Last month, the North American Securities Administrators Association (NASAA) came out with their annual list of financial products and practices to which unsuspecting investors fall prey. At the risk of losing your interest, I’ll shed light on just a few.
On the list, you’ll find various forms of Ponzi schemes. Thanks to Bernie Madoff for teaching the common person what the term Ponzi scheme actually means. Although Mr. Madoff accomplished this on a huge scale, defrauding thousands of investors to the tune of almost $65 billion, he wasn’t the first. And no, it was not Social Security, either—as Rick Perry, presidential hopeful from Texas, might have you believe. Charles Ponzi became notorious for using the technique of paying off early investors with later investors’ money in the early 1920s.
Affinity fraud is a term on the list that has gained more recognition lately with the growth of social networking sites like Facebook, Twitter and LinkedIn. Con artists find opportunities to target their victims by quickly establishing trust and credibility. “The person you trust might be deliberately mimicking your likes and interests to lure you into a scam,” says the NASAA president. We’ve all seen the targeted ads to “Buy Gold” or “Foreclosed Homes”, which both made the top investor traps.
Something else that hit home was variable annuities. If you’ve ever been sucked into the lure of a guaranteed minimum income benefit rider (paying above market interest) like me, you soon realize the benefit comes at a high cost. Variable annuities are notorious for high fees. The mutual funds available in annuities can often be purchased in a typical investment account without a “surrender” period lock-in. For the majority of people who own annuities, they just don’t make sense.
What it boils down to is this: Consider the source of the information, and ask questions.
For a complete list of what to watch out for, check out www.nasaa.org and look for the headline titled, “Con Artists Find Profit in Get-Rich Schemes Tied to Economic Uncertainty.”
If it sounds too good to be true, it probably is.