September 22, 2011

FINRA, SEC: 4 Ways to Spot Retirement Scams

The two agencies released a fact sheet to investors outlining various retirement scams and ways to prevent falling victim to them

FINRA and the Securities and Exchange Commission have released to investors a fact sheet outlining various retirement scams and ways to prevent falling victim to them.

The fact sheet warns against schemes promising early retirement in particular and notes that the earlier a person retires, the more important it is to manage retirement assets appropriately. Retiring early only makes sense, according to the fact sheet, if investors already have enough saved, make smart investments during retirement and withdraw money at a rate that does not deplete savings too early.

Unfortunately, that strategy begins with knowing how much is enough, a number many investors have trouble estimating.

The fact sheet lists promises made by fraudsters that should trigger warning bells in investors’ minds:

  1. Everyone can retire early. The fact is that few workers can actually do so.
  2. It’s possible to earn as much in retirement as it is if you continue working. These promises are based on unrealistically high returns and withdrawal amounts that would deplete savings too quickly.
  3. Returns of 12% or more are possible. The fact sheet notes that returns over 9.6% exceed the historical long-term returns for the stock market and far exceed the long-term returns for the bond market.
  4. It’s possible to withdraw 7% or more and not run out of money. The fact sheet acknowledges that there is no consensus on a universally appropriate withdrawal rate, but encourages investors to be conservative, especially in the first years of retirement.

Regardless of what a suspicious pitch says, there is a common psychology behind it, according to the fact sheet. It’s easy to warn clients to be wary of anything that sounds “too good to be true,” but tricksters make their fortune by passing off their schemes as just good enough. “They look for an Achilles heel by asking seemingly benign questions,” and using the answers to bombard investors with influence tactics.

Some of the most common tactics are also used by legitimate marketers, making it even more difficult for some investors to recognize a scam. The fact sheet lists some of those tactics with an example of what such a claim might sound like:

  • Phantom Riches: A promise of great wealth that is just out of reach. “These gas wells are guaranteed to produce $6,800 a month in income.”
  • Source Credibility: Claiming to be an expert in order to build credibility. “As a senior vice president of XYZ Firm, I would never sell an investment that doesn’t produce.”
  • Social Consensus: Claiming other investors have already benefited. “This is how ___ got his start.”
  • Reciprocity: Offering a small favor in return for a big favor. “I’ll give you a break on my commission if you buy now.”
  • Scarcity: Claiming limited supply to create a false sense of urgency. “There are only two units left, so I’d sign today if I were you.”

Investors should be wary of any strategy that promises guarantees or overly consistent returns. Furthermore, unlicensed brokers selling unregistered securities or investments without documentation are also red flags. Finally, if investors don’t understand the strategy being proposed, they should walk away.

Perhaps the strongest signal is an overly pushy salesperson. As the fact sheet notes, “even if no fraud is taking place, this type of pressuring is inappropriate.”

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