Financial Wellness
Is It a Scam? Test Your Investment Fraud IQ.
Investing can be a great way to grow your money and save for retirement. However, investment scams abound and are on the increase. The trick is figuring out when "good" becomes "too good to be true," and whether you're dealing with a trustworthy person or a scammer.
When in doubt, always do your research. It's your money, so be careful who you trust with it.
Take this short quiz to test your knowledge about investment scams, and gain some insights on how to avoid them.
How much did consumers lose to investment fraud in 2023, according to the Federal Trade Commission?
Which of these are common red flags that an investment opportunity may be a scam?
What is affinity fraud?
Who is a smart choice to manage your investments?
If you're told that an investment that has been purchased by many other successful investors, is that a sure sign that this is a good investment?
If you're told that an investment only has a few left to purchase, is that a good reason to act quickly so you don't miss out?
What are some tactics scammers use in their communications to make an investment seem genuine?
If a celebrity endorses an investment, it must be legitimate. After all, he or she wouldn't put their name to it if it wasn't.
If you get a phone call that sounds like someone you know asking for money because they are in jail or in trouble with the law, it must be genuine because it's the person's voice that you hear on the other end of the line.
You run into an old high school buddy who says he has a great money-making opportunity. He says it's a high-return, risk-free investment, and he's even seen some returns already. Does this opportunity feel like fraud?
When in doubt, always do your research. It's your money, so be careful who you trust with it.
Take this short quiz to test your knowledge about investment scams, and gain some insights on how to avoid them.
How much did consumers lose to investment fraud in 2023, according to the Federal Trade Commission?
- $2 million
- $3.4 billion
- $4.6 billion
- $5.3 million
Answer: $4.6 billion. Consumers reported losing more money to investment scams than any other fraud category in 2023. That amount represents a 21% increase over 2022.
Which of these are common red flags that an investment opportunity may be a scam?
- Guarantees high returns with low risk
- Only available for a very limited time
- Is one of only a few investments left
- You must act immediately
- All of the above
Answer: E. All of the above. All of these should give you pause. No investment is guaranteed, and high returns with low risk are usually a scam. Any time an investment has a sense of urgency, i.e., the investment is only available for a limited time, you must ACT NOW! or risk missing out, or the threat that there are only a few investments left, should all raise red flags.
What is affinity fraud?
- Fraud by someone who says he wants to marry you
- Fraud perpetrated by a member of a church, ethnic group or organization that you belong to
- Fraud by a cellular service carrier
- Fraud by someone who lives overseas or in a different country
Answer: B. Fraud perpetrated by a member of a church, ethnic group or organization that you belong to. Sometimes fraudsters are—or pretend to be—members of a group to which you belong. Often, they enlist respected leaders from within the group to spread the word about the scheme, by convincing those people that a fraudulent investment is legitimate and worthwhile. Called affinity fraud, these scams exploit the trust and friendship that exist in groups of people who have something in common.
Who is a smart choice to manage your investments?
- A trusted financial advisor
- A person not registered or licensed to sell the investment
- A person you recently met that says she is a successful money manager
- An online entity where you're not actually sure who will manage your investment
Answer: A. A trusted financial advisor. Be careful who you give your money to and do your research. A trusted financial advisor can be a lifelong ally to help you work toward achieving your financial goals. However, be wary of turning your money over to someone you've just met, or a faceless online entity that may or may not be legitimate. And never trust your money with anyone who is not licensed to sell the investments. Use FINRA BrokerCheck to ensure the firm and financial professional are properly registered and to verify the phone and address information you receive before you open an account with a brokerage firm or give an individual access to your money.
If you're told that an investment that has been purchased by many other successful investors, is that a sure sign that this is a good investment?
- Yes
- No
Answer: B. No. This is a form of persuasion called "social consensus." It works well for scammers because we often rely on others' actions when deciding what we want to do, and because as social beings we have a strong need to belong to successful groups. They want to make you think that everyone else thinks the investment is a good deal, even though no one may be profiting except the fraudster.
If you're told that an investment only has a few left to purchase, is that a good reason to act quickly so you don't miss out?
- Yes
- No
Answer: B. No. This is a form of persuasion called "scarcity." This tactic creates a false sense of urgency by claiming a limited supply. Scarcity sells so effectively because we think that if something is rare, it must be valuable. However, most investments are not scarce, and there is no hurry to buy them. You should take as much time as you need to decide if the investment is good for you—and not just good for the seller.
What are some tactics scammers use in their communications to make an investment seem genuine?
- An email, text, or encrypted message that seems to come from a legitimate financial institution
- The names of real people or organizations
- Authentic looking logos and graphics
- Links to pages of a seemingly credible website
- All of the above
Answer: E. All of the above. Phishing scams often start with an email, text or encrypted message that falsely claims to be from a financial institution, credit card company, electronic payment service, mail delivery company or another familiar organization or service. Sometimes, the message purports to be from a government or regulatory agency. Scammers often use these tactics to make their messages look legitimate. When in doubt, contact your financial institution directly.
If a celebrity endorses an investment, it must be legitimate. After all, he or she wouldn't put their name to it if it wasn't.
- True
- False
Answer: False. Never make an investment decision just because someone famous says a product or service is a good investment. Increasing numbers of investors are using social media to research opportunities and connect with others. Influencers have taken notice, and social media has become more saturated with financial content than ever before, leading to the rise of the financial influencer or "finfluencer." While celebrities and other well-known personalities might be very good at what they do in their respective professions, a celebrity endorsement doesn't mean that an investment is legitimate or that it's appropriate for all investors. Ask yourself: "Why is this person endorsing this investment, and does it fit in my financial plan?"
If you get a phone call that sounds like someone you know asking for money because they are in jail or in trouble with the law, it must be genuine because it's the person's voice that you hear on the other end of the line.
- True
- False
Answer: B. False. Fraudsters can use AI technology to clone voices, alter images and even create fake videos to spread false or misleading information. AI technology might be used to impersonate a family member or friend, with the intent to convince an investor to transfer money or securities out of an investment account. For example, some scam artists are using AI-generated audio—also known as "deepfake" audio—to try to lure older investors into thinking a grandchild is in financial distress and need of money. Scammers might use deepfake videos to imitate the CEO of a company announcing false news to manipulate the price of a stock. They may also use AI technology to produce realistic looking websites or marketing materials to promote fake investments or fraudulent schemes. In addition, bad actors often impersonate SEC staff and other government officials.
You run into an old high school buddy who says he has a great money-making opportunity. He says it's a high-return, risk-free investment, and he's even seen some returns already. Does this opportunity feel like fraud?
- Yes
- No
Answer: A. Yes. Your Spidey senses should tingle with this one. There are no "risk-free" investments. Fraudsters often make false promises, like no-risk or high-return investments. As the old saying goes, if it sounds too good to be true, it probably is.
Resources: FINRA, Federal Trade Commission, Tower Wealth Management, InvestRight
