by Lawrence C. Melton, Esq., lmelton@dhayeslaw.com
THE HAYES LAW FIRM, www.dhayeslaw.com
Money-Track, a public-television series, and Investor Protection Trust, an investor education group, joined forces to conduct a survey of U.S. investors. They found that a surprising large percentage of investors are susceptible to investment scams.
- 43% would fall for guaranteed return investment scam.
- Only 1% understood basic investment principles.
- 66% would meet with broker before doing background check.
- 2 out of 5 expected Social Security to take care of retirement.
- 50% have not created a financial plan for their retirement.
The findings of the survey belie any notion that investors are sophisticated and knowledgeable on investments matters. Quite the contrary, the typical investor is uninformed and gullible--a moving target for scam artists.
As listed above, the survey found that 43 percent of U.S. investors would fall for a "guaranteed return" investment scam. It is improper for a broker or financial planner to guarantee a specific rate of return. Such a promise ignores the volatility of the market and creates a false expectation in the investor's mind. Always remember: rates of return fluctuate.
Did your broker promise you an average 10-24% return? It is generally inappropriate to guarantee or promise any particular percentage of return. Brokers will sometimes use this as a ploy. If you want a large annual rate of return on your investments you will have to be aggressively invested. By tricking the customer into agreeing to a large annual return, the broker is justified in placing the customer in overly aggressive and risky positions.
The "Phantom Riches" Tactic--dangling the prospect of wealth, enticing you with something you want but can't have. "These gas wells are guaranteed to produce $6,800 a month in income."
There are a number of complicating factors at play which undermine the notion of guaranteed returns: trades may occur, accounts may be assessed fees or interest charged for stock purchased on margin, securities may undergo any of a number of capital events during the month, and cash may be deposited into and/or withdrawn from the account at different times during the month. All of these factors affect the level of return.
Nonetheless, Darla Mercado of InvestmentNews.com reports that "[g]iven the investment swindle scenarios, such as the opportunity to invest in an options-trading system with guaranteed returns of at least 100%, 43% of investors said they would take the bait" See Darla Mercado, 43% Of Investors Are Suckers, Survey Finds, InvestmentNews, May 29, 2007, available at www.investmentnews.com.
The poll also presented questions on eight basic investment principles, such as background checks of financial professionals, and whether the investor knew the definition of "diversification." Of 1,255 people surveyed, just 1% understood basic investment principles.
DIVERSIFICATION is the spreading of investments among different industries and market sectors in order to reduce risks. "It is important to have in one's portfolio stocks that do not all depend on the same economic variables, such as consumer spending, business investments, housing construction and so forth." Burton Malkiel & William Baumol, Redundant Regulation of Foreign Security Trading and U.S. Competitiveness, in Kenneth Lehn & Kamphuis (eds.) Modernizing U.S. Securities Regulation 45 (Irwin, 1992). Studies show that diversification is not possible with less than 25-30 positions. Performance depends upon proper diversification within each asset class (e.g., US stocks; foreign stocks; different industry sectors: consumer, financial, industrial, technological; and among equities and U.S. treasuries, corporate bonds, foreign bonds, etc.).
66% of investors would meet with a financial professional without first doing a background check with NASD, SEC or any other organization. This number is troubling. It is imperative that every investor check the background of his or her broker to make sure that they are free of complaints, free of law suits, and that they are properly registered to sell securities.
The survey numbers regarding retirement planning are equally troubling. Two in five investors said they expected Social Security to make up a major part of their retirement income. 50% said they had not even created a financial plan for retirement. Investment firms typically defend securities fraud claims by asserting that the investor knew and accepted the risks of an investment strategy. This defense is less compelling in the case of the elderly, many of whom lack meaningful investment experience or the ability to recoup losses. Moreover, the debilitating effects of a major illness, along with memory loss and disorientation, which come naturally with old age, work to disable the older investor and detract from the older investor's ability to reason or use cognitive judgment. It is a challenging task to understand the complexities and nuances of certain annuities and insurance products. This is true even for sophisticated and experienced investors. It is doubly challenging in the case of elderly investors. In this regard, senior citizens are particularly vulnerable to broker misconduct, as they are frequently swindled into complex and inappropriate investments which they do not understand.
Have you been the victim of investment fraud? If so, there is help. Contact The Hayes Law Firm. We are an experienced securities arbitration firm. We represent aggrieved investors all across the country. Call us at 1-866-332-3567. Please visit our web page at www.dhayeslaw.com.
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