Recently I was listening to a Vancouversports talk radio station, when Iheard something that I caught my attention an infomercial from the BCSecurities Commission.
The BCSC isn't selling anything. So whyis the BC Securities Commission spendingmoney on advertising?
Well, these are the guys that areresponsible for the integrity of the capitalmarkets. More specifically, financial fraudsand scams fall under their jurisdiction, andthey want to warn potential victims aboutwhat warning signs to look out for.
Investment fraud is a lucrative, andcommon, swindle. The statistics indicatethat about 40 per cent of Canadians havebeen approached to invest in a fraudulentscheme. Roughly one in twenty Canadianshave fallen victim to investment fraud.
What I found interesting isn't just thatthe BCSC is proactive in trying to preventinvestment fraud, but also the choice ofthe particular media that the BCSC isusing to get the word out. After all,Vancouver sports talk radio is a prettyfocused product, and is probably notgoing to have universal appeal across alldemographics. A person might think thatthe BCSC would want to spread their messagein a broader way, given that nobodyis immune to fraud.
The reason that fraud can happen toanyone is that the perpetrator wins thetrust of the victims. One of the most successfulmethods is called affinity fraud,where the fraudster joins a religious, ethnicor other close-knit group of peopleand intentionally builds a common bondwith its members to gain their trust, andthen defrauds group members of theirmoney. It works so well because the victimswill naturally trust people that theyhave something in common with, such asbelonging to the same church, or thesame service club, or the same sportsteam.
But what the BCSC research has foundis that, while fraudsters can prey on anyone,the average fraud victim may lookdifferent than what you might expect.Victims tend to be male, age 45 to 60,have good incomes and above averageinvestment knowledge. These people tendto be do-it-yourself investors who arelooking for quick results.
Which answers the question of why isthe BCSC warning people about investmentfraud via sports talk radio that'sthe station that the most vulnerable groupof people is inclined to listen to.
You might expect that affluent, middleagedmen with above average investmentknowledge would actually be less vulnerableto investment fraud instead of beingthe group that is most at risk, but thesevictims also tend to be confident, aggressive,and more likely to believe that unlessyou act quickly you might miss out.
An analysis of the $240-million EronMortgage fraud found that these affluent,middle-aged men are prone to taking economicrisks, making them the group that ismost susceptible to investment fraud. Theycan be overconfident to the point of recklessness.
One of the things that the BCSC pointsout is that these victims tend not to use aninvestment advisor. That's another thingthat I find interesting, and as I reflect on itI think that it speaks not so much to thedebate about advisory services versus doit-yourself, but rather advisors, generallyspeaking, will know the red flag indicatorsof a potential scam and warn people off.The guys that don't consult advisors don'tget warned off. It is extremely common forfraudsters to advise people to keep theschemes secret from their financial advisors.
Personally speaking, I don't know howmany times I have told people that it's nota question of if the idea is going to fail,it's a question of when, and when the ideainevitably does fail it's not a question ofwhether you will lose some money, butrather a question as to whether you willlose it all.
Even so, sometimes people will still putsome money into things after I tell themthat I think the scheme smells fishy. Afterall, it's hard for people to hear that the ideais probably fraudulent when they got theidea from someone that they trust.
Given all this, the BCSC has come upwith the following scam meter to helpdetermine the legitimacy of a proposedinvestment.
Question 1. Does the proposed investmentoffer:
A. High returns with low risk.
B. A tax free offshore investment opportunity.
C. An opportunity usually only availableto the wealthy or industry insiders.
D. You're not sure what it offers
Question 2. You want to invest because:
A. Your friends or family made moneyfrom the investment and think you can too.
B. It sounds like a good deal and youdon't want to miss out.
C. You can make enough money fromthis investment to do what you really want(e.g. retire well, give more to charity, helpyour family).
D. You're not sure why you want toinvest
Question 3. The person who is sellingyou the investment is:
A. Registered to sell investments.
B. A family member, a friend, or a memberof a church or club that you belong to.
C. A person you recently met.
D. You're not sure who is selling theinvestment.
You can find more information about theBC Securities Commissions, and their scammeter at www.InvestRight.org. It's a usefulwebsite for investors to educate themselveson how to make informed investment decisionsand how to develop critical thinkingskills that they need to protect themselves.
Remember, anyone can be swindled byinvestment fraud, and often it's the peoplethat you would think would be at low riskthat are the ones that are victimized.
The opinions expressed are those of BradBrain, CFP, R.F.P. CLU, CH.F.C., FCSI. BradBrain is a Certified Financial Planner withManulife Securities Incorporated, MemberCIPF and with Manulife Securities InsuranceAgency. Brad Brain can be reached at firstname.lastname@example.org or www.bradbrainfinancial.com.