Watch out for the following, which may indicate illegal activity:
- The “phantom riches” tactic: A guarantee of big profits.
- The “scarcity” tactic: There is a lot of pressure to act fast because the “market is moving.” The salesperson creates a false sense of urgency by claiming limited supply or the special is only good today.
- The “source credibility” tactic: Recommendations from brokers based on inside or confidential information.
- The “reciprocity” tactic: Offering to do a small favor for you in return for a big favor. For example, I’ll give you a break on my commission if you buy now for half off.
If these tactics sound familiar, it’s because legitimate marketers also use them. One key difference is that real deals will still be there tomorrow. Take time to stop, think, ask questions and investigate before making an investment decision. There are several simple questions you can ask a company you’re thinking about working with to determine if the opportunity is a fraud.
If the answers to the following questions are vague or you’re given a definite “no” you should review your options for investing:
1. Do I have to invest right now?
Legitimate investment companies are going to give you the time you need to review your information and decide what investments are best for you. Be suspicious of sellers that give the impression that only a few shares of stocks or partnership units are left. Many try to convince you to wire or send money overnight, but remember that once you wire money, it may be gone forever.
2. Does this company have a proven track record?
Many fraudsters link your opportunity to news stories about the success of legitimate companies as bait to make you believe you can also get rich quick. Look into the history of the company you are considering doing business with. Business reviews with the Better Business Bureau can be accessed over the phone or online. A legitimate investment professional must be properly licensed and his or her firm must be registered with FINRA, the SEC or a state securities regulator, depending on the type of business the firm conducts.
3. Where is my money going?
Request written details about the amount of money going to
the actual purchase of the investment opportunity and how much is going toward commissions, marketing costs, and promoters’ profits. The more expenses, the fewer earnings for you.
4. Can I be certain the promoter is not lying to me?