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How to Protect Yourself from Financial Scams

Updated: Mar 22

You may not think that financial abuse or fraud can happen to you, but don’t allow yourself to be overconfident. There are too many stories of unsuspecting victims who were harmed because of their inability to recognize the red flags that can come with a financial scam. In many cases, the con-artists appeal to one of three aspects of our personality– Greed, Fear, or Ignorance.


RED FLAG: Our ignorance about CUSTODY


Who has CUSTODY of your money? In almost every single instance of financial fraud that I have heard about there has been an issue of custody with the victim’s funds. So, what is custody, exactly?


When you invest your money in anything—you must open an account of some kind (i.e. brokerage, IRA, 401(k) before you can actively invest. When you open your account, you are placing the custody of your funds in the care of a specific institution. In some cases, custody can be obvious, like a bank CD, where your custodian is the bank.


Custody can become a little more complex as you step into the investment world. There are many financial companies out there that are doing business under one name, yet they custody funds with someone else or under a different name. Some firms will use multiple custodians and aggregate the accounts on a single financial statement.


For example, a wealth management firm may be doing business as Joe’s Amazing Wealth Advisors, but they never take actual possession of your funds when you open an account with them. When you meet with Joe, he helps you with all of the investing decisions you need to make, and then you place your funds into an account with Joe’s custodian.


For the sake of this example, we’ll say that Joe uses TD Ameritrade as his custodian. What this means to you is that you will work with Joe as your financial advisor, but your money will be held at TD Ameritrade, a 3rd party custodian that will safeguard your assets. TD Ameritrade will handle the administration on your account, execute trades, and provide you with periodic statements on your account. (Most custodians now offer online access to your account information as well)


In your meetings with Joe, you may decide to give Joe discretionary authority over the management of your account. This means that Joe, or his investment team, has permission to make investment decisions on your behalf without notifying you in advance. Under this type of arrangement, clients usually pay an advisory fee and are notified when changes are made their portfolio.


It’s very important to understand if you are working with an investment advisor that has discretion over your portfolio. It’s important to note, however, that Joe does not at any time have direct access to your funds. He simply has the authority to direct your custodian on how the funds need to be managed. Direct access (where Joe could take custody) should be a red flag.


*A different type of arrangement that doesn’t involve discretion is where a broker needs pre-authorization to make any changes to your investments. This means that you must authorize any trades on the account before they occur.


Where many people get in trouble with custody is when they allow the advisor to have both discretion AND custody of their funds.


Probably the most famous case of our generation–Bernie Madoff– was a perfect example of a custody issue for clients. For the clients working with Madoff’s firm, they would give FULL control over their funds to Madoff, where his firm managed and had full access to client funds…and we know the rest of the story.


TIP– If you are considering working with anyone to invest your financial assets or retirement accounts, even if they are family, you need to address the custody issue.


Key questions to ask:

  1. Where will my funds be invested? Who has custody of them?

  2. Who will send me statements? Will I receive 3rd party statements?

  3. Are these investments regulated or supervised by a 3rd party?

  4. How are you being compensated?

  5. Are you held to a fiduciary standard of care?

Red Flags: UNREALISTIC RETURNS and  SALES TACTICS


This where Greed gets us. The entire point of investing money is to achieve some return on investment, right? We can be constantly bombarded with information and advertising about various investment opportunities.


Tech companies like Google and Facebook can track your activity online and place just the right ads for you to see, commercials flood our sports programming and favorite tv shows, and the financial media itself is a circus. With so much noise, it can become increasingly difficult to discern financial scams at first glance.


Our intuition can warn us immediately if there seems to be the promise of an investment return that sounds “too good to be true.” In the  financial scams that I have personally seen or read about, the victim usually claimed that the returns promised were very excessive—like 300% to 400% excessive.


Not only are these kind of returns typically unrealistic without major levels of speculation, the methods used to invest the funds and achieve said returns are often “TOP SECRET” or “proprietary”. Thus, you won’t be getting disclosures on the investment methods. Consumers should take a hard pass.


One thing that was interesting about Bernie Madoff was that he seduced people with unrealistic consistency in returns. Instead of promising an extreme rate of return, he provided moderate returns that were suspiciously consistent returns (i.e. 12% per year / every year type stuff)


Moreover, It is not unusual for these wonderful investments be offered for only a limited time—like TODAY ONLY—so you need to act fast.


In my opinion, no true financial advisor is going to give the high pressure sales pitch to a client.



TIP— I will concede that it can be very challenging for investors today, especially conservative investors. Therefore, a guaranteed rate of return that promises to restore your wealth or make you a millionaire can be quite enticing. Don’t fall for it! There is a great verse in the Bible, Proverbs 21:5, that states:


“The plans of the diligent lead to profit, as surely as haste leads to poverty.”


This verse is timeless wisdom for anyone wanting to succeed with their finances. Don’t allow yourself to be seduced by unrealistic, get rich quick schemes.


Red Flag: The FEAR Factor


We humans are emotional beings. There is no getting around it because it’s part of who we are. Our emotions about money can be difficult to navigate because often we struggle with multiple behavioral biases that cloud our judgement and effect our ability to make wise decisions.


Take the concept of Loss Aversion made popular by Nobel Prize winning economist, Daniel Kahneman. This concept has been studied over and over again, and studies have concluded that we psychologically feel the pain of financial loss more than we feel the satisfaction of financial gains of equal size. Thus, what do we do? We do all we can to avoid losses because they hurt too much (psychologically at least).


Enter the financial scams that promise NO PAIN. When you invest funds in a market sensitive instrument like a stock, bond, mutual fund, ETF, etc., there’s always the element of risk. You cannot separate the marriage of risk and reward; you can only hope to manage it. Now, let’s combine this element with our Greed factor from above and we get something like this:


“Mr Jones, I know you’re concerned about the direct of the US Economy and the trillions of dollars in debt. Our XYZ Elite Protection Make It Rain Cash Fund has historically provided a 25% guaranteed return—at no risk to you. However, this fund is closed to new investors, so we only have a limited time for you to protect your money. I’ll need to know your answer by the end of the day.”


Sound like a viable investment option?  Not likely.


I could continue down this path, and I’m sure there are many other areas that I could highlight that are equally important. (Don’t get me started on the long-lost relatives we all seem to have in Nigeria or Zimbabwe) The point is that consumers need to be diligent about handling financial investments and financial decisions. Age does make a difference in our ability to handle complex financial decisions, so we all must recognize that the older we get, we simply cannot process things the way that we used to because we rely on our experience more than our current abilities.


I encourage you to seek financial counsel from a qualified financial professional when making investment decisions, especially if you believe that something doesn’t seem right when evaluating a new investment opportunity. A good place to start is with a CERTIFIED FINANCIAL PLANNER™ that is held to a fiduciary standard of care. Also, if you’d like more information about how to protect yourself or loved ones from financial scams, here is a FREE guide from the CFP Board.


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