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We've probably all heard of the Ponzi Scheme, made famous first by Charles Ponzi and more recently by Bernie Madoff:

In March 2009, Madoff pleaded guilty to 11 felonies and admitted to turning his wealth management business into a massive Ponzi scheme that defrauded thousands of investors of billions of dollars. Madoff said he began the Ponzi scheme in the early 1990s. However, federal investigators believe the fraud began as early as the 1980s, and the investment operation may never have been legitimate. The amount missing from client accounts, including fabricated gains, was almost $65 billion. (Wikipedia)

My question is: What are the most common types of financial scams to look out for, as an individual investor? What warning signs are there? How to defend oneself?

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    One of the best places to look for what scams are particularly active is consumer.ftc.gov/scam-alerts
    – keshlam
    Aug 6, 2016 at 1:20
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    To the 2 members voting to close - we have multiple "Is this a scam" questions posted, and it appears those questions are on topic. I don't see why a question asking for general signs of a scam are any less on topic. In theory, a few comprehensive answers here could render most future questions on scams duplicates.
    – JTP - Apologise to Monica ♦
    Sep 1, 2016 at 16:01
  • @JoeTaxpayer: This sounds like a list question that Stack Exchange is traditionally wary of.
    – Oddthinking
    Sep 2, 2016 at 2:27
  • @Oddthinking - I don't see that as compelling. A good number of questions that are on topic are answered with a list of reasons or support for the answer. Odd to me that you're taking an interest in this issue on a stack where you haven't posted in 6 years.
    – JTP - Apologise to Monica ♦
    Sep 2, 2016 at 13:32
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    Saw this old question pop up and my first thought was "401k/IRA fees are the biggest scam". I wish more people were aware of how important it is to seek out low cost plans.
    – Rocky
    Sep 3, 2016 at 1:45

9 Answers 9

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If an offer "is only valid right now" and "if you don't act immediately, it will expire" that is almost always a scam.

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Affinity fraud. You see, Madoff really didn't have to sell himself, people recommended him to their friends. In a similar way, it's easy once a scammer reels in one sucker to keep him on the hook long enough to get 10 friends to invest as well. I've written about Mortgage Acceleration scams, and the common thread is that they are first sold to friends, relatives, neighbors. People tell their fellow church goer about it and pretty soon people's belief just takes over as they want it to work.

Edit - the scam I referenced above was the "Money Merge Account" and its reincarnated "Wealth Unlimited." It claimed to use sophisticated software to enable one to pay their mortgage in less than half the time while not changing their budget. The sellers of the product weren't able to explain how it was supposed to work, since it was nonsense anyway. You were supposed to be able to borrow against a HELOC at a rate higher than your mortgage, yet come out ahead, enough to cut the time in half or less. The link I posted above leads to a spreadsheet I wrote in a weekend, which was better at the math than their software and free. It also linked to 66 pages of accumulated writing I did over a number of months starting in 2008. In the end, I never saw any prosecution over this scam, I suppose people were too embarrassed once they realized they wasted $3500.

How can I get scammed buying S&P ETFs through Schwab? Easy, I can't.

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    Family, friends, and fools.
    – Calculus Knight
    Apr 27, 2015 at 4:57
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    "I've written about Mortgage Acceleration scams" Consider linking to those articles/blogs if they might add useful details or information.
    – Lilienthal
    Nov 30, 2015 at 10:43
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    @Lilienthal - wow, this answer was very early on in my membership. I was careful to not offer too many links, as it might have appeared spammy. This question just came to my attention again, and I've added the link. Better late than never.
    – JTP - Apologise to Monica ♦
    Sep 1, 2016 at 15:56
  • @JoeTaxpayer Yep this is from pretty far back. :) Thanks for adding the link.
    – Lilienthal
    Sep 1, 2016 at 17:13
  • @Lilienthal maybe even better would be to quote relevant parts from linked article into the anser, in case the source goes down. and Joe, I understand your attempt at avoiding a self-promotion accusation. good job anyway.
    – Mindwin Remember Monica
    Sep 2, 2016 at 19:46
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In the case of an investment strategy, if you don't retain custodianship over your funds, or at least determine who is the custodian, then walk away. You should be able to get accurate account statements from a trustworthy third party at all times.

