When a client emailed AnnaMarie Mock, a CFP at Wayne, N.J.-based Highland Financial Advisors, directing her to withdraw $230,000 from her IRA – nearly half her total investment –Mock’s instincts screamed that something was awry.
Mock called the client and learned that a man claiming to be from the Social Security Administration ordered her to wire money from her personal account or face severe penalties. Mock smelled a scam, denied the request, had her client change online passwords, and reported the threat to the Office of the Inspector General and Federal Trade Commission (FTC).
When a client vacationing in India requested a wire transfer, Alex Feick, managing partner at Denver-based Paragon Capital Management, immediately suspected foul play. He was right. His client was hacked because he used a public Wi-Fi hotel account without a virtual private network.
But these scams, as well as get-rich schemes, often involving cryptocurrencies and real estate, have been surging, both on the internet and through cold-calling.
The FTC’s Consumer Sentinel Network, which tracks consumer fraud and identify theft, reported that consumers lost about $1.48 billion related to fraud complaints last year, nearly quadruple the $406 million reported in 2017.
Based on this spike of clients falling for risky investments and scams, advisors need to be more proactive about training their clients to be street smart.
“When you take a look at the typical retail investor, they have little experience and little knowledge of investments,” explains H. Kent Baker, who wrote The Savvy Investor’s Guide to Avoiding Pitfalls, Frauds and Scams. Scam artists prey on gullibility, Baker emphasizes. “Fraudsters are like actors who put on a show and carry false credentials. If it looks too good to be true, it probably is.”
While investors are more likely to panic when stocks are tumbling, and embrace get-rich quick schemes when stocks are surging, their unique proclivities must be understood and continuously monitored.
Advisors can prevent clients from falling into these traps by developing – with the client – an investment policy statement that enumerates short-term, mid-term, and long-term goals.
“It creates a blueprint where the advisor knows the client and the risk tolerance, and sets out a plan of action of how to achieve those goals,” Baker notes. Anything that deviates from the plan will trigger a follow-up by the advisor.
Advisors need to be vigilant given that the financial landscape is brimming with new ways to dupe unsuspecting clients, says Randal Wolverton, a Kansas City, Mo.-based forensic accountant and CPA who spent 28 years with the FBI and still serves as an FBI contractor. “The first thing is to become familiar with the current landscape of security frauds.”
To do so, advisors can research the websites of the SEC, FBI, FINRA, and AICPA. For example, the warning signs on AICPA’s “Eye on Fraud” section include claims of high returns with minimal risk, aggressive sales tactics, and misleading sales documents.
Wolverton has seen a plethora of cryptocurrency schemes, which dangle “instant enrichment of striking it rich,” he says.
“Financial advisors want their client to understand what the investment is, why they’re investing, the risk, and the complex nature of it,” Wolverton declares. “Fraudsters are constantly adjusting and anticipating new schemes. You have to constantly stay on top of emerging frauds.”
Seniors are often targeted in get-rich schemes because they sometimes possess “diminished capacity,” explains Moira Somers, a psychologist who wrote Advice that Sticks: How to Give Financial Advice that People Will Follow. “The mild cognitive impairment makes them fall prey to fraudsters and snake-oil salesmen.”
Advisors, however, often overlook that most financial decisions are “emotionally-driven,” says Somers. “Ninety percent of them are done on emotions and 10 percent on rationality.”
Wolverton notes that many fraudsters target Millennials on their smartphones because they’re often not knowledgeable about investments and don’t know what questions to ask.
Anyone though is a potential target, he emphasizes. “People are lazy,” and see dollar signs in their mind, and get distracted, he says.
Steve Sexton, president of Sexton Advisory Group, has studied schemes and says advisors need to most heed these:
• IRS impersonation scams
• Robocalls/unsolicited phone calls
• Sweepstake/lottery scams
• Elder financial abuse
• Grandparent scams, where fraudsters pose as grandchildren
• Romance/companionship scams, where fraudsters act as romantic interests
• Identity theft
After the hacking described above, Paragon Capital internally distributed a list of best practices to help clients detect fraud, including ways to avoid phishing attempts. Paragon also recommends sharing information about new fraud or misleading investments with clients via email, newsletters, and blogs.
Sound advice has its limits, however. While most advisors do right by clients, some continue to put their own interests first.
