Investment fraud: Tactics that consumers should be aware of

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In just the first quarter of this year, consumers have reportedly lost over $672 million dollars to investment fraud. Last year, consumers reported $1,679 million in losses according to the Federal Trade Commission (FTC). There is no denying that investment fraud is rampant.

“Research shows that education and educational interventions can play a strong role in increasing consumers’ ability to recognize and avoid potential frauds,” said Gerri Walsh, President of the FINRA Investor Education Foundation. “By knowing about the scams that are out there, how they operate, and the red flags of fraud, you can better identify and avoid fraudulent situations.”

The investment

fraud formula

Investment fraud consists of false promises and elaborate success stories to entice people to invest their money in a phony scheme. Nowadays, it often begins with a message from a supposed friend via social media raving about their significant returns with only a minimal investment. After being persuaded to open the account, they often send fake screenshots or reports showing the investment producing great returns.

The problems arise when the victim tries to withdraw funds and is asked to pay high, unexpected fees. Unfortunately, it doesn’t stop there — they continue to make financial demands using elaborate excuses such as account upgrades, taxes, dues, etc. This process continues until the victim realizes they are being scammed and the person on the other end actually hacked their friend’s social media account.

Who is impacted

Most surprising are the demographics associated with investment scams.

People who are more financially literate, college-educated and self-reliant are at higher risk since they tend to be the prime target. While research shows older consumers lose more money, younger victims are more susceptible since they are targeted at a higher rate. Cryptocurrency topped the list of forms of payment required, and social media was the top contact method – further confirming the demographic trends.

According to Better Business Bureau Institute for Marketplace Trust and the FINRA Investor Education Foundation, these five persuasion tactics are often associated with investment fraud.

1. Phantom Riches

The idea of wealth entices the investor. It starts with a life-changing opportunity to invest and receive a substantial return with little to no risk. However, return and risk go together. The higher the risk, the higher probability of return.

2. Source Credibility

Many people portray themselves as subject experts, giving investors a false sense of security. Therefore, verifying a financial expert is imperative in avoiding fraudulent activity. Check with FINRA.org and BBB.org on financial providers.

3. Social Consensus

When a group agrees that an opportunity is worth investing in, many people will follow the group without questioning the validity of the investment. A friend, family member or colleague might be honest, but it doesn’t mean they have a deeper understanding of investing.

4. Reciprocity

A person feels obligated to invest because of receiving a gift or meal to hear about an opportunity. While many legitimate companies offer gifts or dinners to entice people to listen to a pitch, don’t feel obligated to invest.

5. Scarcity

The feeling of missing an opportunity because of time or limited supply can make a person think emotionally and not rationally while making a hasty decision. If presented with a limited time or supply, be cautious. Scarcity is a tactic to make people react quickly before considering the pros and cons.

The Securities and Exchange Commission (SEC) says when investing wisely, you start with your goals, evaluate your comfort zone for risk, create an emergency fund, and pay off high-interest credit card debts. Research any investment opportunity and look at diverse options so you don’t have all your eggs in just one basket.

There are very rarely quick or risk-free ways to make money. Investing takes time, research, and professional guidance.