Land of the Free, Home of the Scammed

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Land of the free

$40 billion is a very big number. No, it's not the U.S. trade deficit for December ($38.5 billion)...and it's not how much computer mogul Michael Dell is worth ($14.6 billion). $40 billion is the amount Americans lose to securities fraud every year. And that doesn't even take into account the numerous other financial scams that have been perpetrated on unwitting Americans. If money makes the world go round, fraud is ensuring it spins like a top.

Need more proof? Add another $40 billion to the equation, since that's how much we lose to insurance fraud every year. Don't forget telemarketing fraud, internet fraud, check fraud, credit card fraud...Fraud is one of America's most booming industries, generating hundreds of billions of dollars, annually.

In the North American Securities Administrators Association's third annual list of the top ten scams, risky investments or sales practice abuses, ten of the most egregious frauds are outlined in one of the most stunning accounts of greed, excess, and human tragedy in U.S. history. From insurance agents illegally selling securities to fraudulent viatical contracts that bilked millions from now-destitute investors, Americans are the targets of an ever-growing number of financial planning scams. "Record-low interest rates and a bear market on Wall Street have created a bull market in fraud on Main Street," said Joseph Borg, president of the North American Securities Administrators Association (NASAA) and director of the Alabama Securities Commission. "Con artists know investors are concerned about the volatile stock market and low yields on bonds and bank deposits, so they pitch their scams as safe alternatives and promise high returns - an impossible combination." The truth is, we can't stop scammers from trying to trick us out of our earthly possessions, but the best defense to this continued assault on our trust and confidence is a good, strong offense. In other words, it's time to pull out the boxing gloves.

Taking a proactive approach to protecting our wallets against these unscrupulous individuals and organizations starts with education. According to the American Association of Retired Persons (AARP), 89% of Americans over the age of 65 couldn't define key investment terms from products they had purchased. These aren't products they were merely interested in, but rather products they had actually purchased. That means, more than likely, a financial professional met with these individuals and convinced them to move a portion or possibly all of their life savings into an investment vehicle they didn't understand. That lack of understanding could lead to any number of problems, only one of which is the surprising loss of an investment. To be fair, we can't blame this phenomenon entirely on financial professionals. Sure, these professionals are ultimately the responsible party for ensuring clients are aware of the products they're purchasing–that's just solid, ethical selling. Yet, Americans must do their own due diligence before making a decision that could lead to serious financial repercussions. Let's face it, in today's world, what you don't know can hurt you, so Americans need access to information that is both unbiased and informative. And the key to gathering that kind of information is to first know where to look.

Unbiased is a curious word...Some claim it's impossible to be completely unbiased, but they're probably the ones trying to sell you something. Financial professionals would have a difficult time being unbiased–their livelihood depends on your decision. Whether consciously or not, they are likely to lead you in one direction rather than another simply by the nature of what licenses they hold and what types of investments they focus on. That's called advice...And advice by definition is biased–no matter what the motive. What about "consumer" organizations like AARP? Are they completely unbiased? The non-profit AARP may not recommend specific mutual funds, but it does sanction an investment program that utilizes certain mutual funds and the mutual fund provider pays the organization for use of its famous trademark.

Yet, we can't cut the financial professional out of the financial planning picture, entirely. Once you've investigated a potential investment, you still need to find someone you can trust to assist in the planning process. And that brings us to the second part of your offense against fraud: if you were to conduct a financial transaction with someone, don't you deserve to know if that person is a criminal? Or if he or she has terrible credit, liens, and bankruptcies? Unfortunately, many of us have no idea if the person calling on the phone or knocking on our doors is looking out for our best interests or their own. It's not as though financial professionals wear a tag that informs us of past criminal activity. That doesn't mean you can't demand to know this information. And there are organizations in the industry that require its financial professional members to meet certain criteria.

Another method to protecting yourself against fraud relates to you, specifically. What kind of help do you need? In other words, would you ask a stockbroker about your healthcare insurance or your insurance agent about taxes? That's like going to a Mexican restaurant for Italian food. And if you're looking to invest large sums of money in high-risk investments, how would that decision relate to your age and your income? Should people over 65 be willing to invest all of their savings in futures? Common sense can go a long way to avoiding the scams that left so many of us with plummeting portfolios. Here's a few basic tips we should all follow:

  • Ask for any offer in writing before committing to it.
  • Don't conduct a financial transaction over the telephone with callers you're unfamiliar with.
  • Don't be pressured into making a quick decision.
  • Always check out a company you're conducting business with at your State Attorney General's Office or the Better Business Bureau.
  • Don't give your financial information (i.e. social security, credit card or checking account numbers) to someone you're unfamiliar with.

Along with those fundamentals, there's one more piece of advice that you've likely heard before, but bears being repeated: if it sounds too good to be true, it usually is. So learn as much as you can about the options available to you, and the person offering them. When it comes to financial matters, if you're not confident and comfortable with your decision you're wasting both your time and the assisting professional's time. One more caveat: don't take anything for granted. For example, if the planner you're meeting with claims to sell securities, ask to see his or her securities' license. Many of the investors who were scammed in 2002 could have avoided losing their investment if they had just asked a few simple questions. There's no foolproof way to avoiding every scam that presents itself. And while we can't protect ourselves against all the crooks out there, we can do our part to ensure we have gathered enough information to make an informed decision. Sure, there might be instances where you did all the research and still got scammed, but with a healthy amount of scrutiny your chances of being a victim decrease dramatically.

$40 billion dollars is a large number. There's no doubt about it. Yet, by educating yourself about scams that  number can, and will, start to fall. Maybe not all at once, and probably never to zero, but if enough Americans stay aware, fraud will no longer be such a booming industry. So keep those boxing gloves on, you're going to need them.