Eight Ways to Avoid Financial Scams

Historians have documented financial fraud dating as far back as 300 BCE. In a scheme known as “bottomry,” shipowners would lend money by offering their ship or cargo as security. If the ship sank at sea, the borrower would not have to repay the loan, and dishonest shipowners would deliberately sink their ships or fake losses to avoid repaying their debts.

Financial fraud has become a much more sophisticated and widespread threat today. From Ponzi schemes to cryptocurrency scams, Canadians need to be vigilant and learn to recognize the signs of fraud to protect themselves from these complex and cunning tactics. Here are eight things to keep in mind.

1. Check permissions and licenses

Financial advisors must register with the securities regulator in each province or territory where they operate. You can check whether someone providing you with investment advice is licensed by using free search tools such as the CSA National Registration Database or CIRO AdvisorReport. Simply enter the advisor’s name in the search tool to confirm their credentials. You can also view any disciplinary actions against registrants by using the list of resources here.

Many advisors have sought additional training and education. They may have one or more financial designations, such as Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA). Advisors using or advertising these designations must be in good standing with the bodies that oversee these designations, and the advisor’s name can be searched in the member directory to ensure they are in good standing.

2. If something sounds too good to be true, it probably isn’t.

Risk and return are inextricably linked. Any investment that promises high returns is, by definition, high risk. And any investment that promises high returns with low risk is likely a scam. Remember, there are always two sides to trading. If someone sells you a low risk, high return investment, why not keep it?

3. Beware of unsolicited investment offers

Fraudsters are increasingly targeting their victims via online platforms and social media groups. The CSA recently warned of fraudulent social media “investment groups” that are taking advantage of unsuspecting investors. Always approach any unsolicited offers with extreme skepticism and think twice before sharing your personal information with someone you don’t know or trust.

4. Understand the investment

Investing can be complicated. By obfuscating the facts, using jargon or lingo, or even inventing terminology, scammers often rely on deceptive tactics to take advantage of their victims. Take the time to do your research and ask them to send you information to support any claims they are making. A real advisor or investment firm should be transparent and willing to explain everything clearly.

5. Avoid pressure tactics

Scammers often pressure potential victims by offering time-limited offers. High-pressure sales tactics are a serious red flag. Legitimate investments give you time to think, ask questions, and seek advice. No legitimate investment opportunity is urgent enough to force you into an uninformed decision.

6. Consult a trusted financial advisor

If you need clarification on your investments, consider paying another financial advisor or planner for a second opinion. Scammers often discourage victims from seeking a second opinion from outside professionals because it increases the likelihood of their fraud being exposed.

7. Stay up to date with current scams

Keeping up with the latest scam patterns and tactics can be an effective preventative measure. Many provincial regulators and organizations, such as the Canadian Securities Administrators (CSA) and the Canadian Investment Regulatory Organization (CIRO), regularly issue alerts on emerging scams. Familiarizing yourself with these warnings can help you spot fraudulent behavior early on.

8. Trust your instincts

Finally, if something doesn’t seem right, trust your instincts. It’s better to miss a legitimate opportunity than to fall victim to a scam.

Investment scams can happen to anyone, but you can significantly reduce your risk with the right knowledge and vigilance. In today’s rapidly changing financial landscape, the best defense is to stay informed and cautious.

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Mark McGrath is a Certified Financial Planner and Associate Portfolio Manager in Squamish, British Columbia. PWL Capital Inc.