By Thomas J. Urban
In its fiscal year-end report, The Securities and Exchange Commission (SEC) announced that it has experienced its highest level of fraud cases, to date, involving would-be investment advisors or investment companies. Here are a few scams to be on the lookout for so you’re sure you don’t fall prey to them.
According to the SEC, one of the scams that has been increasing in popularity and one which investors have been registering more and more complaints about, is known as the “advance fee fraud.” An advance fee fraud occurs when an investor is told they’re required to pay fees before they actually receive stock, money, or other proceeds. These payments might be characterized in a number of different ways ranging from a deposit or processing fee to an underwriting fee, administrative fee, commission, or tax. A common practice is for those claiming they are legitimate investment advisors to gain an investor’s buy-in by instructing them to wire advance fees to escrow agents or lawyers which, in turn, gives those investors a false sense of security.
Less malicious acts highlighted by the SEC include “cherry-picking” of profitable trades for an advisor’s own account rather than a client’s accounts. In doing this, the advisor purchases several securities and waits to see if they will be profitable before allocating them to the client. If they turn out to be profitable, they’re allocated to the advisor’s own account and if they prove to be unprofitable accounts, the advisor allocates them to the investor's.
Federal and State securities laws require brokers, investment advisors, and their firms to be licensed or registered, and to make important information public. (A complete compilation of both investment advisor firms currently registered with the SEC and State securities regulators can be found online at https://adviserinfo.sec.gov/IAPD/Default.aspx.)
Additionally, you should find out whether the brokerage firm and its clearing firm are members of the Securities Investor Protection Corporation (SIPC). SIPC provides limited customer protection if a brokerage firm becomes insolvent.
According to the SEC’s “Ask Questions” document, these are some of the questions you should be asking your advisors to assure you don’t become the next victim:
What to Ask About the Advisor:
• How long has your firm been in business?
• Are you registered with our State securities regulator?
• What training and experience do you have and how long have you been in the business?
• What other firms have you been registered with?
• What is your investment philosophy?
• How do you get paid (i.e. commission, assets you manage, or another method)?
• Do I have any choices on how to pay you?
• Do you make more if I buy this stock (or bond, or mutual fund) rather than another?
• How frequently will I get statements?
• (For registered investment advisors) Will you send me a copy of both parts of your Form ADV?
What to Ask About the Investments:
• Is this investment product registered with the SEC and my State securities agency?
• How will this investment make money (i.e. dividends, interest, or capital gains)?
• What are the total fees to purchase, maintain, and sell this investment?
• How liquid is this investment and how soon can I redeem my money?
• What are the specific risks associated with this investment?
• How long has the company been in business?
• Is this company’s management experienced?