For the last two months, I have offered information on choosing an honest, responsible financial adviser. But all investments involve some element of risk, and scam artists can victimize even the most sophisticated clients. This column offers methods for identifying and protecting yourself from investment scammers who want to separate you or your company from your money.


How do victims differ from nonvictims? The Financial Industry Regulatory Authority (FINRA) Investor Education Foundation’s 2007 Senior Fraud Risk Survey and the 2006 Investor Fraud Study by the Consumer Fraud Research Group revealed some differences between the two groups. Almost two-thirds of victims are self-reliant, optimistic, college-educated, married men earning above-average incomes. This group is also more financially literate than nonvictims.


Almost three-fourths of victims have owned risky investments, compared to about half of nonvictims. Fraud victims are 50 percent more likely to buy investment products from a salesperson who is recommended by a friend and three times more likely to attend a seminar with a free meal. One out of five investors can’t spot persuasion tactics, such as the claim of guaranteed returns that are higher than historical averages.


Scammers go where the money is, which often means targeting older investors—those who are near retirement or already retired. If you have had a recent health challenge or change in your financial situation, you are also an attractive target. You can expect to face high pressure and should be prepared to recognize some of the most common tactics scammers employ.


For example, the “scarcity” approach is intended to create a sense of urgency through a limited-time offer or a claim that supplies are limited. The “reciprocity” tactic offers a small favor, such as a break on commission, in return for a larger favor (e.g., your investment of a substantial sum of money). Building “source credibility” involves claiming to be with a reputable firm or possessing special credentials or experience. A scammer who tells you about all of the other savvy investors who are clients is using the “social consensus” tactic. Then there is the prospect of guaranteed returns that entice you with “phantom riches” that are not possible to achieve.


How can you protect yourself and outsmart the scammers? For the “scarcity” tactic, simply refuse to be rushed into a decision. A legitimate investment will be there after you have a chance to think about it. If you don’t feel guilty or obligated because you are offered something free, you will neatly sidestep the power of the “reciprocity” tactic.


Verify credentials to ensure that “source credibility” is not a false front. Use BrokerCheck (http://brokercheck.finra.org) to see if a broker or brokerage firm is registered with FINRA or the investment adviser is registered with the Securities and Exchange Commission (SEC). BrokerCheck provides employment histories, regulatory action disclosures, violations and complaints, and information on certifications and licenses. Also, use FINRA’s Ask and Check section (http://www.finra.org/investors/ask-and-check) to help with your research.


The “social consensus” tactic relies on your concerns with what everyone else is doing. If you don’t care what investment choices members of your social group or favorite organization are making, this “affinity fraud” won’t work on you. 


The “phantom riches” tactic relies on your ignorance of history. In the past 75 years, stock market annual returns have averaged just over 10 percent, and there is no such thing as a guaranteed, risk-free investment.


You can also develop defensive tactics, such an exit strategy. Keep saying “No, I’m not interested,” or say you will think about the information, then end the conversation. Ask specific questions until you receive detailed information, before you provide any information about yourself or your financial situation. Insist on taking time to talk to an accountant, lawyer, investment adviser, or family member, especially if the salesperson has encouraged you to keep the investment secret.


Make sure to add your name to the Federal Trade Commission’s Do Not Call Registry (www.donotcall.gov) to reduce the quantity of unwanted solicitations. Take a look at the Risk Meter (http://apps.finra.org/meters/1/riskmeter.aspx) to see if you have traits that make you vulnerable to fraud, and use the Scam Meter (http://apps.finra.org/meters/1/scammeter.aspx) to answer four questions to determine whether an investment might be a scam.


If the worst happens and you become the victim of a scam, or even suspect fraudulent activity, file a complaint at the FINRA website (http://www.finra.org/investors/file-complaint). The SEC website has a complaint section that also allows you to submit information on spam email solicitations (http://www.sec.gov/complaint.shtml).


Knowing scam-avoidance strategies will protect you, your company and your employees, so consider sharing these resources. Remember that information is power, and it’s the best guarantee of building your wealth at an achievable rate.