6 Ways to Steer Clear of Financial Fraud

by Laura Adams

Lately, the subject of staying safe from financial fraud has come up several times in my conversations with friends and coaching clients. When you combine an unscrupulous business person with a clueless customer, it’s a recipe for disaster. It makes me think of those videos of wildebeest crossing a skinny, crocodile-infested African river. The crocodiles always nab one or two who are too eager to jump into the murky water.

What is Financial Fraud?

Protect Your Investments

Protect Your Investments

Financial fraud can rear its ugly head in a variety of ways, such as Ponzi schemes, mortgage scams, predatory lending, identity theft, and securities fraud. In this article I’ll focus on ways to stay safe from an unscrupulous investment firm or advisor.

How to Prevent Financial Fraud

All it takes to prevent financial fraud is a little education about the warning signs. Knowing what to look for allows you to do your due diligence before choosing a financial advisor or scratching a check for a new investment.

Here are 6 ways to steer clear of becoming a victim of financial fraud:

Fraud Prevention Tip #1: Ask Many Questions

Sometimes we don’t ask enough questions or ask the right questions because we don’t want to look like a novice. But the ironic part is that asking questions is the only way to learn! So get over any apprehension you have about questioning a financial institution, an investment firm, or an individual advisor.

AARP offers a Financial Adviser Questionnaire, and the Certified Financial Planner Board of Standards has a Checklist for Interviewing a Financial Planner if you need some guidance about the best questions to ask.

You shouldn’t stop asking questions until you’re completely satisfied with the answers. If a company or person can’t answer you or tells you not to worry about your concern, my advice is not to work with them.

Fraud Prevention Tip #2: Get Information in Writing

If an investment company or advisor doesn’t offer information about their product or services in writing, ask for it. They should provide detailed information about their company background, professional designations, and method of charging clients.

You must be able to verify the individual securities or assets within any investment, in order to safely add it to your portfolio. If a so-called professional isn’t 100% transparent about themselves or the types of investments they offer, you should not work with them.

Fraud Prevention Tip #3: Know the Custodian of Your Money

One of the biggest red flags in the financial industry is a company or advisor who asks you to make a check payable directly to them. Your money should always be held by a third party custodian, regardless of who makes your investment decisions. The custodian firm must send financial statements to you—not to your advisor—on a regular basis.

Fraud Prevention Tip #4: Sleep on It

Always take plenty of time to think about a potential investment or financial institution before you go all in. If you ever feel pressure from a salesperson or advisor to make a quick decision, that should deploy your fraud radar! Any legitimate product or service will still be available in a day or two. Simply back away from any offer where you don’t have time to discuss it with another industry professional or your family.

Fraud Prevention Tip #5: Trust Your Instincts

As you communicate with a financial institution or advisor, trust your instincts if you don’t believe that they’re legitimate or professional. If they seem evasive or promise you something that seems too good to be true, get a second opinion or simply walk away from what they’re offering.

Fraud Prevention Tip #6: Do Background Checks

The Securities and Exchange Commission has links to information about most brokers and their firms. You can snoop around to see if they’re properly licensed or have had and disciplinary measures taken against them. You’ll find contact information for your state securities regulator on the website of the North American Securities Administrators Association.

If you take the time to follow these six tips, you’ll drastically reduce the chances that you could ever lose money by becoming the victim of investment fraud.

Additionally, you’ll find more tips and resources at:

  • Securities Investor Protection Corporation: SIPC.gov
  • U.S. Securities and Exchange Commission: investor.gov and
  • Financial Fraud Enforcement Task Force: stopfraud.gov


Published or updated October 5, 2011.
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{ 1 comment… read it below or add one }

1 Roger @ The Chicago Financial Planner

Excellent post Laura. Your tip #3 is so very critical. I generally tell people that if an advisor tells you that you don’t need statements from a reputable 3rd part custodian this is a great time to get up and end the meeting on the spot. This was one of the main features of Madoff’s fraud, he was the custodian which allowed him to issue his bogus statements to clients.


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