If you fall for an investment fraud, it is likely that you never see your money again. This is why it is essential that you be very careful when dealing with strangers over the internet pitching you opportunities that seem too good to be true.
There are certain Red-Flags that you can help you separate scammers from genuine opportunities.
- Risk-Free High-Return Guarantees
Investment is an inherently risky activity. There are no investments without certain degree of risk.
If you are approached by a person who guarantees returns on your investment and the returns are well above the typical Risk-Free Return, then that is a huge red flag. You should never invest in such an opportunity because it is very likely a scam.
There are a few certain ways in which you can make guaranteed returns. This includes placing your money in a Fixed deposit Account with your bank which can give you Interest rates from 8% – 10.5%, or investing in SA 10Y Government bond which has around 9.4% yield, or other kinds of debt-related products.
However, the returns from such an investment are always low when compared to riskier investment products.
- Selling Unlicensed Products
Always check whether the product you’re investing in has been licensed by the Financial Sector Conduct Authority. The FSCA is the government regulatory body for financial markets in South Africa. They are a Financial Regulator in charge of overseeing Conduct of Financial Institutions and financial products.
If you see an advertisement for an investment product, then you should always cross-check with the FSCA to determine if it is licensed. You can ask the seller to show the credentials of the product and then verify it through the FSCA website.
Unlicensed products are dangerous because it is highly likely that the product is a scam. Further, an unlicensed product is not regulated by the FSCA which means that there is no investor protection.
- Unregulated Broker or Fake Credentials
There are numerous unregulated brokers operating online. These brokers pose as regulated brokers, so you need to be very careful. Always cross-check the credentials of any broker that you want to do business with.
South African Broker Comparison website Safe Forex Brokers SA explains that the best way to check whether a broker is licensed is to ask for their FSP number. You should cross-check that license number through the FSCA’s public search on their website to find out whether the license number is genuine and the license has been accorded to the broker in question.
Check the products for which the Financial Service Provider is authorized, and for how long has the provider been regulated.
Also, there are some fake brokers & scammers who claim that they are regulated while they are actually not, and they normally use the FSP No. of other licensed providers to claim that they are regulated. So, you must validate that the provider that you are signing up with is actually licensed.
The problem with investing or trading through an unlicensed broker is that they may carry on fraudulent practices without any investor protection. Your money will be unsafe.
- Promising Overly-Consistent Returns
Consistent returns can only be delivered by very few types of investment products. No market-linked investment product can promise consistent returns. Hence, you should stay away from any investment opportunity that promises consistent high returns without risks.
If a person approaches you with the promise of consistent returns, then you should check the type of investment product that they are offering. Once you Google the investment product, you should be able to confirm whether such investment products can offer consistent returns or not.
Understanding the investment product or opportunity before investing is essential.
- Unable to Explain Complex Investment Strategy or Investment Plan
As mentioned in the last point, you should always understand the product before investing any money. When you’re approached for an investment opportunity, make sure that you ask questions until you completely understand the investment plan or strategy.
This will not only tell you whether the investment opportunity is a good fit for you, but you will also be able check whether the investment opportunity is genuine.
If the person is unable to explain the strategy & provide reasons as to why that strategy can provide the promised returns, then it is highly likely that the person is a scammer, and you should never invest your money.
- Missing Documentation
Always check the documentation before making an investment. The documentation surrounding the investment allows you to check how genuine the opportunity is and how serious the people offering the opportunity are.
If there are any missing documents, then you should be very careful before investing your money. It is possible that a genuine investment opportunity does not have all the documents, but it is unlikely.
Hence, you should always consider missing documentation to be a major red flag as far as investment opportunities are concerned.
- Account Discrepancy
You should always check your account statements that you get from your broker.
It is possible that some discrepancies may occur due to genuine mistakes. However, if there are consistent account discrepancies and they do not get resolved quickly, then you should stop trading with such a broker.
Account discrepancies are a rare occurrence, but they can happen. Hence, it is the speed and helpfulness with which they get resolved is what you should be concerned about.
If an account discrepancy does not get resolved, then that is a major red flag. Some types of discrepancies include error in your account statement, unauthorized trades, missing funds, and so on.
- Pushy Salesperson – Urgency and Limited Time Opportunity
If the salesperson is too pushy, then that means that they do not believe in their product & are likely to generate hefty commissions from the sale of that product. Do not engage with salespersons who are too pushy or those who offer a limited time opportunity.
A limited time opportunity is a marketing strategy that is used by brokers to make you fear missing out on the opportunity. This is a tried-and-tested method to make more sales more quickly.
Hence, if a salesperson is offering a limited time opportunity, then you should stay away since the opportunity is most likely a fraud and you will not see your money again.
- Pitching Tax-Free Offshore Investments
Offshore investments are always highly risky. Offshore investments are not subject to the jurisdiction of the South African government. This means that you will have little legal recourse in case you lose your money on an off-shore investment due to fraudulent behaviour or scams.
Hence, if you’re planning on making an offshore investment, then you should be very careful and check whether the opportunity is genuine.
If a person says that the returns from such an investment will be tax-free, then you should consult with a lawyer to make sure that it is true. Not all offshore investments are tax-free. You may also be taxed by the offshore country in which you are making the investment.
Hence, a tax-free offshore investment is likely a scam, and you should consult your lawyers & Licensed Financial Advisor before investing in any such scheme.
- Making Fake Promises & Offers That Are Too Good to Be True
Any offer that is too good to be true, is most likely to be a scam. There are many scammers out there who make such offers in order to take advantage of unsuspecting investors.
If the investment opportunity comes out of the blue, and it sounds too good to be true, then you should never part with your money in the first place.
All investments are subject to market-risk. If a person is making promises such as high guaranteed returns, or double your money in a short time, or anything like that, then you should never invest.
- Making Unsolicited Calls
If you’re getting repeated unsolicited calls from a salesperson selling an investment product, then you should be careful. Repeated calls may mean that the salesperson is having trouble selling the product since it is not genuine or not profitable.
If the calls are unsolicited, then you should always ask how the caller got your number. Usually, the number is gathered in an unethical way, which should tell you that the caller is not to be trusted.
- Friends or Family Pitching a Great Opportunity
It may seem counterintuitive, but if you’re getting an investment pitch from a friend or a family member regarding investment in some scheme, then you should avoid investing in such an investment opportunity. If the offer seems too good to be true, then it probably is.
It is not necessary that the friend or family member is aware that the opportunity is a scam. They may have been approached by someone else and are convinced that the opportunity is great.
However, you should stay away from such opportunities since they rarely work out or are a scam.
Remember
There are several ways in which you can detect whether an investment product or opportunity is a scam. Do not blindly trust anyone & be led into the fear of missing out.
Take your time to carry out your own thorough due diligence, refer to this checklist, ask questions, consult licensed Financial Advisors, and then decide if you want to put your money in an investment.