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If anyone offers you guaranteed better than average returns, run. They are either lying to you or to themselves. (Claiming that they will try to beat the market is more credible, but that becomes a matter of whether there is any reason to believe that they'll succeed.)

If anyone sends you an unsolicited stock tip, run. They wouldn't be doing so if it wasn't an attempt to manipulate you or the market or both. Most likely its a pump-and-dump attempt.

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Investing in a business can be daunting and risky, so it is not for everyone. The most common pitfalls are mentioned here:

  • Friends of friends of friends of ... a business
  • Offers with an expiration date. If someone is seriously looking for an investor, they give the investor time to decide
  • Business owners who don't want to share what they are doing with your money
  • If a story sounds to good to be true, it usually is

Beyond that:

  • Always do background checks on the people who you are dealing with
  • Make sure the business actually can achieve their goals realistically with your investment money, or make sure if they use additional financing the numbers add up
  • Use legal counsel when making investment contracts
  • Make sure the company you are dealing with is registered in your own country and has a company legal structure that you know about and you can deal with. (For example, an English Ltd is common here in The Netherlands, but when they go bust you have to take some massive legal hurdles to get something done.)
  • Don't trust anything without double checking it yourself

It all sounds a bit like "Don't trust anyone" and sadly, this is true when there's a lot of money involved. So be prepared and do your homework, this sometimes will save you more money than you gain with your investments :)

Good luck!

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    "One born every minute" (paraphrased) PT Barnum. "A fool and his money are soon parted". Caveat emptor. Especially caveat emptor.
    – Xalorous
    Sep 2, 2016 at 22:23
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Anything where the initial step of someone trying to get you into anything financial is to send you an e-mail.

There are valid situations in which e-mails may be used to introduce you to a financial product or offer, such as if you have signed up for an electronic newsletter that includes such information. But in that particular case, the e-mail isn't the first step; rather, whatever caused you to sign up for the newsletter was.

Even in a valid, legitimate scenario, you should obviously still perform due diligence and research the offer before committing any of your money. But the odds that someone is contacting you out of the blue via e-mail with a legitimate financial offer are tiny.

The odds that a lawyer, a banker or someone similar in a remote country would initially contact you via e-mail are yet smaller; I'd call those odds infinitesimal. Non-zero, but unlikely enough that it is probably more likely that you would win the grand prize in the state lottery four times in a row.

Keep in mind that responding in any way to spam e-mails will simply confirm to the sender that your e-mail address is valid and is being read. That is likely to cause you to receive more spam, not less, no matter the content of your response. Hence, it is better to flag the e-mail as spam or junk if your e-mail provider offers that feature, or just delete it if they don't.

The same general principles as above also apply to social media messaging and similar venues, but the exact details are highly likely to differ somewhat.

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Cosigning on a loan. More broadly any exchange of value between family members or friends. Despite good intentions, these often go awry.

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    I like this answer because people are far more likely to be victimized by cosigning a loan than to come across a Madoff situation. Don't cosign anything for which you do not want to take full financial responsibility.
    – Rocky
    Aug 26, 2017 at 17:01
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If some one ever offers High returns and low risk they are either extremely stupid or scamming you.

If they did find a high return low risk investment a smart person would buy it then repackage it as a low return low risk investment and then sell it to you. People would still buy and they would make a ton.

Either they are lying (scam) or a fool(about as bad)

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    The fool is often the dupe of a scammer.
    – Xalorous
    Sep 2, 2016 at 22:26
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Pretty much any financial transaction where they start by calling you on the phone is a scam. They aren't doing it for your benefit and the caller is on commission.

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  • I wouldn't go that far. There's lots of telemarketers hawking legit products. Whether they are worthwhile is another question. You are spot on about the commission part. And I certainly list my numbers on the do-not-call list, because I find that most of the junk sold by telemarketers is just that, junk.
    – Xalorous
    Sep 2, 2016 at 22:25

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