How to protect yourself from an investment scam


The two most common type of scams used on Australians are dating and romance scams, and investment scams. Between them they accounted for almost $50 million of the $83.6 million reported to the  Australian Competition and Consumer Commission’s (ACCC) Scamwatch service during 2016.

While we’re not qualified to provide guidance on how to enhance your love-life, we are very much dedicated to improving your financial life, and that means providing you with the knowledge to avoid investment scammers. Here’s what you need to know.

Unlicensed schemes and promotions

Any person or business that provides a service related to a financial product needs to be licensed. This license is an Australian Financial Services Licence (AFSL) issued by the financial markets regulator ASIC.

Before dealing with an investment or financial adviser, ask for their AFSL number. Then cross-check both the name and AFSL number in the ASIC Professional Register to confirm that such a company does indeed hold a licence with that number.

ASIC keeps a list of companies that do not hold AFSLs, but have tried to sell a financial service to Australians. If you are contacted by a company on this list, do not engage with them. If you do you could be leaving yourself exposed without the protections to which you are entitled as an investor.

Overseas Sharemarket Boiler Rooms

Many years ago I had a client ask me for my opinion on an investment offer he had received. My client had received a phone call out of the blue from a broker with a posh English accent. The broker offered the chance to trade shares in many different countries with the promise of very high investment returns if my client signed up.

Soon my client received a glossy information pack  in the mail. The pack contained a stunning brochure full with images of London’s financial district. My client needed no further proof of the credibility of this broking firm, and was ready to send his funds to the Asian ‘office’ of this broker to get started with this financial opportunity of a lifetime!

Except it wasn’t an opportunity! I discovered that this ‘firm’ was already on the radar as a known ‘boiler room’ based in a South-East Asian country. Their modus-operandi was to hire British travellers with refined accents to cold call internationally and tempt people like my client into invest with them.

If you decide to invest, or send funds, overseas you will lose the protection given to you by the Australian financial services laws and regulations.  Think very carefully before you decide to do so. If things go wrong you’ll be left with little legal protection.

Pump and Dump

Another popular type of scam involves spruiking a share or other investment to ‘pump’ up its price. Back in the day, boiler rooms used to be full of aggressive salespeople glued to their phones and pushing naive investors into buying some penny stock (the ‘pump’) to raise its market price . After the pump, the boiler room operators would sell all their stock into the market  (the ‘dump’) to lock in huge profits. The stock price would crash burning the naive investors who were lured into buying the stock.

These days the boiler room has been replaced by chat rooms or investor forums where participants exchange ideas and tips on the next big investment or hot stock.

While most participants are genuinely interested in sharing their knowledge and ideas, these forums provide plenty of opportunity for pump and dump scammers to operate with near-impunity.

Investment Seminars

Investment seminars are very popular with scammers. Such seminars typically involve a charismatic presenter willing to share their very successful trading strategy … for a fee.

Investment seminars come in all flavours; property investing, share trading, option or currency trading amongst others. They promise easy money with low risk and without the need for extensive training or education. Those who sign up are often asked to pay thousands of dollars for a ‘trading system’ before they can start investing.

Here’s the thing I don’t get. If you really had a system for creating fabulous wealth through trading with little or no risk, why tell anyone else? Keep it to yourself, use your ‘system’ and if it is as good as you claim it to be, well, you’ll be Warren Buffett rich in next to no time.

No Such Thing as a Free Lunch

As much as we’d like to believe in the Tooth Fairy, the rational adult in us knows that she doesn’t exist. The promise of high returns with little or no risk is the investment equivalent of the Tooth Fairy. Still, somehow we don’t have as much trouble accepting that it is possible to achieve riskless returns.  It isn’t.

The prospect of something for nothing, of getting rich without risking much remains seductive. And it’s precisely this desire that investment scammers tap into when seeking victims. Resist their siren song of high returns without the risk. There is, unfortunately, no such thing.

If you are looking to invest, start by understanding your risk profile using our free risk profile questionnaire.