How hard is it to avoid investment fraud and scams as an investor?
The answer to that is complicated, because there are many ways to invest, and there is a lot less red tape these days. If you choose to directly buy stocks from a well-established company from a reputable broker, for example, then you will be taking on a fair bit of risk. However, you are unlikely to fall victim to a scam in such a direct transaction.
As far as I can tell — and you can read more about it here — most common types of investment fraud rely on trying to pass flawed products and opportunities as honest ones. You also get a lot of fraud and money lost due to bad actors in the financial industry. A crooked investment advisor, for example, may make good investments in the name of their clients while also bundling the client with a lot of unnecessary hidden fees that go straight to their pocket.
Avoiding most of these scams comes down to being diligent. Yes, there have been massive investment firms and famous brokers who fooled million-dollar companies into investing in Ponzi schemes before. But more often than not, checking a broker’s reputation, history, license paperwork, and other components of their background is enough to uncover potential red flags. And even if you fail to notice something, as long as that financial advisor is a fiduciary, you can sue them to recover your investment losses once their misdeeds come to light.
As for fraudulent products, you can avoid many of the common scams by trying to track down how that investment generates value. If you can’t, then you either don’t understand the market that product is part of, or that product isn’t a solid investment. Either way, it is safer to invest your money elsewhere.
The bottom line is that it’s not that hard to avoid fraud, and if you are being careful, you may even be able to recover your losses if the worst happens.