How to Spot Investment Fraud

Accidentally being involved in a fraudulent investment is great way to lose money. But if you’re looking into investments, it’s likely that you want to gain a return on your investment, not lose it. So how can you protect yourself from falling prey to investment fraud scams? This guide will cover the three major steps you can take to avoid getting caught up in one of these scams, along with descriptions of some of the most popular types of large-scale investment scams.

Be Skeptical

The number one thing you should do when presented with an investment opportunity is to be skeptical. Even if everything seems to check out on the surface, there’s never an investment that you should blindly agree to without knowing all of the details. Four of the more common things to be skeptical of when it comes to investments are:

  • Unexpected offers or offers from strangers
  • High returns within a short timeframe
  • Low or no-risk investments
  • Secret methods or information

Unexpected investment offers or offers from strangers are often a sign of investment fraud. You need to ask yourself, “why did this person I don’t know choose me?” The answer is likely because you seemed like an easy target to scam, not because they want to help you make more money.

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Investments which promise high returns in a short amount of time are another sign of a fraudulent investment. If you’re promised an above market return you should end the conversation there. There’s no such thing as a “get rich quick” scheme in the real investment world.

Low or no-risk investments are another impossibility in the investment world, and a sure sign that something isn’t quite right. Every investment has a risk involved, and the higher the potential return, the higher the risk.

Secret methods or information typically means one of two things. Either there is no method or illegal insider trading is going on. If the person offering you the investment can’t explain the details in a way you can understand it’s because there’s something they don’t want you to know. Be wary of sophisticated terminology used to confuse you.

Always Verify

While being skeptical will certainly help you avoid fraudulent investments, there are other times where simply being skeptical isn’t enough. Occasionally you’ll have to verify information with third parties.

When in doubt, it’s always a good idea to verify the information you’re given with an independent third party whom you trust. If you want advice on whether or not an investment is sound, another broker or financial representative whom you trust can help. For verifying the credentials of a broker, there are a number of databases such as

profit, loss, risk
  • FINRA (Financial Industry Regulatory Authority)
  • SEC (Securities and Exchange Commission)
  • State securities or insurance regulator

Investment professionals must be registered with one of these databases, so they’re useful resources. Fraudulent brokers will try to deceive you with fancy titles and professional looking fronts in the hopes that you won’t check their registration status.

Aside from making themselves look the part so you won’t dig too deep into their own backgrounds, they’ll also attempt to make you believe that their investments are legitimate too. A popular example of this is the inclusion of an “everyone’s doing it” line. By implying that a lot of people are also in on this investment, the fraudster is attempting to dissuade you from looking into it too much. If an investment opportunity is truly legitimate, then it will be verifiable with a third party broker.

Don’t be Pressured

Other common signs of investment fraud are tied to high-pressure sales tactics. If the person offering you an investment opportunity is being too pushy or attempting to use guilt to sway your opinions, walk away. Some ways fraudsters attempt to pressure their prospective targets include:

  • Requesting unnecessary personal information
  • Limited time offers
  • “Freebies”
  • Discouraging second opinions

Unnecessary personal information such as bank account numbers should never be given out lightly. If the salesperson is pressuring you into releasing information like this, it’s clear that they aren’t really there to offer you a legitimate investment.


Limited time offers might be common in the sales world, but not in the investment world. If someone is pressuring you into making a quick decision about an investment, that’s a sign that they don’t want you to take the time to think about the potential shortcomings. A good investment today will still be a good investment tomorrow, so there’s no need to rush.

“Freebies” are when a salesperson gives you something small for free to guilt you into buying something larger from them. In the case of investing, this could mean the broker gives you a piece of information or advice to start, but then expects you to “return the favor” by investing with them. Even if you accept something for free, such as advice, don’t feel obligated to return the favor by investing in their offer.

Second opinions are always good to get when dealing with a financial investment, especially a large one. This ties back into the previous section on verifying the claims made by the person who initially contacted you about an offer. If this person attempts to dissuade you from getting a second opinion from someone you trust, it’s likely because an actual financial professional would be able to see through their scam. Don’t believe them if they claim it’s because the third party will “steal the investment.”

Common Types of Investment Fraud

Two of the biggest forms of investment fraud are Pyramid and Ponzi schemes. Both of these fraudulent investment strategies rely on unsuspecting investors who believe they’re going to get rich quick. They also both rely on a constant stream of new “clients” or “partners” to keep their facades going.

Pyramid Schemes are when, after an initial investment is made, the return doesn’t get paid out until the investor refers a certain number of other investors to the scam. Due to this “business plan” the one person at the top of the pyramid gains an exponential amount of money while those at the bottom must work to simply break even. If no new investors are brought into the scam by the previously scammed investors, then the entire pyramid will collapse.

Ponzi Schemes are a bit different in that the investors aren’t told they need to bring in new investors in order to gain a return. Instead, earlier investors are simply paid with the investments of later investors without their knowledge. As with pyramid schemes, ponzi schemes also break down once the source of new investors dries up since they are the only source of new money being pumped into the system.

In an attempt to make these kinds of schemes appear legitimate, the fraudsters will often pay high returns to the initial investors quickly. These initial investors, believing they’ve found a quick and reliable investment opportunity, will then recruit their friends and family. Just because a friend or family member tells you about how much money they made from a quick investment doesn’t mean it’s legitimate. These financial scammers are preying on the trust between you and those you know.


Investment fraud is more prevalent than ever due to the rise of the internet. However, that doesn’t mean that traditional avenues such as mail and magazine ads are safe either. Luckily, no matter where you come across a new investment, you now have some tools at your disposal for determining whether it’s worth your time or simply a scam. Remember to be skeptical, verify any and all information, and don’t be pressured into decisions.

FBO Services

FBO Services is a family business office that combines a wide skill set, encompassing accounting, tax services, and fee-only financial planning. Our expert team is independent and free of conflicts as we assist you with all aspects of your financial affairs, including what to do if you suspect you’ve been caught up in investment fraud. In addition to our family office and tax services, we also provide specialized services such as tax compliance, partnerships and LLCs, forensic accounting, and estate planning. We will also work with your personal attorney or CPA. Contact FBO Services today!