Knowing how to spot investment scams is an essential skill for a modern investor. Collectively, investors represent a gold mine for organised crime. Is there an easier target than a group of people who wish to pay £000’s in return for something intangible?
The online space, in particular, can be a dangerous place. It is difficult to tell apart an adventurous investment from a black hole.
So how can we filter out the malicious players in such a large sea of choice?
Follow these three steps to increase your vigilance and detect investment scams with confidence.
1. Beware of unauthorised firms and unregulated investments
The Financial Conduct Authority (FCA) regulates only certain types of investments and investment firms.
For the maximum protection against scams – stick to regulated investments offered by authorised firms. Doing so will give you the following cover:
- Access to the complaints watchdog (the Financial Ombudsman) if you believe you have been treated unfairly
- Up to £85,000 compensation if the firm goes bankrupt and you cannot recover your money as a result.
How can I tell if a firm has FCA authorised status?
Companies can gain different levels of authorisation, or permission, to carry out different activities, therefore it is essential to check that their permissions cover the proposed investment.
After finding the firm on the register, click to ‘see the requirements that apply to this firm’.
The next page reveals whether the firm has authorised status. Authorisations could cover holding your money and selling specific types of financial products.
You can also search directly on the FCA Warning List to check that an investment firm isn’t flagged as a suspicious or fraudulent organisation.
What is the difference between regulated and unregulated investments?
Even if an authorised firm promotes a particular investment, this provides no guarantee that the FCA considers the investment as ‘regulated’. We can sort regulated investments from unregulated investments using the following rule-of-thumb lists:
- Residential and commercial buildings
We should assume that any investments that don’t fall under the regulated categories are unregulated. Examples include:
- Mini-bonds (Loans issued directly between a borrowing company and an investor)
- Cryptocurrencies such as Bitcoin
- Car park spaces
- Woodland and forestry
- Storage units
- Shipping containers
- Diamonds and other precious stones
- Overseas property
How to spot investment scams posing as regulated investments or authorised firms
Unfortunately, this is also an issue. Many scammers present themselves as FCA firms, when in fact they are not. The scammer may be relying on you not looking them up on the register.
More sophisticated scammers steal the identity of a real authorised firm. Like a wolf in sheep’s clothing, they use fake branding to fool investors into handing over their money. The clients may falsely believe that the FCA regulates their investment, only to discover otherwise when the scam unravels at a much later date.
If someone contacts you and claims to represent an authorised firm, you can quickly put their credentials to the test. First, politely end the call. Ring the firm back using a number you have obtained from their official website. Ask the switchboard to put you back in touch with the person you were speaking with.
Are all unregulated investments scams?
‘Unregulated’ is not the same as ‘fraudulent’. ‘Unregulated’ simply means that the investment in question does not fall under the FCA’s remit.
Many investors find legitimate and profitable opportunities in wine, land and gold. Investments such as these, often referred to as ‘alternative investments’, help diversify their basic investment portfolio.
The ‘unregulated’ label merely demands a heightened sense of scepticism. Scammers naturally prefer to operate in areas under lower regulation and therefore these investments will have a higher rate of scams.
When a company approaches you with a scheme which involves an unregulated area, this should now raise a red flag.
2. Watch out for unrealistic promises
Realistic average returns for risky investments range from 4% to 8% per year. Scammers may offer 10% or even 18% per year in an attempt to lure investors.
Sometimes scams will advertise a reasonable-sounding rate of return but will also claim that the investment carries “low risk” or “no risk”. This is equally alarming, due to the unbreakable relationship between risk and return.
High returns will always come with additional risk. This is because investments only offer higher returns to compensate investors for extra volatility.
Therefore, by definition, higher returns will always have higher volatility and therefore can never be “low risk”.
Reality check: Worldwide, investors have placed £billions into US government bonds which pay 0 – 2% interest. Investor accept these low returns because of their risk-free status. Why would so much money stay in these low-return bonds if higher returns elsewhere could be had without risk?
Our advice for how to spot investment scams is to blacklist any printed promotional material or online adverts which promise 8%+ risk-free returns. The scam rate across this group of opportunities is eye-watering.
Are all comforting assurances fraudulent?
This depends on what assurance is provided, let’s explore a few examples:
No history of losses
Investment providers may point to investors never having lost a penny. This declaration might be factually true, and useful information to share. It is certainly not indicative of fraud. However, we need to apply scepticism and not take such assurances at face value. Past performance is not a guarantee of future performance. The historical period may have been short, or during the boom years of an economic cycle. For these reasons and more, losses could still be on the horizon for new investors.
Investments may use language such as ‘FCA Protected’ or ‘FSCS Protected’. These terms give the impression that the investment qualifies for the Financial Services Compensation Scheme. Unscrupulous investment companies may emphasise this in a misleading manner.
