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LIDO INSIGHTS | Avoiding Fraud: Essential Questions to Ask Before You Invest | July 2020

Published 07-28-2020


By: Greg Kushner

I have been advising high-net-worth investors for over 30 years, and I have certainly seen my share of frauds and scams in that time. Fortunately, by relying on some basic questions below that you should ask, I have been able to avoid some well-known scams in which my clients were eager to invest.  Whether you are a first-time investor or have been investing for many years, there are some key questions you should always ask before you commit your hard-earned money to an investment. The adage, “If it sounds too good to be true, it usually is.” is one that never goes out of style. So many investors are stretching to find yield in today’s incredibly low interest rate environment, and as a result they may be taking on way too much risk. Often, they may not fully understand the risks they are accepting, or even worse, have fallen into a scammer’s trap. Besides hiring a trusted financial advisor to help guide you on the right path for you, there are essential questions you should ask before you invest.

Is the Seller Licensed?

In this highly connected, electronic world we all live in, there is no excuse not to do an internet search related to the proposed investment. Smart investors will always check the background of any individual who is promoting an investment opportunity and should do so even before learning about the investment opportunity itself. Check out a broker’s background and qualifications at If not a broker, but rather an investment adviser, then start at to see if the firm is registered and regulated by the Securities and Exchange Commission. This website provides information about firms registered with the Securities and Exchange Commission and most state-registered investment adviser firms. If you are not sure who to contact, or if you have any questions regarding the background of an investment professional, call (800) 732-0330, the agency’s toll-free investor assistance line. Remember, con artists are experts in the art of persuasion, often using a variety of influence tactics tailored to the vulnerabilities of their victims. Many times, they have not registered with the regulatory bodies to stay “under the radar” of the authorities.

Is the Investment Registered?

Any offer or sale of securities must be registered with the Securities and Exchange Commission or exempt from registration. The reason that registration is important is because it provides investors with key information about the company’s or fund’s management, products, services, investment strategies, track record if applicable, and the financing of the venture. If you are considering an investment, you can check whether an investment is registered with the Securities and Exchange Commission by using the agency’s “EDGAR” database or contacting them at the same number above.

How Do the Risks Compare with the Potential Rewards?

Every investor should know the potential for greater returns always comes with greater risk. As I mentioned above, if the return just seems a bit too good, be aware. Understanding the always-important trade-off between risk and reward can help you separate legitimate investments from unlawful schemes or scams. Of course, investments with greater risk may offer higher potential returns, but they may expose you to greater investment losses that you might not be able to accept. You should always remember that every investment carries some degree of risk, and no legitimate investment offers the best of both worlds – low risk and high returns! Many investment frauds are pitched as high-return opportunities with little or no risk. Other scammers might try to outsmart you by offering somewhat lower returns but with tremendous consistency of returns. You should ignore both types of these so-called great investments or report them to the authorities if you suspect fraud.

Do You Understand the Investment?

You should never invest in something you do not understand. You do not have to be an expert, but a general understanding of the risks and rewards is key. Be sure to always read an investment’s prospectus or disclosure statement carefully. If you cannot understand the investment and how it will help you make money, ask a trusted financial professional for help. If you are still confused, you should probably think twice about investing.

Is There a Separate Custodian That Holds the Funds?

Remember the Madoff Ponzi scheme? Of course you do, as it was one of the most publicized scams in history. You probably still do not know how he could have pulled off such a massive scheme.  He was able to do this because his investment fund used a related firm to supposedly hold the securities. What this means is that Madoff’s fund purportedly bought and sold securities effectively from himself.  Do you see why that is a problem? The issue is two-fold: there is no check and balance regarding the price paid or sold, and there is no independent party providing you with transactions and account balances. He was able to print bogus statements showing the investors how wonderful he was doing and showing an ever-increasing and consistent growth in fund value. Whenever possible, be sure your assets are held with a reputable custodian instead of giving the investment manager or operator control of the funds.

Where Can You Turn for Help?

There are many ways to find a good investment advisor or investment product. Ask friends that are in a similar financial situation as you, but always do your own homework. Don’t rely on a supposedly smart or apparently financially successful friend to blindly invest; that is how many people became victims in the Madoff Ponzi scheme – referrals from trusted friends. Whether checking out an investment professional, researching an investment, or learning about new products, try to obtain unbiased information from trusted sources. This can be a great advantage when it comes to investing wisely.

Remember my basic rule above – if it seems too good to be true, it is probably a scam! Good luck out there!