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Like many other forms of fraud, investment fraud is a significant and growing problem. Investment fraud is the illegal or fake sale of financial instruments -- think Ponzi schemes and advance-fee schemes (collecting a fee in advance, supposedly for investment advice, and then absconding with it). The fact that a larger percentage of investors are choosing their own investments, rather than having an account with a money manager, makes it easier for fraudsters to find and exploit investors. And with interest rates so low, many people are turning to the stock market and similar investments in search of a reasonable rate of return.
A recently released AARP survey looked at a variety of factors to determine which characteristics make an investor more vulnerable to investment fraud. The survey found that investors who highly value wealth accumulation, who are more willing to take investment risks, who are open to investing based on cold calls and emails, and who frequently buy and sell investments are more likely to be victims of fraud.
Importance of wealth accumulation
The AARP survey asked respondents to agree or disagree with the statement, "Some of the most important achievements in life include acquiring money." 60% of those who'd been victims of investment fraud agreed with the statement, as opposed to 41% of overall respondents. It's possible that laying a great deal of importance on wealth accumulation may cause investors to jump at potentially dubious opportunities or otherwise cut corners in pursuit of wealth. Which leads us to...
Higher risk tolerance
48% of investment fraud victims agreed with the statement, "I don't mind taking chances with my money, as long as I think there's a chance it might pay off," as opposed to 30% of overall respondents. Victims of investment fraud were also more likely to agree with the statement, "The most profitable financial returns are often found in investments that are not regulated by the government." Interestingly, investment fraud victims were more likely to identify themselves as politically conservative than overall respondents (64% of investment fraud victims, versus 44% of overall respondents). Apparently political conservatism doesn't correlate to financial conservatism for these investors.
Willing to listen to sales pitches
Victims of investment fraud reported receiving investment sales phone calls and emails much more frequently than the overall group of respondents. Victims also were more likely to agree to the statement, "I am interested in receiving investment offers because you never know when something great might come along," implying that they are more likely to make an investment with those sales callers. Indeed, 24% of investment fraud victims reported having made an investment based on a cold call, as opposed to 6% of overall respondents.
Frequent investment activity
Over 41% of investment fraud victims reported making five or more investment decisions in a year, as opposed to just 11% of overall respondents. It's hard to say whether this activity is a cause or an effect of investment fraud victims' vulnerability; it could be that making a larger number of investments simply makes it more likely that at least one of those investments will turn out to be fraudulent.
The whole picture
Many of the vulnerabilities highlighted in the AARP survey tie back to risk. Being willing to make an investment based on the recommendation of a total stranger is certainly riskier than relying on well-known sources, such as friends or established experts; similarly, investing frequently raises risk levels compared to adopting a buy-and-hold investing strategy. And a potential victim's willingness to take higher risks probably ties back to the importance he places on accumulating wealth. If becoming rich is extremely important to someone, he'd be more likely to go all out in an effort to secure wealth than would someone who places less importance on money.
Reducing your vulnerability
If you find yourself agreeing with many of the same statements that resonate with investment fraud victims, it would be wise to ratchet up your security levels. For example, if you get a cold call for an investment that sounds intriguing, take the time to check out the caller and confirm that he's registered with state or national securities regulators before you give him any money to invest. And if you're considering an investment that's not government regulated, take the time to do plenty of research first. It may be tedious, but if taking a few hours to investigate saves you from becoming a victim of fraud, that's a pretty good return on your invested time.
