In order to store up enough money for retirement, we all need to invest. Some use a work sponsored pension, some a 401(k), some use an IRA or another individual account. Many of us use a combination of different kinds of accounts, but regardless of how we go about it, nearly everyone works with an advisor in some capacity or another. What can often happen is that while researching investments, we are bombarded with sales literature and other offers to help make us rich. Being wary of some investment red flags can help you avoid being swindled.
There are some products out there that have guaranteed returns. But usually they are extremely low interest rates (to the tune of 1% or less). As they get higher, they are locking in your money for longer periods of time (think CD’s and Bonds). In the world of investing, nothing is guaranteed. If you are pitched a product that offers a guaranteed return, or you are guaranteed to never lose money, be cautious. It is either a false claim, or you are going to get little to no return.
Any investment that wants you to act quickly is trying to catch you off guard. They will throw a lot of great looking returns, a whole host of false promises, and say if you don’t act now, you won’t be able to invest. An investment that is worth your time is the one you can thoroughly research before giving it your money. Don’t fall for this high pressure sales tactic.
Sometimes advisors and others in the investment sales business will try to offer you something in return for investing in their company. The SEC monitors gift giving thoroughly, but those who are good at it can get around some of the laws. Never invest with anyone that tries to coerce you into it by offering a free lunch, a free round of golf, or any other sort of gift. Invest because the investment looks sound, not because of the gifts that it comes with.
There are some credentials that take time and effort to earn (such as the CFP designation). There are others that can be had for basically applying for them. Never base your decision to invest because an advisor shows a bunch of fancy credentials. Always do a background check on the FINRA Broker Check site before trusting someone new with your money.
You may get hit up to invest in a company, a fund, or a stock that is very hush-hush. They tactic being used here is that you are getting in on the ground level; and it is a secret to virtually everyone else. This way you get to say you knew before others knew, and you made substantial gains. If that is the case, why were you approached (often by someone you don’t know)? The real secret here is that this investment either doesn’t exist, or the company is struggling to stay afloat.
Any advisor worth your time will know exactly what the fees and expenses are of the products he is selling (or be able to produce them while you are in his office). If you are struggling to find information on a product, then chances are that the company backing the product is trying to keep them hidden. If you are going to give them your money, you deserve to know the answers to all your questions.
Have you ever heard the line, “This product has beaten the averages the past 10 years!” There are many great investments out there, however, the chances of one ALWAYS over performing the rest of the market is so slim it is probably a lie. Don’t fall for that; you can easily check the performance history on Google Finance.
The red flags should not be an immediate dismissal of the product you are being offered. However, they should cue you to do some more of your own research. Sometimes the investment will turn out great. For instance I received unsolicited advice to buy into a new tech company a few years ago. I looked it over, and dismissed it as a borderline scam. Over the next 12 months that stock grew 1,012% (no, I didn’t accidentally add a zero in there). I missed out on a great investment, but it could have easily gone under and I would have been left with nothing. The point is, do your homework. If it sounds too good to be true, it deserves closer inspection.