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How to avoid being a victim of investment fraud

Posted by on Mar 21, 2011 in Investments, Moneyville | 0 comments

By Sheryl Smolkin

Read this article and comments at Moneyville.ca

One of your worst nightmares may be that you will end up losing your life savings by investing in a Ponzi scheme with the next Bernie Madoff or Earl Jones.

A Ponzi or pyramid scheme is an investment opportunity that promises consistent guaranteed returns. But the fraudster never actually invests your money. The dividends you receive are actually new money contributed by more recent investors. Sooner or later the whole deck of cards collapses.

Because the Competition Bureau has designated March as Fraud Prevention Month, The Financial Advisors Association of Canada (Advocis) has identified a number of ways to help you avoid becoming the victim of a Ponzi Scheme.

Advocis CEO Greg Pollock says before entrusting your money to a financial advisor, ask questions and verify the advisor’s credentials. “Lots of people hold themselves out as financial advisors in Canada and they have no accreditation, licence or professional background.”

You may think a referral to a financial advisor from a friend or relative will help to protect you, but you still need to do your due diligence and cannot assume the financial advisor has been pre-screened or pre-approved.

Here are some red flags:
Unreasonable or guaranteed returns: Investment returns fluctuate. If you are offered a guaranteed 20 per cent return simply not realistic. Walk away.

Out of your comfort zone: If the advisor is suggesting that you take out another mortgage on your house or cash in your RRSPs to invest, this should make you  very uncomfortable. Don’t go down that road.

Too complex to explain: Never invest in something you don’t understand. Be suspicious if you ask for more information about the product and the advisor says it is “too complicated to explain.”

Time pressure: Beware of “one time offers” and the limited opportunity to invest in a “big deal.” These situations do occur occasionally, but a legitimate advisor should be taking a longer term approach to your portfolio.

All or nothing: You are being pressured to “put all your eggs in one basket.” Don’t give in. A well diversified portfolio will ultimately deliver long term, consistent returns.

If you feel you have been a victim of financial advice fraud, don’t be embarrassed or ashamed. Tell someone in authority as soon as possible. This can include the RCMP, The Canadian Anti-Fraud Centre or a provincial insurance or securities regulators.

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