If it sounds too good to be true, it probably is. And when it comes to money, these words may be hard to remember if someone is offering a financial return that sounds too good to pass up.
According to the U.S. Securities and Exchange Commission (SEC), some of these types of investment fraud are called Ponzi schemes, where new money pays off early-stage investors to create the false appearance that investors are profiting from a legitimate business. Without a constant flow of money from new investors, Ponzi schemes eventually collapse.
If someone approaches you with an investment, here are some red flags to be aware of:
High rate of return that’s guaranteed with little or no risk. Every investment has some degree of risk, and those with higher returns typically involve more risk. There is no such thing as a “guaranteed” rate of return.
Overly consistent returns. Investment values go up and down over time, so be suspicious of an investment that continues providing positive returns regardless of overall market conditions.
Limited-time offer. If a sales pitch says that the offer is only available for a limited time or only for a special group of people, this should cause concern.
Free offers to get you in the door. Salesmen can try to build trust by offering a free trinket or lunch at a seminar that they say only a few select people are invited to. While the seminar may be listed as an educational event, you may be asked for money at a later date. The freebie is being used to gain your trust so that you’re more willing to open your wallet when the time comes.
You don’t understand the investment. If the investment is so complicated that you don’t know what you’re investing in, stay away. All of the information about the investment should be readily available and include filings with the SEC. If the financial professional won’t make documents available, walk away.
Unlicensed sellers. In addition to the investment not being registered with the SEC or state regulators, look out for investment professionals and firms that aren’t licensed or registered with the federal or state government. Securities laws require it.
Difficulty receiving payments. If you don’t receive a payment or have difficulty cashing out of your investment, be wary. Ponzi scheme promoters routinely encourage participants to “roll over” investments and may offer even higher returns on the amount rolled over.