How to Protect Your Retirement From Investment Fraud

How to Protect Your Retirement From Investment Fraud

Are you getting ready to retire? If you are, it's a good time to learn about protecting your retirement accounts. The first and perhaps most important step is to familiarize yourself with the warning signs of investment fraud.

Here's how you can recognize fraud when you see it and take action to safeguard your savings.

What Is Investment Fraud?

According to the FBI, investment fraud is the illegal sale or purported sale of financial instruments. Essentially, it refers to any situation where someone acts as or on behalf of a financial professional and uses false information to steal money from unsuspecting investors.

Investment fraud happens in myriad ways. Fraudsters might say that they'll invest the money you give them on behalf of an investor at a much higher return rate. In some cases, they take a down payment and promise a big financial payout in the future. But the higher returns and the big payout never come.

There's also advance fee fraud, wherein a victim pays money to someone who promises something of great value — such as a no-risk investment with very high year-over-year returns — but gives nothing in return.

Then there's the infamous Ponzi scheme, a type of fraud in which a fraudster promises to invest your money and guarantees high returns with little or no risk. But your money isn't invested at all — instead, it's used to pay fake dividends to people who invested earlier. The scam continues until the number of new investors can't support the cash flow needed to keep it going — which is usually when the fraudster makes off with the remaining money.

These examples are just a few of the many forms of investment fraud; the U.S. Securities & Exchange Commission has a much more comprehensive overview.

Warning Signs to Watch Out For

Investment fraud usually makes headlines, but there are many things you can do to protect your retirement accounts and minimize your risk of falling victim.

There are several red flags to watch out for, including but not limited to:

  • Promises of low- or no-risk investments.
  • Guaranteed returns.
  • Little to no fluctuation in year-to-year returns.
  • Extremely complicated investment processes.
  • Securities or business shares that aren't registered but are available for public purchase.
  • Plans or schemes targeted at affinity groups (i.e., groups with a common religion or ethnicity).
  • Unsolicited investment offers, especially ones that arrive via email or social media.

Alone, any of those situations might seem legitimate. Some investment returns simply don't change much year over year, especially in a typical market. But a combination of these flags could indicate a fraudulent investment.

Protecting Your Retirement Accounts From Fraud

Knowledge is power, the old saying goes, but knowledge is protection, too. The more you know about what to watch for, the better you'll recognize a shady investing offer, and the better you'll be at protecting your retirement accounts from illegal activity.

Research any investment thoroughly before signing any documents or transferring any funds. Start with an online search of the person who contacted you and the company they represent (or claim to represent), and dig up as much information on the investment, too. But don't be fooled by flash: Anyone can throw together a professional-looking website these days. Dig deep, and ask pointed questions about any claims, terms or conditions.

If you don't understand how your investments work, talk to a trusted family member or an independent financial expert. Talk to your investment advisor before committing to an investment. A legitimate, ethical financial professional will always explain how your money is invested, how it makes money, the fees involved and how they get paid for helping you manage your money.

By getting and staying informed, you'll have a good chance of catching any fraudulent activity before it drains your finances.

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