How to avoid an investment scam

Avoiding investment scams is becoming even more important, as recent Australian data shows investment scams have now overtaken romance and dating scams as the most lucrative method of fraud.

Historically, investment scams have been common both overseas and in New Zealand. In fact, it's nearly the 10-year anniversary of when the world’s largest investment scam was discovered. This scam was by Bernie Madoff in the United States, who defrauded clients of as much as US$50 billion. The worldwide financial services industry sustained significant reputational damage because of Madoff's fraud, and in New Zealand this was the same time that most finance companies also went bust which didn’t help confidence in the New Zealand financial system either!

Fortunately, legislation and supervision have improved significantly since the events above, especially in New Zealand. However, there will always be those who operate outside the rules, so here are seven of the top ways you can avoid those people and avoid an investment scam.

1. Research

Before you make any investment, in general, ensure you understand how the investment works. When you know what type of investment would fit with your financial goals (and other investments if you have them), start researching the investment on offer. If you’re unsure on whether the one on offer is right for you, seek the opinion of an Authorised Financial Adviser. Not only will they be able to help you check the legitimacy of the investment, they can offer advice on whether the investment fits your financial goals.

2. Take the time to make an informed decision

Be suspicious of time-limited offers and high-pressure salespeople. If the investment is legitimate, you should not have to invest on the spot. Many investment scams claim to be for a “limited time only” and have an undercurrent of urgency. Scammers are renowned for making people feel like they will miss out if they don’t commit now – this is a ploy to get you to hand money over before carrying out any due diligence about whoever’s offering the investment. Don’t jump at an opportunity – if it sounds too good to be true, there’s a very high chance that it’s going to lose you money.

3. Check legitimacy

There are several ways to do this:

• In New Zealand, investment providers must hold a licence issued by the Financial Markets Authority, which includes being listed online.
• You can also check the Financial Markets Authority’s suspected scam list for the provider name – or any similar or related name that comes up in a search of the provider.
• Lastly, searching the Financial Services Provider Register for the company, plus any names they give you as ‘advisers’.

4. Choose your investments, don't let them choose you

If you have a financial plan, you can evaluate any new opportunities in tandem with your plan. With consideration of how new investment offers will fit with your goals and your risk tolerance, you’ll be more likely to choose an appropriate investment – and not one that’s a scam.

5. Be wary of high returns with low risk

Investment markets fluctuate – and there is always a level of risk involved. Even money deposited in a New Zealand bank is at risk, even if the risk is a very low one. While some investments are relatively low risk, those low risk investments also offer similarly low returns. A high return investment almost always has a high risk attached to it – that’s how you have the potential of high returns in the first place. However, investment scams offer high returns with low risk. This scenario is too good to be true, but scammers pray on people’s trusting nature and naivety about investing in order to get a commitment to a dodgy investment.

Occasionally, an investment scammer might tell you the offer is made only to a select few people and should be kept a secret. This is just a ploy to make you feel special and to stop you speaking to the authorities or an actual financial adviser.

6. Avoid one-man-bands

The fewer people involved in an investment scam, the easier it can be to run. While scammers can have elaborate operations with falsified statements and professional websites, anybody with a computer can set these up – and a sole operator can be a sign for alarm.

At absolute minimum, investing with a third-party custodian (like a well-respected investment firm) who holds your invested funds in trust reduces your exposure to scams.

7. Minimise your targetability

The more public your contact information, the easier it is for scammers to target you for investing into their scam. One of the easiest ways to research an individual is through social media. For example, a Facebook account is often linked to a phone number – and many have not set their privacy settings as high as they can go, meaning data such as age, where they live, phone number, email address, family members, and every detail such as how you spent last Sunday are all on display to anyone who comes across you. We strongly recommend increasing your privacy settings so that personal information is not displayed.

Also, be very wary of unsolicited emails, and avoid clicking on links contained in them. Ensuring you have a robust anti-virus system on your computer can help - but shouldn't be totally relied upon as protection!

Related material:

• Financial traps and scams to avoid
• What is catfishing?‍
• Cryptocurrency in the firing line‍
• ‍Should you trust a 'finfluencer'?

The bottom line

The top seven ways to avoid falling victim to an investment scam are:

1. Do your research.
2. Take the time to make an informed decision.
3. Check the legitimacy of the offeror and the offer.
4. Choose your investments, don’t let them choose you.
5. Be wary of high returns with low risk.
6. Avoid "one-man bands".
7. Minimise your targetability.