The recession ravaged everyone’s retirement plans, and opportunistic scam artists have preyed on investors’ fears. The North American Securities Administrators Association recently named the biggest potential threats to investors. Education and information are an investor’s best defense against investment fraud, the agency says, but we would say a knowledgeable and trustworthy advisor is an investor’s second line of defense.
- Leveraged exchange-traded funds. Exchange-traded funds track an index and can be traded multiple times throughout the day. Some of the stocks held in these funds can be volatile, so they aren’t the best products for your risk-averse clients.
- Ponzi schemes. The infamous Bernie Madoff PSA notwithstanding, Ponzi schemes are still one of the biggest potential threats to investors, according to NASAA. The agency’s president, Fred Joseph, calls Ponzi schemes “the securities world’s equivalent of a purse snatch.”
- Real estate investment schemes. There are signs that the housing market may be recovering, but scammers are still taking advantage of homeowners struggling to keep their heads – and their homes – above water. NASAA did point out that reverse mortgages are a legitimate lending option, and particularly attractive to seniors. However, the agency cautions, the resulting lump sum home equity payment is a tempting target for scammers, who may attempt to funnel payments into unsuitable investment products.
- Private placement offerings. Under Federal Regulation D, Rule 506, companies that sell securities to a small pool of investors can raise unlimited capital without registering with the Securities and Exchange Commission if they meet certain requirements. While the NASAA admits Rule 506 is used legally by many legitimate issuers, scammers have found uses for the exception as well.
- Natural resources investments. There are more businesses catering to eco-minded individuals than you can shake a shade-grown stick at, and scammers are using that to their advantage. NASAA predicts a rise in scams involving energy and precious metals. Oil and gas schemes will appeal to investors trying to make money quickly, according to the agency, as well as phony investments in natural gas, wind and solar energy.