The international financial market is a labyrinthine system far too complicated for one person to understand, and trillions of dollars worth of financial instruments are traded every day. There’s no point in understanding how the nuts and bolts of the system work since it just keeps becoming more complex and opaque. That environment creates the right kind of conditions for illicit activities to take place.
Financial experts often claim that they can detect scams right away, but even their expertise has limits. Bernie Madoff, the mastermind of the largest Ponzi scheme in history, went undetected for decades. His investors had lost over $18 billion by the time he confessed his fraud. Of course, that shouldn’t deter you from investing in the financial markets. You need to be more cautious and practice some common sense.
Governments and regulators have waged war on financial criminals for decades. They have also tried their best to educate people about some of the tell-tale signs of a scam. That said, financial criminals have gotten more sophisticated, and fraud remains rampant. Here are a few things you need to know about financial scams.
1. There’s no such thing as guaranteed profit
Every financial transaction carries some degree of risk, and no legitimate financial advisor will tell their clients that profit is guaranteed. If someone approaches you with a guarantee, you need to assume that they’re scamming you. A simple look at the financial markets will reveal that there’s no rhyme or reason to market movements, and there’s no legal way to ensure a profit on your transactions.
Unfortunately, many people have fallen victim to false promises of guaranteed profit. Market outsiders are more likely to be victimized by fraudsters, and we’ve seen many cases of average people losing their life savings. Only transact with registered banks and brokerages and avoid black market traders.
2. If it sounds too good to be true, it probably is
When it comes to investments, it’s best to err on the side of caution. You need to watch out for financial advisors that advertise what their clients can achieve instead of what they do. Advisors tend to be conservative, so watch out for ones that make outlandish promises. For instance, some might claim that investing in them could give you the lifestyle you desire. Promises of wealth are a tell-tale sign of a scam.
Financial advertisements are heavily regulated. By law, a company’s ad cannot promise something it cannot deliver. For instance, advertisements for banks almost always focus on the services they provide and are always grounded in facts. If you see an ad that promises an instant windfall, make sure to report it to the relevant authorities.
3. Market predictions are usually inaccurate
Only financial advisors and market veterans possess enough working knowledge of the financial markets to navigate it, which puts most people at a disadvantage. The average person is at the mercy of market experts, and they wouldn’t be able to tell a legitimate advisor from a fraudster. If there’s one thing you should know, it’s that no one can reasonably predict how the market will move. One can form conjectures based on evidence, but the conclusions are short-term at best.
Some people might claim to have a foolproof way of predicting how the markets will move in a given time frame. They will say that they have access to privileged information that allows them to make accurate predictions. Notice how the product they’re selling isn’t their services but their supposed expert predictions.
You need only use your common sense to deduce that it’s a complete lie. If the system truly worked, why wouldn’t they use the information to enrich themselves? Why go to great lengths to sell the system? Many businesses routinely keep valuable information secret, and the same applies to the financial markets.
4. Be careful who you trust
Online articles and reviews might work for everyday merchandise, but you shouldn’t take financial advice from random blogs off the Internet. A page or a review can be easily bought, and you would have no way of verifying whether the information is true. Scammers know that people use the Internet for everything, which is why it’s full of fake or misleading information.
Trust can be deadly when it comes to money, and it pays to be skeptical of the people you work with, even if they come from a respected organization. You want to meet your financial advisor in the flesh. It also helps to ask around about their reputation and track record. Serving court papers could be difficult if the perpetrator masked their true identity.
The bottom line
You need to be constantly on guard for financial fraud, and these four tips will help you spot a scam. It’s always safer to transact with established institutions. Always ask for their accreditation and walk away if you aren’t satisfied with their answers.