearly two decades – including a reported profit during a period when the broader market had lost more than 40%. Results that appear too good to be true, typically are.
A Questionable Auditor
An independent auditor should regularly examine any advisor’s books and records to confirm that client money is being handled properly. An advisor managing substantial assets but using a small or obscure auditing firm is a cause for concern. Ask who audits the firm and whether that auditor is truly independent.
Testimonials and Word-of-Mouth Marketing
The SEC restricts the use of client testimonials in financial services for a clear reason: past results for one client offer no guarantee of the same results for another. If an advisor’s marketing relies heavily on client endorsements or builds its reputation almost entirely through social connections and word of mouth rather than documented performance and credentials, look more carefully at what’s behind the appeal.