First of all, for regulated investments, the FSCS protection will probably only cover any cash held with the company, rather than your investment. Secondly, the scheme does not payout just because a regulated investment has underperformed. This is simply the risk you take on as an investor. If a company states that the FSCS scheme will guarantee the return of an investment, run away.
We see this term used in a variety of ways across investment brochures. Some are more valid uses than others!
Some investments, such as Premium Bonds issued by National Savings & Investments (NS&I), are physically financed by the government. This is a very legitimate use of this phrase.
Some companies claim that the government invests in their products, or uses their service.
This is little more than a company wanting to ‘show off’ its prestigious customers. Continue to be wary, however, as even government institutions have made poor investment decisions in the past:
- Several UK councils and other bodies lost a combined £1bn when Icelandic bank IceSave collapsed during the ‘credit crunch’ of 2009.
- In 2019, Kent Council found itself unable to redeem funds from the now infamous Woodford Equity Income fund after requesting a withdrawal. The fund was not fraudulent but had followed a controversial investment strategy of investing in illiquid investments. The fund found itself unable to raise cash to repay investors on demand, and was forced to close the door to outflows until it could sell its investments.
- Hampshire County Council found itself the victim of fraud when it invested £7.1m in a fund managed by Bernie Madoffs, which collapsed when it transpired that the miracle fund had been nothing more than the world’s largest Ponzi scheme.
3. How to spot investment scams – look for the hard sell
We all appreciate passion and enthusiasm from the employees that we interact with. Who would buy a cappuccino from the coffee shop that only claimed to sell the ‘Eighth best coffee in the city’?
In contrast, you should seek out the exact opposite qualities in those who manage and promote investments. A responsible adviser acknowledges that all investments could lose their client money, and may not be suitable for all. This sober realisation tends to remove the rosy tinting from the language to sell legitimate investments.
If you see an investment firm using similar sales techniques to a car dealership or butcher, you should, therefore, be very concerned.
All legitimate investment firms understand the following:
- No investment is suitable for every investor.
- An individual’s personal risk appetite and time horizon are important considerations to take into account.
- Firms must explain risks clearly to allow an investor to weigh up the cost and benefits associated with an investment.
By pushing a single investment hard onto all interested parties, scammers break all of these rules in their pursuit of chasing your cash.
What selling techniques should I look out for?
Throwing ethical principles to the wind, scammers will regularly appeal to peoples emotions and aspirations to seal the deal. Marketing materials are often crammed full of Carribean imagery and supercars.
The exclamation mark is a clear sign that something isn’t right. An excitable tone is another attempt to drive emotional rather than logical decision making.
Investment scams have used cold calling for decades now, and show no sign of ceasing. I have personally received several sales pitches over the phone from dubious sources.
From personal experience, I can reveal that these scammers are not easy to spot. If you are imagining someone speaking broken English similar to a Nigerian email scammer, you couldn’t be further from the truth.
In the past, I have received phone calls from young men with well-spoken, southern English accents. They claimed to be calling from a generic firm name such as London Capital Markets. I kept them on the phone to learn more about what exactly they were peddling, and what their sales pitch sounded like. I came away impressed with their ability to hold a challenging conversation with an experienced investor.
From this experience, I want to share a dire warning for all advanced investors. Do not rely on your intelligence or investment knowledge to discern a real caller from a fake one. On the phone, where talking is the only currency, scammers are in their element. They are more practised at the game than you are. The only way to win is to not play at all.
Refuse all cold calls that relate to investments. Research investment opportunities that are right for your basic investment portfolio, at the time that is right for you.
Investment scams may also apply time pressure to encourage an unwise snap decision to invest. For example, the scammer may explain that the fund closes to new investment by the end of the day.
Time pressure removes the opportunity for you to carry out diligent research and speeds up the cash generation process. If you feel pressured to make an investment ‘in the moment’, don’t. Only in a fictitious scenario would an investment opportunity being marketed to retail investors disappear within a matter of hours.
Scammers will say whatever they believe will part you from your cash. However, their linguistic and marketing tricks set them apart from reputable firms. Looking out for aggressive or enthusiastic marketing language is a great can be how to spot investment scams.
How to Spot Investment Scams
Advertised returns above 8% per year are a red flag. Challenge why this could be the case.
'Risk free' or 'guaranteed' returns above 2% are equally suspicious.
For maximum safety, stick to regulated investments. These include mainstream stocks & shares, funds, and property.
Deal only with FCA authorised firms. Use the online FCA register to check.
Watch out for aggressive sales techniques, including bold assurances, and the absence of risk warnings.
Be suspicious of language designed to invoke emotion or creates time pressure to encourage you to make a decision.
Ignore cold callers completely. Don't even express an interest in receiving 'additional information'.
Above all, exercise a relentless level of skepticism. If in doubt, don't invest.
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