When seeking financial advice, it's important to work with a trustworthy and reliable financial advisor who has your best interests in mind. Unfortunately, not all financial advisors operate with integrity, and some may attempt to scam clients out of their hard-earned money. Financial advisor scams can take many different forms and can be difficult to spot, leaving many unsuspecting clients vulnerable to financial losses. In this article, we'll provide an overview of some of the most common financial advisor scams and offer tips on how to avoid falling victim to them. By learning about these scams and taking steps to protect yourself, you can help ensure that your financial future is in good hands.
If you’re looking to hire qualified, pre-screened financial advisors, consider using the free advisor match service to get matched with 1-3 advisors suited to help meet your specific financial requirements.
5 Signs That Indicate a Potential Financial Advisor Scam
1. The advisor uses high-pressure sales tactics
One of the biggest giveaways that a financial advisor doesn't have your best interest in mind is when they use high-pressure sales tactics to push you into making quick investment decisions. Employing tactics such as "act now or you will lose out on this opportunity" or "this offer is only available for a limited time" are designed not to give you much time to think or evaluate the investment option presented. It is essential not to fall for such tactics and take your time to make an informed decision based on your financial goals and risk appetite.
2. The advisor guarantees high returns
Be wary of an advisor who promises guaranteed high returns on investment. No investment is entirely risk-free, and a qualified financial advisor would not use language to imply otherwise. A higher return typically involves higher risk. Moreover, since market-linked instruments cannot ‘guarantee’ returns, it might be one of the biggest signs to watch out for. A financial advisor promising high returns with no risk is likely trying to scam you.
3. You receive unsolicited investment opportunities
If an unsolicited investment opportunity seems too good to be true, it probably is. An unsolicited phone call, email or text message offering such an opportunity may be false. Scammers often use these means to target unsuspecting individuals. Before investing in anything, it is essential to conduct due diligence. And remember – never give out your personal or financial information over the phone or email.
4. The advisor lacks proper credentials or license
Before working with any financial advisor, take the time to verify their credentials. Always check with regulatory bodies to ensure your advisor is licensed to provide financial advice. If an advisor is reluctant to share their credentials with you, it is best to avoid them.
5. Lack of transparency in fees and commissions
Before investing, ensure you understand all the fees and commissions associated with the product. A reputable financial advisor is usually transparent about their fee and lays them out clearly. If an advisor is not forthcoming with this information, it might be a good idea to rethink investing with them. Check if they are a fiduciary financial advisor. A fiduciary financial advisor will have your best interests in mind and never solicit programs or schemes where they receive a commission.
4 Common Types of Financial Advisor Scams
There are several kinds of financial advisor scams that you may fall prey to. Some of these are explained below:
1. Ponzi schemes
Named after Charles Ponzi, who infamously carried out this scam on a large scale in the 1920s, a Ponzi scheme is a scam that lets investors believe that their profits are from legitimate sources. However, this is not the case and the source of the profits are other investors themselves. The scheme can keep running if new investors keep contributing funds and earlier investors do not demand repayment. But when there are not enough new investors to keep everyone happy, the entire scheme collapses.
The only person who ultimately benefits is the initiator of the scheme to whom all the investment flows. Be on the lookout for schemes that offer high returns with little or no risk.
2. Pyramid schemes
A pyramid scheme is a fraudulent business model in which participants recruit new members to earn money. As more people join, the pyramid grows, and participants receive a portion of the recruitment fees. Pyramid schemes are illegal and unsustainable, and participants typically lose their money.
A pyramid scheme is similar to a Ponzi scheme, with one exception. In a pyramid scheme, the investor must pay a joining fee or purchase inventory to participate. If you come across an investment opportunity that requires you to purchase the products you must sell or that pays you for recruiting new members, you're most likely being scammed.
3. Pump and dump scams
These scams involve the artificial inflation of the price of a stock by an advisor through the spread of false or misleading information. Scammers then sell their shares at a profit, causing the price to plummet and leaving other investors with significant losses. The best way to keep yourself safe is to avoid unsolicited investment opportunities from financial advisors and conduct due diligence before investing.
4. Churning and excessive trading
Churning and excessive trading are a type of investment advisor fraud where the advisor buys and sells securities excessively to generate commissions. Since advisors earn a commission – the more they trade, the more money they make. This practice is illegal and can result in significant losses for the investor.
Also see: 8 Mistakes to Avoid While Hiring a Financial Advisor
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3 Tips to Avoid Financial Advisor Scams
There are certain tips that you can use to avoid being scammed. These are:
1. Conduct thorough research before hiring an advisor
Take the time to research any financial advisor you're considering working with. Check their credentials, license, and registration with relevant regulatory bodies. Look for reviews and ratings from previous clients. Also see if any misconduct complaint has been filed against them and ensure that they have a clear record.
2. Avoid falling for affinity fraud
Scammers often exploit the human instinct to trust members of one's "tribe" to trick investors. This tribe could involve members from the same religion, cultural background or region. Belonging to the same group can inspire trust in potential investors, making them easy marks. Before hiring a financial advisor, assess your biases and ensure you are not trusting someone solely because of where they are from or the people they know. Thoroughly vet the advisor's background and check their credentials before working with them.
3. Trust your instincts
Lastly, trust your gut and be skeptical of any financial advisor you are unfamiliar with. Ask them questions and be wary if they refuse to provide answers or lie.
If you do fall for a financial advisor scam, don't panic. Here are the steps you can take if you suspect financial fraud.
What to Do if You Suspect a Financial Advisor Scam
If you fear you have been a victim of financial fraud, you can take the following steps:
1. Report to relevant authorities
If you suspect you've been a victim of a financial advisor scam, report it to the relevant authorities. This includes regulatory bodies like the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
2. Contact your financial institution and freeze accounts
If you believe your financial accounts have been compromised, contact your financial institution immediately and freeze your accounts to prevent further losses.
3. Seek legal advice
Consider seeking legal advice from a qualified attorney specializing in financial fraud cases. They can help you understand your legal options and guide you through recovering any losses suffered by you.
4. Share your experience to help others avoid scams
Consider sharing your experience with others to help raise awareness and avoid similar scams.
To conclude
While financial advisor scams are unfortunately common, there are steps you can take to protect yourself and your money. By being aware of the common tactics used by scammers and the warning signs of a potentially fraudulent advisor, you can make informed decisions about who to trust with your finances. Remember to thoroughly research any financial advisor you're considering working with, ask questions, and never feel pressured into making a decision quickly. By taking a cautious and informed approach to financial planning, you can ensure that your financial future is secure and that you're working with a reputable advisor who has your best interests in mind.
Seek professional investment advice from reputable sources and conduct due diligence before investing. Consider using the free advisor match tool to get matched with vetted and qualified financial advisors. Answer a few questions based on your financial needs, and the match tool will help connect you with 1-3 financial advisors that may be suited to help you.