Avoiding an Investment Scam

Over the weekend, I was fortunate to be invited to Ascot to watch the races with my company. It was an absolutely fantastic experience – made all the sweeter for being the first time I’d been to the races and being able to take my partner Verity along with me. As my company sponsors the races, we were able to get tickets to the prestigious King Edward enclosure, rubbing shoulders with people I couldn’t have imagined sharing a drink with when I was younger. Over dinner that evening, the two of us started talking about how we could do that sort of thing more often. I started talking about investment risk and how an awful lot of what I’ve learnt so far has been little more than trial and error.

Certainly, I read as much as I can on personal finance. I ask people who seem to have achieved something and know things on which I’m less knowledgable. I take every opportunity to speak to business owners, successful investors, financiers, property experts – all in the hope of learning and deploying that knowledge to our benefit. Despite this, I’m extremely careful with my money. I wouldn’t consider myself ‘wealthy’ – simply knowledgable about money. I work hard, I save what I can, and I take a great deal of pleasure from sharing what I do have with the people round me. Losing my parents at a young age taught me very early on that material possessions weren’t something that were going to hold a great deal of value to me. Losing my parents removed the ‘safety net’ that a lot of people take for granted for many decades. If I lose my money, noone is going to come swooping in to save me.

Being aware of this makes me cautious when it comes to new investments. Investment scams seem harder to detect than ever before. Con artists can set up websites in an afternoon, lifting content almost wholesale from reputable investment companies and then setting out to attract money. A website can easily look ‘professional’, documents can easily be made to look ‘official’, and it’s not exactly difficult to get draft copies of legal disclaimers posted up.

I’ve come close to several investments which looked authentic enough at first glance – almost enough to get my money – but on closer inspection made me walk away. They’ve included fine wine, timber and film investments. In this article, I’m going to explore some of the warning signs that I’ve noticed over the years. It’s worth saying that whilst their existence doesn’t prove fraud (and conversely their absence doesn’t prove legitimacy), these things just don’t stack up to me.

Returns of 10% or more

I’m extremely wary of companies that claim to offer returns of 10% or more. Such statements seem risky to me, firstly because that’s an extremely stretching target to achieve consistently, and secondly because if they can do it, why can’t everyone else. In my experience, returns of around 6% are more sustainable. Occasionally I’ll make an investment which blows my socks off and generates a double digit return, but these are few and far between.

They use the phrases ‘guaranteed return’ or ‘low risk’

Most private investments can’t genuinely qualify as ‘low risk’ – investing in companies isn’t a risk free venture, with limited security (unlike the government back of a savings account). Likewise, the use of the word ‘guaranteed’ is a major warning. Why on earth would the issuer of the investment guarantee your return if they’d lost money?

Using a similar logo or name to a recognised brand

Financial con artists will often use the name of logo of a large, international institution in their own branding. Sometimes, this is a direct duplicate, sometimes it’s a close apprxomation. For example, I once saw a company called St George’s Place Wealth Management – very similar to St Jame’s Place Wealth Management. Likewise, I was recently made aware of a company called Morginsuisse Holdings, LLC, which I believe to be based on the names of JP Morgan and Credit Suisse.

Poorly written documentation

Spotting poorly written documentation can be pretty hard if you’re not used to reading it. Investment agreements, terms of service, and disclosure documents such of prospectuses are often lengthy, sophisticated and drafted by a trained legal professional. The complexity is usually a reflection of the face that most investments are.

Amateuerish contracts are fairly easy to dismantle with a bit of practice. They might have spelling errors, be edited inconsistently and often don’t use the standard legal terminology. Even if a poorly written document isn’t soliticiting a fraudulant deal, it’s probably insufficient to protect your interests as an investor.

Some company try to gain legitimacy by coping real documentation and then making minor adjustments. This can easily fool people because a quick review shows it to look OK. One way to identify such an attempt is to look for changes in the tone and style of the document. If the document occasionally switches between highly professional, legal terms and informal phrasing, you could be looking at a fake document being used as.

Contradictions between the advertising and offering material.

The advertisements and formal offering material should be a perfect reflection of one another. I was once offered an investment which stated the company would offer to buy back my investment once every six months at a fresh valuation, but the documentation stated this ‘buy-back opportunity’ would only occur once every FIVE YEARS! This immediately raised a red flag with me, and despite the salesman telling me they’d get it corrected, I walked away from what I still believe to have been another investment scam.

No physical office

A company doesn’t need a physical office to be legitimate. It’s easier than ever for companies to be run remotely, but if it represents itself as a large, established institution, then it would most likely have a physical presence. A quick search on Google will quickly highlight whether the address listed on the documentation leads to an physical or virtual office, or even just a P.O box.

In some cases, companies are set up with the same address as their law firm. This is not an automatic indication of dubious intent, but it also doesn’t mean it’s a legitimate opportunity.

Unusual management background or unfair terms

The performance of your investment is heavily dependent on the competency of the management. It is therefore important to know who the key decision makers are. Whenever I’m reviewing an investment opportunity, I look at the background of all key individuals involved with that investment. Where were they educated? What have they achieved? What is their track record with this kind of investment?

I’ve come across several opportunities in which the management haven’t had as great a track record as the investment salespeople would have me believe. I even came across an investment in which the key players seemed totally fictitious! Both of these were warnings to me – you should always be able to independently verify the background and history of the entire management team.

Conclusion

Ultimately, I try to approach investments with the assumption that the company is trying to steal money from me. I don’t treat the sales person rudely, but I always tread on the side of scepticism, and the presence of any of the red flags listed above is usually enough to make me walk away from what I see as an investment scam.