How to Avoid a Financial Product Scam


U.S. News & World Report has posted an article to help investors deal with the constant bombardment of unsolicited sales pitches and investment advice, which could be great, but is more likely substandard, and may be deadly. The article by David Ning, “7 Ways to Avoid Financial Product Scams,” purports to present “seven ways to pick out the gems from the duds.” Frankly, picking out “the gems from the duds” is not what the article is about. It does contain some pretty good general advice though. We have added some comments as well.

Do not be rushed into an investment decision. Quick decisions are emotional and not driven by reason and logic. You want to make investment decisions based on reason and logic, not emotions. “Give yourself some time to think things over, and see if it makes sense for your own circumstances first.”

“Be incredibly skeptical.” Good salesmen and con men (two different types of people) are often experts at identifying and playing on their victim’s insecurities. Know yourself and be honest. Unless you are truly experienced and informed about the product being proposed, don’t bite. Seek advice from an experienced, unconflicted financial advisor who is not trying to sell you something at the moment.
Find out what questions to ask and how to ask them, or, better yet, have an independent and unconflicted advisor do it for you. “Don’t be pressured into a decision until you are 100 percent satisfied with the answers.”

“Ask the same question a couple of different times, in different ways. Many people are trained to answer your question in a way that may appeal to you. By asking at different times and in different ways, you will be better able to decipher the sales pitches and find out whether the solution offered can help you.” That is easier said than done. It assumes you are both knowledgeable about the investment and an experienced cross-examiner. The better practice is to seek independent and unconflicted advice from an expert, or walk away.

“Figure out the other party’s intentions.” We’ll save you some time. If you receive unsolicited advice, the other party’s intention is to make money (a fee or commission) from selling you a financial product. It could be a good product. But in our experience, it is more likely to be an overly complex, illiquid product with risks that are not well understood by you or the person selling it.

Stick with cash, bonds and common stocks, or mutual funds that invest in them. Despite all the sales hype, which you should ignore, the most important decision you can make ? the one that will determine 95% of your gain or loss ? is what percentage of cash, bonds and stocks should be in your portfolio. This has to do with balancing your risk tolerance with your need for growth. Your risk tolerance should be driven by how soon you might need to liquidate the investments to meet obligations. You should have enough different stocks and bonds to achieve diversification. The best way to do that it to buy broad based index mutual funds.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.