Can you spot the investment fraud warning signs?
It’s Fraud Prevention Month, and we’re putting the Fraud Warning Signs in the spotlight with five new videos.
In each video, we highlight a fraud warning sign using a scenario based on a real investment fraud case investigated by the B.C. Securities Commission (BCSC). In some of these cases, millions of dollars were lost to investment fraud.
In this article, we also touch on BCSC research that looks at how well British Columbians can recognize the signs, and how the “fear of missing out” can impact your investment decision-making.
1. Fear of Missing Out (FOMO)
FOMO and investing are not a good pairing.
Fraudsters will push for people to purchase investments by making them sound like exclusive or lucrative opportunities. They may say things like they’re only offering the opportunity to a select few, and this is the time to get in. They may even try to reassure you by saying they’ve got their friends to get in on the investment, too.
FOMO May Nudge Younger Adults Towards Investment Opportunities on Social Media
According to new BCSC research, younger adults and those who experience FOMO are more likely to say social media is a good place to seek out investment opportunities.
Social media can influence how we consume information about investments. Generally, due to increasingly sophisticated algorithms, our social media feeds are curated to show us information based on our browsing habits and other online interests. If social media-fueled investing trends or events go viral, they will likely fill up our feeds. These types of investing trends are often volatile and involve complex investing strategies that may not be suited to young adults who are newer to investing. People who experience FOMO may think they’re missing out on those investing opportunities if they don’t act right away.
Social Media Scams are Prevalent
In addition to consuming news and other world events, social media gives us a chance to easily connect with our networks, and find people with shared interests. Fraudsters use these same advantages in a more sinister way in order to lure people into investment scams. They’ll amp up the pressure and tell you to act quick, playing on your FOMO. They may share false success stories or get-rich-quick schemes. They may even use your personal information to further target you. If you’re someone who experiences FOMO, these types of online tactics could make you vulnerable to investment fraud.
So, when it comes to FOMO and investing, sometimes, it’s best to embrace the “joy of missing out” (JOMO) instead!
2. The Trust Trap
We tend to let our guard down with people we trust. And fraudsters can manipulate our natural tendency to trust people close to us, like family and friends.
There are different ways fraudsters can use the trust trap to lead people into investment scams.
Fraudsters Sink Their Hooks Into a Community or Group
Sometimes, fraudsters will insert themselves into community groups or religious groups. They will work their way towards becoming a valued member of that group, before offering fraudulent investment opportunities.
Fraudsters Rely On a Select Few to Pass the Scam On
Another trust trap strategy fraudsters use is becoming close with one person or a small group of people. The fraudster will then encourage them to tell their family, friends, and other personal networks about the investment. When this happens, not only are the original investors misled, but they have now potentially pulled their loved ones into an investment scheme.
Are Young Adults More Vulnerable to the Trust Trap?
A recent BCSC-commissioned survey indicates that young adults in B.C. may be more susceptible to the trust trap. Results suggest nearly half of young B.C. adults would consider putting money into a dubious investment offer if it came from a friend or family member. Learn more about these survey results.
If you’ve been offered an investment from someone you know and trust, don’t just take their word for it – take the necessary steps to validate it. One option is speaking to a registered investment advisor or another financial professional for independent advice.
3. High Return | No Risk | Guaranteed
Offering investments that guarantee high returns with little or no risk is a common way for fraudsters to lure people into investment schemes. Investing always comes with risks. Generally, higher returns come with higher risks.
Remember, if an offer sounds too good to be true, it probably is. It’s important to do your own research into an investment that you’re considering, and perhaps seek a second opinion.
4. Pressure to Buy
Have you ever been on the receiving end of a pushy salesperson’s pitch? If so, you may have felt pressured to buy the product they’re aggressively trying to sell. When it comes to feeling pressured to buy an investment, there may be a lot more to lose financially.
Fraudsters will put the pressure on in order to try and rush people into investing. They might tell you there’s no time to waste – that you have to sign now to get in on the deal.
You should never feel pressured to buy an investment. It takes time to look into whether an investment opportunity checks out, and if the person trying to sell you the investment is registered to do so.
5. Questions Not Answered
Fraudsters prey on people’s lack of investment knowledge to rope them into investment scams. They’ll often do this by dodging your questions, and resorting to arguments that are complex and filled with jargon.
If you feel confused about the investment, or your questions aren’t being answered in a direct way, listen to your instincts and walk away.
Do Your Research Before Committing to an Investment
Don’t rush into an investment, especially if you don’t have all the information. It’s important to make information-gathering a key part of your investing habits. Here are a few tips:
- Use search tools like SEDAR+ and AreTheyRegistered.ca to review financial statements, check registration, and find registered investment advisors
- Check the BCSC’s Disciplined List and the CSA’s Disciplined List for potential misconduct by an individual
- Use the Investment Caution List to search for unregistered investment activity
- Routinely check for investor alerts issued in BC and across Canada
BCSC Research on the Fraud Warning Signs
Fewer than half of British Columbians recognize all of the warning signs of investment fraud, according to a new study commissioned by the British Columbia Securities Commission (BCSC).
When presented with six scenarios associated with investment fraud, only 44 per cent correctly identified all of them as warning signs:
- Guaranteed high returns with little or no risk
- Moving money outside the country to avoid tax
- A strong push to act now
- An offer of inside information
- An offer available only to a select few
- Being encouraged to invest because friends and family have already done so
A recommendation from friends or family was the least recognized sign, with 61 per cent of British Columbians flagging that as an indicator of a possible fraudulent investment. The most recognized warning sign, chosen by 77 per cent, was a guarantee of high returns with little or no risk.
How Does Your Investment Fraud Knowledge Measure Up?
We are encouraging British Columbians to visit InvestRight to test their ability to spot suspicious investment opportunities. Click the link below to take our investment fraud quiz.
Report a Concern
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393, or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using BCSC’s online complaint form.