Avoid Investment Scams, Part 1

May 19, 2009
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“There’s no such thing as a free lunch.” – Milton Friedman.

“Fed up with purported financial advisers preying on unwitting older people, investigators from the Arkansas Securities Department last year staged an undercover sweep of one of the hucksters’ favorite showcases — free lunch seminars.”

That was the lead in today’s Wall Street Journal article Laws Take On Financial Scams Against Seniors.  According to the article, which is about some questionable and possibly illegal practices, “financial scams that target seniors are on the rise, and states are cracking down.”

“Besides Arkansas and Michigan, Idaho also passed a senior-victim law in recent months that will go into effect this year. Six other states, including Maryland, Minnesota, Missouri, New Jersey, Rhode Island and West Virginia, have similar bills pending in their current legislative session.”

Leaving aside whether seniors are in particular need of protection, and whether the site of the crime is only a lunch seminar, let’s take a look at the misleading products offered.  Here are some relevant quotes, with emphasis added.

The Arkansas sweep … uncovered …shady practices — misleading claims, underplayed risk.

The recession has spurred more scams that play off people’s fear of stocks.  Some investments pitched as low-risk could instead be quite complex.

The events are generally pitched as educational events, with a free meal thrown in. But in Arkansas, state agents instead found that the dozens of seminars they attended all featured hard-sell pitches for financial products, many of which weren’t appropriate for elderly investors. Presenters at about half of the seminars made misleading claims about potential investment returns, Arkansas regulators say. And at about a quarter of the events, products being pushed were ill-suited to older people, such as investments heavily exposed to swings in stock prices.

The frequency of scams is increasing in the recession, many financial experts say. Seizing on fear of stock-market turmoil, sales people and fraudsters are hawking investments that claim to be “low-risk,” or a supposedly safe way to invest in the stock market and earn back losses. In fact, the products may be complex and have significant downsides.

Firms that have been cited for violations range from big financial giants to single-person offices.  In October 2007, a unit of Allianz SE, the German financial company, agreed in a settlement with Minnesota’s attorney general to review sales practices and to give refunds to as many as 7,000 Minnesota seniors that the state said may have been sold unsuitable annuities since 2001.  Allianz also agreed to strengthen its process to determine suitability for customers over the age of 65.

There is nothing illegal about financial advisers pitching products at seminars, but under securities and investor-protection laws, there are lines that these salespeople can’t cross.  Brokers must follow “suitability” standards, meaning they can’t sell a product that doesn’t make sense given a person’s age, income, or liquidity needs.  They can’t misrepresent products. S ales materials and oral presentations must show a balanced picture, with both the risks and benefits of investing in the product.  Any statements to investors that an investment is “safe as cash” or that it carries no market or credit risk “would raise serious questions under FINRA’s advertising rules,” according to the regulatory group.

A number of products sold to seniors have triggered investigations in recent months, including reverse mortgages, which can help senior tap equity into the home and be beneficial, but which can also include hidden costs. Also popular are deferred annuities, which promise future payments to the investor but which can lock up money for a decade or more.


I am not surprised that one of the vehicles used by the scam artists are deferred annuities, as I have written about this before. Quite simply, variable annuities pay salespeople very high commissions. Annuities may be suitable for some people, but determining what is best for you should be done by someone who does not gain from the decision. In other words, your best option is to hire a fee-only planner to advise you on whether you really need a deferred annuity. Quite possibly, a fee-only planner will come up with a less expensive solution that achieves the same goals as an annuity.

The article lists several sites which will help you if you think you have been scammed. Of course it may be too late at that point.  Instead, I’d recommend one site that will help you find a fee-only planner, a fiduciary acting in your best interests – the NAPFA website.

As mentioned in the article, salespeople must only follow a “suitability standard” and do not have to tell you about the best option for you.  The difference between a “suitability standard” and a “fiduciary standard” may seem like a technicality, but the effect on your financial wellbeing can be huge.

Read Part 2.


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