 |
Protect Your Nest Egg From Con Artists
Be on your guard against advisers selling fraudulent or unsuitable investment products.
December 2006
By Susan B. Garland
Charles Mansfield thought he had his financial future made. In 1993, at 55, he was working as a physicist at the Los Alamos National Laboratory when he accepted an early-retirement deal from the University of California, which manages the lab.
At an investment seminar for lab retirees, Mansfield met Andrew Weis, a securities sales representative. Mansfield was so impressed with Weis that he eventually turned over the $50,000 in his 403(b) plan for the adviser to manage. Weis told Mansfield that he had rolled the assets into an IRA, and that he was investing in a resort and a couple of leasing firms. Account statements that Weis sent showed that the assets were growing handsomely, recalls the retiree, now 68. Believing that his nest egg was secure, Mansfield says he mortgaged his house to shore up a failing business that eventually went bankrupt.
Unbeknownst to Mansfield and two dozen other retirees and seniors in New Mexico and Colorado, Weis was engaging in a Ponzi scheme, according to regulators in the two states. Although some of Weis's early activities were legitimate, regulators say, he began creating bogus investments. He used money from new investors to pay small "dividends" to older ones so they would think their portfolios were thriving, regulators say. In October, Weis, 56, pleaded guilty to securities fraud and was sentenced to 20 years in prison. Authorities say he defrauded 25 people out of nearly $600,000.
Mansfield, who holds a doctorate, says, "I'm smart, but it was easy for me to be blindsided."
Unfortunately, Mansfield and Weis's other victims have a lot of company. Nearly half of all investment-fraud complaints filed with state securities regulators are made by seniors. Expecting a surge in fraud as baby-boomers retire, enforcement agencies are revving up campaigns to educate older individuals on how to avoid being scammed.
Regulators are warning seniors to watch out for invitations to free-meal investment seminars, cold calls from telemarketers, and radio and TV advertisements pitching investment deals. And even if you think you're a savvy investor, that doesn't mean you can always tell the smooth talker from the real thing.
Consider this finding: Seniors who were victims of investment fraud scored higher on financial literacy questions than nonvictims, according to a study for the NASD Investor Education Foundation. They also tended to be wealthier, more educated and married. (Read the study, Off the Hook Again: Understanding Why the Elderly are Victimized by Economic Fraud Crimes, at www.nasdfoundation.org.)
"Results suggest that some investment knowledge and experience can be dangerous," says Grace Cheng Braun, president and chief executive officer of WISE Senior Services, a nonprofit in Santa Monica, Cal., that conducted the study. "People are more likely to listen to sales pitches and to rely on their own judgment, and thus may fall prey to con artists."
It's not just outright cons that worry regulators and consumer advocates. They're also alarmed by rising sales of legitimate investments, such as equity-indexed annuities and variable-rate annuities. Regulators say that even when an equity-indexed annuity or a variable-rate annuity is sold by a licensed agent or broker, these products are not suitable for many elderly buyers.
In many cases, elderly investors don't realize that the annuities could lock up their assets for a decade or more. If they need the money sooner, they may end up paying 20% in penalties. "These products are not appropriate for a lot of seniors because a lot of seniors need access to their money," says Lori Schock, acting director of the Securities and Exchange Commission's Office of Investor Education and Assistance.
Protect Yourself Against Investment Fraud
You can reduce the chances of investing in fraudulent or unsuitable products by rejecting invitations to free-meal seminars, tossing out unsolicited mail and hanging up on cold callers. But if you find yourself tantalized by a prospective investment, be sure to take steps to safeguard your nest egg.
Be skeptical of promises of above-market returns. Keep in mind the adage: If it's too good to be true, it probably is. In March, the SEC charged two people in Allentown, Pa., with selling $3.9 million in fictitious certificates of deposit to at least 50 investors. The complaint said that the two promised rates of 7% to 9% and created fake monthly statements.
Few investments, with the possible exceptions of Treasuries and traditional bank CDs, can actually guarantee a return. The SEC warns, for instance, that many investors believe that they can't lose money with equity-indexed annuities. But if you need to cash out early, a large surrender fee could turn the investment into a big loser.
Recognize the trouble investments. The SEC warns consumers to watch out for "prime bank" schemes, where fraudsters promise huge returns by claiming to buy and trade financial instruments in overseas elite banks; these instruments don't exist. If you hear TV pitches for "IRA approved" investments, turn off the tube. In those ads, marketers are selling products with high fees, which will erode your returns.
Also, watch out for "sale and leaseback" contracts, which occur when a salesperson sells an investor a piece of equipment or property, such as a pay phone, ATM or a long-term lease. As part of the deal, the company agrees to pay investors a fee to lease back and service the property, which is usually fictitious.
Avoid promissory notes as well. With a promissory note, an investor lends money for a fixed period to a company, which agrees to pay a fixed return. But regulators warn that legitimate notes are marketed almost exclusively to corporate investors. Notes marketed to the general public are usually cons. If you can't resist, make sure the securities are registered with the state or the SEC and that the seller is a registered broker (see the box for resources).
Take your time. When you're told that you need to act immediately, it's likely that the salesperson is trying to hide something from you. Never sign anything without taking time to conduct research.
And don't follow your friends' advice. Con artists often seek out members of the same group to spread the word. Churches are a favorite target. "If your pastor tells you about an investment, you may go for it because you trust him. But he could be getting taken, too," says Jacqueline Wiley-Sistrunk, coordinator of Seniors Against Investment Fraud, run by California's Department of Corporations.
Insist on written information. Make sure that the fine print includes information on commissions, penalties and returns as well as the risks and assumptions underlying the plan. It's possible, however, that even the materials are fraudulent, so check out the investment with someone you can trust and ask your state securities regulator for help.
Check out the adviser. Don't be swayed by fancy titles. Salespeople often use designations that could include the words senior, elder, registered or certified. Advisers often attain these titles after attending a sales-related course. Bogus advisers do not have the licenses or expertise to sell you products. For instance, a "senior estate planner" is not a lawyer who is qualified to devise a living trust.
Ask for the license numbers of the person purporting to be an insurance agent, broker or investment adviser. Then check out the adviser with a government entity. Note that an insurance agent can't sell securities. Even if a broker is registered, ask the broker's firm if it's authorizing the products. In the Los Alamos case, regulators say that Weis began selling products not backed by his firm. "People are freelancing without the company's knowledge," says Joseph Stein, regional director of the Seniors Vs. Crime Project of the Florida attorney general.
If you allow an adviser to trade in your account, review your monthly statements. Make sure you understand the investments, and watch out for high trading activity that could generate a lot of fees for your broker and low returns for you.
Go to Kiplinger.com
|
|
|
