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Investing Scams — 4 Fraud Traps to Avoid

What to look for to ensure you're making a smart, safe investment

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Investment Scam #2: Free Lunch

Come to a free investment seminar, meal included — nothing will be sold to you! More than likely, if you haven’t already received such an invitation, you will. According to the FINRA Investor Education Foundation, as of 2010, 78% of seniors are targeted by these tactics, with 60% receiving six or more invitations over just three years. In fact, however, these seminars are nothing but a sales pitch in a fancy wrapper.

In September 2007, a consortium of regulators issued a report about a year-long examination of 110 such “free lunch” seminars. They found that 100% of these “educational workshops” were sales presentations, half made misleading or exaggerated claims and about one-third either pitched unsuitable products or committed outright fraud.

Bottom line: Use your common sense. The hotels, resorts and country clubs where these seminars are held aren’t free, nor are the meals. They have to be paid for somehow, and ultimately, the money comes (in the form of fees) from the pockets of the attendees. Stay away, unless you’re a master at saying “No!”

Investment Scam #3: I’ll Make You More Money for ‘2-and-20’

Everybody these days, it seems, either wants to get into a hedge fund or wants you to get into one. Only open to high-net-worth investors, these partnerships generally aren’t registered with the SEC and therefore aren’t required to follow the same rules as mutual funds. The real problem, though, is the fees hedge fund managers charge: typically, up to 2% of assets (per year) for their services, plus as much as 20% of any profits.

Supposedly, in return for these fees, a hedge fund will be able to score positive returns in any market — a tempting offer. But do these folks actually deliver? Industry-wide figures are hard to come by, and notoriously unreliable (because bad hedge funds quickly go out of business). However, the London Daily Telegraph cited a stark example of just how damaging 2-and-20 fees can be even with the best of performance.

Warren Buffett is widely regarded as one of the greatest investors of all time. A $1,000 investment in Berkshire Hathaway when Buffett took over the company in 1965 would have grown to $4.8 million through 2009. On the other hand, had Buffett charged the 2-and-20 that hedge fund managers do, that same $1,000 would have grown to only $400,000. In other words, $4.4 million that could have been yours would instead line the pockets of the hedge-fund manager.

Avoid any hedge fund with this top-heavy fee structure.

Article printed from InvestorPlace Media,

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