10 Tips for Avoiding Financial Fraud in 2016

U.S stock markets have been on a tear since their epic plunge in the wake of the 2008 financial crisis. The S&P 500 index, the broadest gauge of U.S. stocks and the one most closely watched by analysts, has risen nearly 300% since hitting a 10-year low of 683 in March 2009.

But that bull run may be coming to a close with higher interest rates on the horizon and U.S. companies facing weaker demand due to a number of troubled economies overseas.

Meanwhile, Bernard Madoff’s massive Ponzi scheme, which unraveled in late 2008 and is probably the largest financial fraud ever committed, has receded further into investors’ memories.

The message then for investors heading into the New Year is to remain vigil against fraud and stay alert to investment advisors making promises that sound too good to be true – because they almost certainly are.

“With the stock market mostly trading sideways in 2015, and some sectors down dramatically, the year end is always a good time for investors to review their portfolio,” said Chicago-based Securities Analyst Andrew Stoltmann. “There are certain, common sense steps investors can take to help prevent against investment fraud. If these steps were regularly followed, I'd likely be out of a job...”

With that in mind, here are Stoltmann’s 10 steps for avoiding financial fraud:

1. Limit your exposure. Diversification is the single best and fundamental method for avoiding being scammed. It is worth thinking twice before putting more than 5% of one's assets in any single investment.

2. Perform a background check. Don’t get pressured to make a decision before checking for past censures, pending investigations, or lawsuits and verified legitimate registration. For firms and advisors based in the U.S., check the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) for more information as a starting point. A simple Google check remains the best method for performing due diligence on brokers.

3. Don’t be a courtesy victim. Con artists will not hesitate to exploit the good manners of the potential victim. A stranger who calls and asks for money is to be regarded with utmost caution and skepticism. It’s not impolite to just hang up.

4. Don’t be rushed -- check it out. Say no to any salesperson that attempts to pressure you to make an immediate decision.

5. Always watch over and protect your nest egg. Never trust anyone who wants you to turn over your money to them and then sit back and wait for results. Demand the money is held with a legitimate, third party custodian like Charles Schwab or Fidelity.

6. Independent audits: Find out about independent audits and who performs them. Before investing in any company, make certain there are audited financial statements by a “big four” accounting firm. Bernard Madoff’s funds were audited, but by a storefront auditing firm nobody had heard of.

7. Avoid email solicitations. Legitimate financial professionals rarely, if ever, send unsolicited emails. Unsolicited email claims should be treated with great suspicion as email lists are easy to obtain and emails are easy to send.

8. Be wary of those offering quick returns and special access. These claims should all be red-flag phrases for the wise investor. Legitimate investment professionals do not promise sure bets. Scammers often make the combination of safety and high returns seem plausible by granting you “special access” based on your relationship with a mutual acquaintance or shared affiliation.

9. Monitor your investments and ask tough questions. Too many investors trust unscrupulous investment professionals and outright con artists to make financial decisions for them. They then compound their error by failing to keep an eye on the progress of the investment. Insist on regular written reports. Check the written information and look for excessive or unauthorized trading in your funds. Don’t be swayed by assurances that such practices are route or in your best interest.

10. Don’t let embarrassment or fear keep you from reporting investment fraud or abuse. Investors who fail to report that they have been victimized often hesitate out of embarrassment. Older investors fear they will be judged incapable of handing their own affairs and be forced into a nursing home or other facility. Sophisticated investors don’t want to admit that a smooth talker took them in. Con artists know all about such sensitivities.