Guides- How to Avoid Investment Scams

How to Avoid Investment Scams

There are thousands of legal scams and hundreds of illegal scams. Therefore, you are several times more likely to be impacted by a legal scam. How do you protect your financial interests?


Use the Internet to research the advisor who is selling the product, the firm the advisor works for, and the product. Look for any negative information that should be cause for concern.

CRD Numbers

Require advisors to provide their CRD (Central Registry Depository) numbers and the CRD numbers of the firms that hold their sales licenses. Contact local law enforcement if they cannot provide CRD numbers. 


Use the CRD numbers in FINRA's BrokerCheck service to review the compliance records of the advisors and the firms who hold the advisor licenses. Avoid advisors and firms that have a history of client complaints.


Most Ponzi schemes are based on referral marketing. That is, they make sure a few investors have a positive experience, then they use the investors as references to convince you to turn over your assets. References are worthless because they are controlled by advisors.

Affinity Marketing

Another major characteristic of scams is affinity marketing or marketing to groups with common interests. For example, you buy a product because the seller belongs to your church or country club (see Bernie Madoff) or shares some other interest or club membership.


These firms take physical possession of our assets and provide services that include trading, collecting dividends and interest, and producing monthly statements. You want to be sure brand name firm is your custodian. Bad guys cannot steal your assets if they cannot take physical possession of them.

Too Good to be True

A good rule for your assets is if it sounds too good to be true it is not true. The most frequent pitch in this regard is to promise high returns for low risk. First of all, it is illegal to promise high returns. Second, high returns for low risk does not exist. If you want high returns you have to take a lot of risk. If you want low risk you have to give up higher returns. 

Bad Advice

You biggest risk is not illegal investment scams. It is bad financial advice from incompetent or unethical financial advisors who have gained your confidence. You trusted the wrong advisor. Make sure you conduct your due diligence before you buy what the advisor is selling.

  • Use Paladin's "Request for Information" to obtain the information you need to determine advisor quality  

Conflicts of Interest

Every advisor has this potential conflict of interest. Do they recommend the best products or do they recommend the products that produce the most income for them. You can see how this is a major ethical dilemma. Your best protection is to interview multiple professionals and compare their recommendations. Pay particular attention to the expense ratios of the products, how the advisors are compensated, and how much they are compensated. Require documentation for all investment expense and advisor compensation data.

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