Better Business Bureau: Protect yourself from investment fraud

Randy Hutchinson
·3 min read

Comparitech is a website that helps readers improve their cyber security and privacy online. It analyzed data from the BBB, FTC, Internet Crime Complaint Center, and Financial Crimes Enforcement Network to estimate that just under 90,000 Americans lost almost $1.6 billion to investment fraud in 2021. Only 62% of investment-fraud cases are reported, so the true numbers for victims and losses are higher.

Other findings included:

  • The average loss almost doubled from $1,550 in 2020 to $3,000 in 2021.

  • The FTC saw a huge surge in investment scams involving cryptocurrency.

  • Social media is a gold mine for investment scammers.

The impact of investment fraud goes beyond the direct dollar losses. In a 2015 study, the Financial Industry Regulatory Authority’s (FINRA) Investor Education Foundation reported that there are indirect financial costs and non-financial costs. Indirect financial costs include legal fees, fees for bounced checks, lost wages, and opportunity costs. Non-financial costs include stress, depression, anger, health issues and lost time.

FINRA says the stereotype of an investment fraud victim is someone isolated, frail and gullible. We’re all at risk, but FINRA says victims actually tend to be college educated and have above average financial knowledge and income. They are also self-reliant when it comes to making decisions and open to listening to new ideas or sales pitches, which can make them more susceptible to common persuasion tactics in investment scams:

  • The “Phantom Riches” Tactic – dangling the prospect of wealth, enticing you with something you want but can’t have. “These gas wells are guaranteed to produce $6,800 a month in income.”

  • The “Source Credibility” Tactic – trying to build credibility by claiming to be with a reputable firm or to have a special credential or experience. “Believe me, as a senior vice president of XYZ Firm, I would never sell an investment that doesn't produce.”

  • The “Social Consensus” Tactic – leading you to believe that other savvy investors have already invested. “This is how Warren Buffett got his start. I know it’s a lot of money, but I’m in – and so is my mom and half her church – and it’s worth every dime.”

  • The “Reciprocity” Tactic – offering to do a small favor for you in return for a big favor. “I'll give you a break on my commission if you buy now – half off.”

  • The “Scarcity” Tactic – creating a false sense of urgency by claiming limited supply. “There are only two units left, so I’d sign today if I were you.”

Legitimate marketers use the same tactics, making it harder to distinguish a good offer from a bad one.

Take your time making any investment decision. At the BBB, we say “the faster they talk, the slower you should go.” Promises of guaranteed returns with little or no risk, and regardless of your investment experience, are scams. Remember that statistics and testimonials can be faked.

Ask if the person trying to sell you an investment is registered with FINRA, the SEC, and/or a state securities regulator, and verify the answers. FINRA’s BrokerCheck is a free online tool that can help you research the backgrounds of investment professionals and firms. Check the firm out with the BBB. Most investment offerings have to be registered with the SEC or a state securities regulator, so check out the offering also.

Randy Hutchinson is president & CEO Better Business Bureau of the Mid-South. This column is in partnership with Better Business Bureau of Middle Tennessee & Southern Kentucky.

This article originally appeared on Jackson Sun: Better Business Bureau: Protect yourself from investment fraud