Beware of Sophisticated Investment Scams: How to Spot and Avoid Them

The days of poorly written emails from “Nigerian princes” are long gone. Today’s scammers use much more sophisticated techniques to defraud unsuspecting investors.

These criminals, often operating from overseas, are stealing tens of billions of dollars from Americans every year – a trend projected to worsen as technology like AI makes it easier to perpetrate fraud. According to a 2023 AARP study, Americans over 60 lose $28.3 billion annually to fraud.

To protect yourself, it’s crucial to recognize common scam tactics and know how to respond.

Common investment scams

Investment scams are continually evolving, making it essential for investors to stay informed about the latest threats. Here are some common investment scams to watch out for:

Impersonation Schemes
Scammers have become adept at impersonating legitimate brokers or investment advisers on social media. They create accounts and websites that mimic real firms, using actual logos and links to build credibility.

Therefore, always verify the source's identity when receiving investment information through social media to avoid falling victim to these schemes.

Crypto Investment Scams
The fear of missing out (FOMO) is a powerful tool for scammers. Currently, they lure investors – often through social media, too – into “crypto” investment scams, including digital assets, cryptocurrencies, coins and tokens.

Pre-IPO Investment Scams
The SEC’s Office of Investor Education and Advocacy (OIEA) warns about scams offering the opportunity to buy “pre-IPO” shares of companies. These scams can be promoted through various channels, including social media, phone calls, emails and in-person solicitations.

If an investment opportunity sounds too good to be true, it probably is. Always approach these offers with skepticism and do thorough research.

Common scammer tactics

Scammers use a variety of psychological tricks to manipulate their victims into making hasty and unwise investment decisions. By understanding these tactics, you can better defend yourself against their deceptive practices.

Here are some of the most common methods fraudsters employ to lure investors:

Phantom Riches Tactic
Scammers dangle the prospect of wealth, enticing you with promises that seem too good to be true. For example, “This timeshare is guaranteed to produce $5,000 a month in income.” Always question unrealistic returns and remember that legitimate investments come with risks.

Source Credibility Tactic
To build credibility, fraudsters may claim to be from reputable firms or hold special credentials. “As a senior vice president of XYZ Firm, I would never sell an investment that doesn’t produce.” Verify their credentials independently before making any investment decisions.

Social Consensus Tactic
Scammers may lead you to believe that other savvy investors have already invested. “This is how (well-known person’s name) got his start. I know it’s a lot of money, but I'm in (investment scam type), and so is my mom and half her church, and it's worth every dime.” Always seek independent advice and do not rely solely on testimonials.

Reciprocity Tactic
Offering small favors in return for big ones is a common ploy. “I’ll give you a break on my commission if you buy now—half off.” Be wary of such offers and evaluate the investment on its own merits.

Scarcity Tactic
Creating a false sense of urgency by claiming limited supply is another trick. “Only two units are left, so I’d sign today if I were you.” Take your time to research and do not rush into decisions based on pressure tactics.

Common red flags

Recognizing the warning signs of investment fraud can save you from significant financial loss. Here are some red flags to watch for when evaluating investment opportunities:

Unregistered Investment Professionals
Much of the investment fraud in the U.S. is committed by unlicensed, unregistered individuals. Before investing, check the registration status of the seller using Investor.gov to ensure they are legitimate.

Aggressive Sales Practices
Scammers may use high-pressure tactics, often operating from “boiler rooms” with scripted pitches. Be cautious if you receive unsolicited calls pushing for immediate investment. Legitimate professionals do not use high-pressure sales tactics.

Social Media Solicitations
Fraudsters use social media to quickly and cheaply reach many potential victims. Be wary of making investment decisions based solely on information from social media platforms. Always verify the source and seek independent advice.

Protect yourself with these steps

End the Conversation
Practice saying “No.” or “I’m sorry, I’m not interested. Thank you.” Have an exit strategy if the pressure rises. Scammers rely on getting you to engage, so cutting off the conversation can protect you.

Turn the Tables and Ask Questions
Before giving out personal information, ask and check the credentials of the person you’re dealing with. Legitimate professionals will welcome your due diligence.

Talk to Someone Before Investing
Be skeptical if asked to keep a deal secret. Discuss any investment decision with a family member, professional or trusted financial adviser. A second opinion can help you spot potential scams.

Remove Your Name from Solicitation Lists
Use the Federal Trade Commission’s National Do Not Call Registry to reduce sales pitches. This can decrease the number of scam attempts you receive.

Keep Your Guard Up
Be skeptical of unsolicited offers, especially those claiming to be from regulatory organizations or law firms. Fraudsters often use these tactics to build credibility.

Do Some Searching
Research any organization or individual before engaging with them. Add terms like “fraud” or “scam” to your search to identify potential red flags. A quick search can reveal if others have reported issues.

Don’t Send Money or Personal Information
Treat requests for wire transfers or cryptocurrency with extreme caution. Verify the identity of the person or organization before providing any information. Once money is sent via these methods, it is often irretrievable.

Know Where to Report Fraud
If you suspect fraud, report it using FINRA’s Investor Complaint Center, the SEC, or your state securities regulator. Reporting fraud can help protect others and increase the chances of recovering your losses.

Bottom line

Investment scams are becoming more sophisticated, making it more important than ever to stay vigilant. By recognizing common tactics and taking proactive steps to verify information, you can protect yourself from falling victim to fraud.

Always remember: If an investment opportunity sounds too good to be true, it probably is. Stay informed, stay skeptical and safeguard your financial future.

Always consult your financial adviser about investment ideas before committing your hard-earned money. They can provide valuable insight and help you avoid potential scams.